Accommodation Is the Policy: Rising Philippine Bank Strains Under the BSP’s Easing Cycle

 

 

Truth has to be repeated constantly, because Error also is being preached all the time, and not just by a few, but by the multitude. In the Press and Encyclopaedias, in Schools and Universities, everywhere Error holds sway, feeling happy and comfortable in the knowledge of having Majority on its side― John Wolfgang Goethe

 

In this issue

Accommodation Is the Policy: Rising Philippine Bank Strains Under the BSP’s Easing Cycle

Section I — Universal-Commercial Bank Credit Is Stalling Despite BSP’s Aggressive Easing

Section II—Banks Are Reallocating, Liquidity Is Recycling, Not Financing Growth

Section III — BSP Is Accommodating Outcomes, Not Steering the Cycle

Conclusion: Accommodation as Policy, Crisis as Outcome 

Accommodation Is the Policy: Rising Philippine Bank Strains Under the BSP’s Easing Cycle 

Inflation optics, soft-peg constraints, and the mounting cost of balance-sheet preservation.

Section I — Universal-Commercial Bank Credit Is Stalling Despite BSP’s Aggressive Easing 

Interest rate cuts have become the by-phrase of the local financial community. 

Authorities continue to signal sustained monetary loosening as economic stimulus, while establishment economists and legacy media have rationalized financial easing—and the resulting rally in the PSEi 30—as a necessary catalyst for market recovery. Ironically, the same narrative also attributes the peso’s record weakness to this easing cycle. 

Either the mainstream genuinely believes that peso depreciation and economic recovery naturally go hand in hand, or market relationships are being selectively blurred or fudged to justify coordinated equity-market pumps.

Recent BSP releases—including the Universal and Commercial (UC) Bank’s November Loans Outstanding, the November Depository Corporations Survey, the November Philippine Bank’s Balance Sheet and Selected Performance Indicators, and the December central bank survey (MAS) indicators—tell a more troubling story beneath the liquidity narrative. 

Since late 2024, the BSP has pursued an extended easing cycle combining aggressive reserve-requirement reductions and repeated policy rate cuts, alongside financial backstops such as the doubling of deposit insurance coverage. 

Reserve requirements for UC banks were slashed from 9.5% to 7.0% in late 2024, and further to 5.0% by March 2025, amounting to a 450-basis-point liquidity release. Over the same period, successive rate cuts brought the policy rate down to 4.5% by December 2025. 

This accommodative stance unfolded against the backdrop of lingering pandemic-era fiscal deficits, whose credibility was further strained by the flood-control corruption controversy that erupted in Q3 2025. 

Yet despite persistent easing signals, private credit growth failed to re-accelerate. 

Figure 1

Universal bank lending peaked in January 2025 and slowed again by November, with both production loans and consumer credit losing momentum. (Figure 1, topmost window) 

UC banks reported a marked deceleration in November 2025, with total loan growth at around 10.7%, the slowest pace since late 2024. This was driven by weakening production loan growth (about 9.0%), while consumer credit, though still elevated in nominal terms, cooled to roughly 23%, its slowest expansion since late 2023. (Figure 1, middle image) 

This slowdown is striking given the macro backdrop: post-4% Q3 GDP growth, moderating inflation, and near-full employment—conditions that should, in theory, have reinforced credit demand. 

Instead, while lending momentum faded, monetary liquidity continued to expand. M1 growth (cash in circulation and transferable deposits) remained positive at just over 7% in November, extending its uptrend even as credit creation slowed. (Figure 1, lowest graph)

Figure 2

At the same time, deposit liabilities grew by only about 7.3%, continuing to underperform loan growth and reinforcing the underlying imbalance. (Figure 2, topmost visual) 

Taken together—slowing production and consumer loans, lagging deposit growth, and rising transactional liquidity—the evidence suggests that monetary easing is no longer transmitting into productive credit formation. 

Rather than catalyzing real investment, it appears to be inflating balance sheets and leverage, heightening systemic fragility without delivering commensurate real-economy gains. 

That is not all. 

Section II—Banks Are Reallocating, Liquidity Is Recycling, Not Financing Growth 

In the BSP’s December central bank survey, currency issuance not only surged to a record Php 3.2 trillion, but its year-on-year YoY growth accelerated to about 17–18%, surpassing the 2018 spike and ranking as the third-highest on record, behind only 2008 and 2020. (Figure 2 middle image) 

Notably, 2018 coincided with the BSP’s baptismal phase of its reserve-requirement (RRR) easing cycle, while 2008 (Great Financial Crisis) and 2020 (Pandemic recession) were both periods marked by domestic economic stress and volatility spikes of the USDPHP. 

History may not repeat—but does it rhyme? 

This liquidity surge, which should be further reflected in the December Depository Corporations Survey, likely contributed to the January-effect euphoria in the PSE, reinforcing asset (equity) price inflation even as credit growth slowed. 

Crucially, this marginal liquidity growth is not coming from private lending. 

Instead, net claims on the central government (NCoCG) held by banks surged to a record Php 5.89 trillion, up roughly 11% year-on-year, the fastest pace since mid-2024. 

At the same time, the BSP’s own NCoCG rebounded to around Php 760 billion—its highest nominal level since March 2025, largely due to a sharp decline in liabilities to the national government—despite falling nearly 20% YoY. (Figure 2, lowest chart) 

This decline most plausibly reflects a drawdown of government deposits at the BSP or reduced sterilization vis-à-vis the Treasury, mechanically releasing base money into the financial system. While debt repayment is a theoretical alternative, the persistence of record public debt levels as of November (Php 17.562 trillion) makes that explanation unlikely. 

Despite falling Treasury yields—which have reduced banks’ mark-to-market losses and should have eased balance-sheet pressures—banks continued to accumulate sovereign exposure.

Figure 3

Held-to-Maturity (HTM) securities climbed to a record Php 4.08 trillion in November, underscoring a significant reallocation into government paper. HTMs now account for roughly 70% of banks’ net claims on the central government. (Figure 3, topmost window) 

Banks have also escalated on investments. After a brief pullback in September from unprecedented highs, Available-for-Sale (AFS) securities rebounded by over 7% to Php 3.30 trillion, approaching HTM levels and reinforcing the portfolio shift away from private credit. (Figure 3, middle diagram) 

Yet despite record nominal credit, aggressive securities accumulation, and abundant liquidity, bank liquidity metrics continue to deteriorate. (Figure 3, lowest graph) 

• Liquid assets-to-deposits fell to about 47%, near pre-easing and pandemic-era lows, effectively erasing the BSP’s 2020-21 emergency liquidity buffers. 
• Cash-to-deposits dropped to roughly 9.7% in November, the second-lowest level on record.

Figure 4

While banks have reduced bills payable, bond payables continued to rise, lifting total borrowings to around Php 1.5 trillion, down from the Php 1.906 trillion March 2025 peak but still elevated. (Figure 4, topmost window) 

Liquidity management has increasingly shifted inward: interbank lending surged to a record Php 502 billion, alongside repo transactions exceeding Php 100 billion, signaling intensive liquidity recycling within the banking system. (Figure 4, middle image) 

Taken together, these figures point to a clear pattern. 

Banks are reallocating balance sheets toward sovereign absorption, liquidity management, and interbank cushioning—not expanding productive credit. The BSP, in turn, appears less to be steering outcomes than accommodating them, validating financial system preferences rather than redirecting capital toward growth. 

Section III — BSP Is Accommodating Outcomes, Not Steering the Cycle 

The BSP’s recent policy trajectory reveals a central bank anchored less to credit conditions or balance-sheet health than to inflation optics and system accommodation. 

Reserve-requirement cuts and successive policy-rate reductions have consistently followed periods of CPI deceleration, even amid deteriorating bank liquidity metrics, balance sheets increasingly tilted toward sovereign absorption, and liquidity being recycled within the financial system rather than funding productive expansion. (Figure 4, lowest chart) 

Monetary easing, in this context, has been CPI-conditioned rather than cycle-stabilizing. 

CPI, therefore, becomes highly politicized and susceptible to the policy agendas of political leadership. 

Why this persistence? 

While the BSP’s inflation-targeting framework does not explicitly target asset prices, it cannot ignore collateral values in a bank-dominated financial system. 

Falling collateral values threaten capital adequacy, impair credit transmission, and raise systemic stress. Policy calibration therefore prioritizes preventing balance-sheet rupture, even when that means sustaining distortions and postponing adjustment.

Figure 5

This implicit bias toward continuity has encouraged banks to manage imbalances rather than resolve them—through accounting optics, ratio management, and asset reclassification. 

Non-performing and related risks (e.g. loan loss provision) are contained not by deleveraging, but by supporting numerator growth (total loan portfolio—TLP—or bank credit growth) relative to denominators, a classic Wile E. Coyote velocity dynamic: balance sheets continue running forward, suspended by liquidity and policy accommodation, even as underlying fundamentals weaken. (Figure 5, top and middle panes) 

The same dynamic appears on the BSP’s external balance sheet. While net foreign assets (NFA) remain elevated, their support increasingly comes from valuation and financing effects rather than organic FX inflows. 

• Rising global gold prices mechanically lift reserve valuations without expanding usable foreign-exchange buffers. (Figure 5, lowest graph) 
• National government external borrowing routed through the BSP temporarily bolsters NFA, but these gains are liability-mirrored, not earned. 
• Bank borrowings similarly augment liquidity while obscuring underlying fragility.

Figure 6

More revealing than the level of NFA is its slowing rate of accumulation, which coincides with persistent USDPHP pressure. (Figure 6, topmost visual) 

This deceleration signals that the BSP’s capacity to manage the exchange rate is increasingly constrained by the very accommodations it sustains. 

Peso dynamics, therefore, are not incidental. Under the BSP’s soft-peg regime, exchange-rate management remains a direct but tacit policy objective, subordinated to liquidity preservation, fiscal dominance, and bailout imperatives. (Figure 6, lowest chart) 

Rather than defending a fixed level, the BSP has been compelled to tolerate managed depreciation, balancing currency weakness against the need to sustain domestic liquidity and support a political economy defined by a widening savings-investment gap. 

USDPHP hit a record 59.46 last week amid declining volume and suppressed volatility, highlighting trade constraints and the footprint of BSP intervention. 

This trade-off is most visible in energy and utility pricing—not through import dependence, but through bailout architecture. Producer subsidies, RPT reliefs, administered pricing, and government-nudged implicit M&A arrangements suppress inflation pass-through while deepening balance-sheet entanglement between the state, the financial system, and regulated corporates. 

CPI relief is achieved, but only by displacing risk elsewhere in the system. 

• In this sense, the regime exemplifies Goodhart’s Law: by targeting CPI, other signals—credit quality, liquidity resilience, capital discipline—are progressively distorted. 
• It also reflects a Heisenberg Uncertainty-style policy problem: intervention alters the system it seeks to stabilize, most visibly in leverage-dependent sectors and currency dynamics. 

Sustained FX intervention further amplifies this fragility, increasing the risk that adjustment, when it arrives, will be sharper and more volatile. 

Viewed together, the pattern is consistent. The BSP is not directing capital toward productive expansion nor pre-empting cyclical deterioration. It is validating outcomes shaped by asset inflation, fiscal dominance, bailout logic, and inflation optics, accommodating systemic constraints in ways that systematically favor incumbents. 

The public is offered stability in appearance, while adjustment is deferred—quietly, repeatedly, and at growing long-term cost. 

Conclusion: Accommodation as Policy, Crisis as Outcome 

The evidence presented does not describe policy error in the conventional sense. It reflects the unintended consequences of an institutional regime constraint operating within a political-economic framework that systematically privileges incumbent interests. 

The BSP and the bank-dominated financial system operate under conditions where inflation optics, fiscal dominance, bailout dependencies, and soft-peg maintenance sharply limit genuine counter-cyclical control. Within this structure, discretion is less about steering the cycle than accommodating existing balance-sheet vulnerabilities. 

What is sold as stimulus is largely balance-sheet preservation; what is promoted as stability is increasingly liquidity- and valuation-driven; and what appears as growth is often internal transactional recycling rather than productive expansion. 

In such a regime, monetary policy does not fail abruptly — it erodes gradually, until markets, balance sheets, or external constraints force destabilizing adjustments. 

The risk is not that the peso weakens, or that interest rates are “too low,” but that accumulated distortions increase the likelihood that eventual correction becomes more volatile, less controllable, and more socially costly. 

This is not an argument about intent or competence. It is an argument about incentives, institutional constraints, and the limits of accommodation once gravity reasserts itself. 

Where political-ideological rigidity suppresses reform, crisis ceases to be an accident and becomes the logical endgame.

 

2026 Opens with USDPHP at Record Highs: The Peso Is the Symptom, Policy Is the Disease

 

With the exception only of the 200-year period of the gold standard, practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people. There is less ground than ever for hoping that, so long as the people have no choice but to use the money their government provides, governments will become more trustworthy—Friedrich August von Hayek 

In this issue 

2026 Opens with USDPHP at Record Highs: The Peso Is the Symptom, Policy Is the Disease 

I. 2026: The Peso at Record Lows, BSP’s Contradictory Stance

II. The USDPHP’s Suppressed Volatility

III. Media Agitprop and Be Careful of What You Wish For

IV. Lindy Effect: USDPHP’s  56-year Uptrend

V. Gold’s Rising Role in the GIR: Serendipity Saved Incompetence

VI. Inflation: Same Story, Different Mask

VII. Self-Poverty Ratings, Sentiment, and the Limits of Macro Optics

VIII. Employment Optics vs Labor Reality

IX. Deficits, Debt, and the Entropic Drift

X. PSE’s January 2026 Boom: Liquidity First, Fundamentals Later

XI. Conclusion: Record USDPHP A Symptom, Policies The Disease 

2026 Opens with USDPHP at Record Highs: The Peso Is the Symptom, Policy Is the Disease 

Gold-inflated FX reserves, suppressed USDPHP volatility, and the slow collapse of the BSP’s soft peg—symptoms of a deeper political problem.

Nota Bene: 

For new readers, this post extends our earlier analysis and projections on USDPHP; please see the reference sections for our previous works. 

I. 2026: The Peso at Record Lows, BSP’s Contradictory Stance 

2026 opened with USDPHP printing its fourth record high, touching 59.355 on January 7, placing the peso at an all-time low. This comes after the pair decisively breached the 59 level in October 2025—a threshold that, in practice, had functioned as a de facto boundary since late 2022, or roughly three years. 

Almost immediately, the Bangko Sentral ng Pilipinas (BSP) went public, stating it would not defend the peso, despite what it described as “tremendous pressure” to do so. 

This posture echoed its statement following the October breakout, where the BSP asserted that it merely “allows” market forces to determine the exchange rate. 

As we noted in a November 2025 post, such phrasing implicitly presupposes central bank supremacy over the market, implying that exchange-rate movements occur only at the BSP’s discretion—an assertion belied by the data.

II. The USDPHP’s Suppressed Volatility 

Figure 1

Absent official confirmation, one is reminded of Bismarck’s dictum: never believe anything in politics until it has been officially denied. Circumstantial evidence points strongly to prior intervention. In the seven instances when USDPHP approached or touched 59 before October 2025, both trading volume and realized volatility consistently compressed—a pattern difficult to reconcile with a freely clearing market. (Figure 1, topmost and middle panes) 

The same pattern has persisted after the breakout. 

While the BSP has ostensibly “allowed” USDPHP to violate its three-year boundary, average daily trading volume has trended downward since mid-2025, and by early January 2026 had fallen back to levels last seen in late 2024. Combined with a persistently narrow intraday trading range, this has produced a marked decline in day-to-day price changes. Put bluntly, suppressed volume has translated into suppressed volatility—a classic signature of administrative smoothing. 

III. Media Agitprop and Be Careful of What You Wish For 

Predictably, much of the self-righteous media attributed the peso’s latest record low to a “strong” US dollar. Yet the DXY remains broadly range-bound near its 2022 levels, despite a modest rebound from its mid-2025 trough. (Figure 1, lowest chart) 

The divergence is telling: USDPHP has been rising steadily since May 2025, even as the broad dollar index failed to make new highs. 

Yes, the dollar strengthened this week, appreciating against seven of ten Asian currencies tracked by Bloomberg, and USDPHP—up roughly 0.7% on the week—was among the largest movers. But context matters. 

Be careful what the establishment wishes for. Such agitprop risks becoming self-fulfilling. 

The US dollar may indeed be attempting a cyclical rebound. Should that occur, it would likely coincide with a tightening of global financial conditions, making dollar funding scarcer and more expensive. 

A stronger DXY would not cause domestic weakness—but it would expose internal fragilities that have been obscured by global easing. 

This pattern is consistent with Minsky’s financial instability hypothesis. Repeated suppression of exchange-rate volatility creates the illusion of stability, encouraging leverage, fiscal expansion, and balance-sheet risk. The eventual adjustment does not arrive as a shock—but as accumulated fragility ventilated through the peso.

Figure 2

As we argued last November, USDPHP spikes rarely occur in a vacuum. Historically, they coincide with periods of economic stress. Using BSP end-of-quarter data: (Figure 2) 

• 1983 debt crisis: +121% over 12 quarters (Q1 1982–Q1 1985)
• 1997 Asian Financial Crisis: +66.2% over 6 quarters (Q1 1997–Q3 1998)
• Dot-com bust (1999–2004): +30.6% over 20 quarters (Q2 1999–Q1 2004)
• Global Financial Crisis: +17.0% over 5 quarters (Q4 2007–Q1 2009)
• Pandemic recession: +22.6% over 7 quarters (Q4 2020–Q3 2022) 

The current breakout, now coinciding with weakening growth momentum, fits this historical pattern uncomfortably well. 

IV. Lindy Effect: USDPHP’s  56-year Uptrend 

More importantly, the breach of the 59 level reinforces the USDPHP’s roughly 56-year secular uptrend. This can be viewed through Nassim Taleb’s Lindy Effect: not as a property of the exchange rate itself, but of the political-economic ideological regime that governs it. The longer a depreciation bias survives—across crises, cycles, and administrations—the more robust and persistent it proves to be. 

This trend is therefore measured not merely by age, but by repeated survival—by the durability of the policies, incentives, and fiscal behaviors that continually reproduce it.

V. Gold’s Rising Role in the GIR: Serendipity Saved Incompetence 

This context is essential when evaluating the BSP’s reported December 2025 Gross International Reserves (GIR) of $110.872 billion. 

Figure 3

All-time-high gold prices played a decisive role in both the monthly and annual GIR outcome. Remarkably, the valuation gain on gold alone accounted for more than 100% of the roughly $4.6 billion year-on-year increase, while declines in foreign exchange investments exerted a drag on the headline figure.(Figure 3)

Figure 4

As a result, gold now represents its highest share of GIR in over a decade. This is especially striking given that the BSP was the largest net seller of gold in 2024, a move justified at the time as opportunistic monetization of high prices—and, more pointedly, on the argument that gold was a “dead asset.” (Figure 4, topmost and bottom graphs) 

Ironically, the BSP has since been incrementally rebuilding its gold position at higher prices than those at which it sold. 

As in 2020, gold once again served as a leading indicator. Then, large-scale gold sales—alongside increased national government’s external borrowing—were used to finance peso defense under a quasi-soft-peg regime. Once the proceeds were exhausted, borrowing constraints tightened, and usable FX reserves were drawn down, markets ultimately forced an adjustment: a weaker peso. (Figure 4, middle image) 

Briefly, BSP gold sales foreshadowed the 2020 USDPHP spike—and a rerun appears to be unfolding. 

Gold, however, is not equivalent to FX. It is less liquid in crisis: politically sensitive to mobilize, slower to swap into dollars, and volatile in mark-to-market terms. Markets understand this distinction—even if headline GIR figures do not.

Viewed counterfactually, had gold prices fallen in 2025, GIR would have declined materially, reserve-adequacy ratios would look materially worse, and narrative control would have been far more difficult. None of the reported strength reflects improved external competitiveness, durable capital inflows, or enhanced peso credibility. 

Gold did not validate policy. It rescued the optics. 

In that sense, the 2025 reserve story reveals something uncomfortable to the mainstream but unmistakable: serendipity saved incompetence. 

VI. Inflation: Same Story, Different Mask 

The government’s inflation narrative should feel familiar by now. 

Last week, sections of the mainstream media began warning—belatedly—about the impact of peso depreciation on electricity prices. This is hardly new. 

The Philippines’ recent inflation history has unfolded in distinct waves, each closely intertwined with the USDPHP.

Figure 5

During 2013–2018, the steady rise in USDPHP coincided with the first wave of inflationary upswing, which began building from 2015. The second wave in USDPHP (2021–2022) overlapped with the second inflation shock spanning 2019–2022, driven by global central bank easing, supply disruptions, energy prices, and domestic pass-through effects. (Figure 5, topmost image) 

What distinguishes the two episodes is not the inflation spike—but the disinflation phase that followed. 

From September 2018 to June 2021, USDPHP declined by roughly 11%, while CPI fell sharply from 6.7% to just 0.8%. As discussed previously, this period coincided with the BSP’s increasing reliance on Other Reserve Assets (ORA)—including derivatives, repos, and short-term FX borrowing—to manage the exchange-rate regime, a shift clearly visible in the GIR composition. 

In the current episode, the adjustment mechanism has been fundamentally different. 

Since first testing the 59 level in 2022, USDPHP has remained range-bound between 55 and 59, with no sustained appreciation. Yet headline CPI retraced materially—not because of currency relief or market forces, but due to a combination of: 

• Demand destruction, now evident in slowing GDP growth
• Administrative price controls, including ₱20 rice programs and mandated MSRPs
• Distortions arising from these interventions, masking underlying pressures
• Composition and measurement effects, aligned with political incentives for easing—particularly amid ongoing bailouts of the energy sector, banks, and real estate 

It was therefore no coincidence that a day before the October 2025 59-level breakout, the administration announced renewed price freezes, citing natural calamities as justification. 

Despite these measures, December CPI rose to 1.8%, well above consensus expectations, lifting quarterly inflation from 1.4% in Q3 to 1.7% in Q4. Disinflation, it appears, has already begun to fray. 

This erosion is further reflected in liquidity conditions. Bailouts in the energy sector coincided with an 8.26% year-on-year expansion in M3 in October, the fastest since September 2023. (Figure 5, middle diagram) 

November data remain unpublished. 

More broadly, the BSP has either delayed, discontinued, or reduced the frequency of several previously standard statistical releases—ranging from Bank’s MSME lending to stock market activities (transactions, index, and market capitalization) and more. Whether this reflects capacity constraints or political narrative sensitivity remains an open question. But opacity rarely improves credibility. 

VII. Self-Poverty Ratings, Sentiment, and the Limits of Macro Optics 

While headline CPI surprised to the upside, food inflation for the bottom 30% of households turned positive for the first time since March 2025—a critical inflection point historically associated with rising hunger and self-rated poverty. (Figure 5, lowest visual)

Figure 6

Consistent with this, the SWS Q4 survey showed self-rated poverty rising to 51% of households, with another 12% on the borderline—a combined 63%. (Figure 6, upper chart) 

This deterioration in sentiment persists despite record consumer credit, near-full employment headlines, slowing CPI, pandemic-scale deficit spending, and still-positive GDP growth. 

This is not an anomaly. Improvements in self-rated poverty reversed as early as 2017, spanning two administrations and coinciding with a sustained surge in deficit spending. 

What is rarely discussed is that this reflects the redistributive and extraction effects of crowding out—the attenuation of the private sector in favor of the state and its preferred private sector intermediaries. 

Households have responded predictably by leveraging their balance sheets to sustain consumption amid eroding purchasing power, refinancing debt rather than building resilience through savings. 

This divergence between headline indicators and lived experience is a classic case of James Buchanan’s fiscal illusion. By diffusing costs through inflation, deficits, and administered prices, the state masks the true burden of adjustment—until it reappears in household balance sheets and public sentiment.

VIII. Employment Optics vs Labor Reality 

The government reported improving employment data last November. Less visible is that labor force participation has been declining since late 2022, while employment momentum shows signs of plateauing (via rounding top formation). (Figure 6, lower graph) 

More troubling is the quality of employment. Functional illiteracy remains widespread, MSMEs and informal work dominate job creation, and household income growth remains structurally dependent on OFW remittances. 

This combination explains why sentiment remains depressed—and why slowing GDP risks morphing into a more pernicious mix of rising NPLs, renewed inflation pressures from deficit monetization, or outright stagflation.

IX. Deficits, Debt, and the Entropic Drift 

Despite the rhetoric surrounding corruption and reform, the administration has signed a Php 6.793 trillion 2026 budget, ensuring that the entropic forces dragging on growth remain firmly in place.

Figure 7

Public debt rose to a record Php 17.65 trillion in November, up 9.7% year-on-year, defying the Bureau of the Treasury’s September projection of year-end declines. (Figure 7, middle and topmost images) 

Domestic debt expanded by 10.95%, while foreign debt rose 7%, continuing its gradual upward share since 2021.(Figure 7, lowest diagram) 

As we have repeatedly argued, expanding deficits mechanically imply rising debt and servicing burdens. Whether domestic or foreign, this accumulation heightens balance-sheet and duration risks. 

No amount of propa-news or fiscal newspeak alters that arithmetic. 

Eventually, these imbalances surface—in the exchange rate, inflation, interest rates, asset prices, and real activity. Not abruptly, but gradually, through a boiling-frog dynamic—a process that markets ventilate over time. 

As Mancur Olson warned, mature systems accumulate distributional coalitions that extract rents while resisting adjustment. The result is slower growth, rising inequality, and a political preference for redistribution over reform—precisely the conditions now reflected in peso weakness and declining household sentiment.

X. PSE’s January 2026 Boom: Liquidity First, Fundamentals Later 

Unsurprisingly, liquidity-driven rallies continue to propel global equity markets, with the effect especially visible in Asia. The Philippine PSEi 30 gained 3.47% week-on-week (WoW), ranking fourth in the region. As evidence of speculative mania, nine of nineteen Asian indices closed at or near all-time highs for the first time, delivering unusually strong market breadth.

Figure 8

Yet the Philippine rally remains highly concentrated, with a handful of brokers and heavily traded issues generating most of the volume. The largest-capitalization stock, ICTSI, surged 12.5% WoW, almost single-handedly driving the PSEi 30, flanked by Jollibee (+12.32%) and AEV (+11.35%). (Figure 8, topmost visual) 

Weekly breadth within the PSEi 30 favored gainers (19 of 30), while the broader PSE recorded its best two-week breadth since January 2023—ironically, the PSEi 30 still closed 2023 down 1.77%. (Figure 8, middle window) 

Although the number of issues traded daily spiked to 2022 highs—often read as a sign of rising retail participation—main-board turnover averaged just Php 6.25 billion per day, a curious outcome amid New Year euphoria. (Figure 8, lowest chart) 

As with prior easing-driven rallies, such liquidity pumps tend to have short half-lives.

XI. Conclusion: Record USDPHP A Symptom, Policies The Disease 

The November break of USDPHP 59 marked the unraveling of the BSP’s soft peg and exposed underlying economic fragility. December’s record highs made clear that this was not a transient overshoot, but the manifestation of deeper fault lines—fiscal bailouts, and mounting financial stress—expressed as widening bailouts initially at the energy sector 

January 2026 merely confirms the trajectory. What appears as resilience in the BSP’s foreign reserves has largely been valuation-driven. What looks like disinflation is increasingly administrative maneuvers. What passes for growth is the rising use of leverage, mounting deficits, and liquidity injections rather than productivity or competitiveness. 

In this sense, the peso’s decline is not an accident of global conditions. It is the byproduct of a political-economic regime that repeatedly socializes losses, crowds out private adjustment, favors centralization, predisposed to asset bubbles and substitutes newspeak for balance-sheet repair. 

The exchange rate is not the problem. It is the messenger. 

____

References

Friedrich von Hayek, Choice In Currency, A Way To Stop Inflation, The Institute Of Economic Affairs 1976 

Prudent Investor Newsletters, The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility, Substack, November 02, 2025 

Prudent Investor Newsletters, USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress, Substack, December 21, 2025 

Nassim Nicholas Taleb An Expert Called Lindy January 9, 2017

Why the PSE Failed in 2025: Engineered Markets and Broken Policy Transmission

 

 

An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today—Laurence J. Peter 

Wishing you an exciting 2026: record highs, easy money, and all the risks that come with it. 

In this issue: 

Why the PSE Failed in 2025: Engineered Markets and Broken Policy Transmission

I. The Echo Chamber of Optimism

II. Institutional Conflicts of Interest: Agency Problem and the Information Asymmetry

III. Global Euphoria vs. Local Fragility: A Market That Failed to Respond—Despite Every Attempt to Boost It

IV. Engineered Rallies and the BSP’s Easing Cycle Elixir

V. Mounting Concentration Risk and the ICTSI Distortion

VI. Foreign Selling, CMEPA, and the Gaming Bubble

VII. From Equities to Energy: Bailouts Without Calling Them Bailouts

VIII. A Lone Divergence: Mining and the War Economy

IX. The Philippine Treasury Market Confirms the Diagnosis

X. Conclusion: When Policy Loses Its Grip

XI. Epilogue: The Façade of January Effects 

Why the PSE Failed in 2025: Engineered Markets and Broken Policy Transmission 

Why the PSEi 30 underperformed despite rate cuts, engineered rallies, and unprecedented policy support 

I. The Echo Chamber of Optimism

Figure 1

Does the public even remember the barrage of starry-eyed headlines and sanguine projections that dominated discourse from late-2024 through 2025? (Figure 1) 

From Goldman Sachs’ overweight upgrade on Philippine equities (November 2024), to the relentless amplification of projected PSEi 30 returns by the mainstream echo chamber, to a business media outfit hosting a Pollyannish stock market outlook forum in February 2025, optimism was not merely expressed—it was drilled into the public consciousness. 

Strangely, at the forum, Warren Buffett’s aphorism—“be greedy when everybody is fearful”—was cited ironically at a time when virtually every expert was advocating optimism. Even “cautious optimism” emerged as the most defensive stance. 

All told, media and institutional narratives throughout 2025 projected rising equities anchored on a strengthening GDP—an assumption that would soon have the rug pulled out from under it.

Figure 2

In hindsight, the establishment’s posture resembled a classic denial phase in a deflating PSEi 30 bubble cycle. (Figure 2)

II. Institutional Conflicts of Interest: Agency Problem and the Information Asymmetry 

The fundamental problem lies in the structural conflicts of interest between financial institutions and the investing public. 

This dilemma reflects classic agency problem and asymmetric information. The objectives of buy- and sell-side institutions—fees, commissions, deal flow—diverge materially from those of retail investors seeking risk-adjusted returns. 

As a result, sales pitches camouflaged as institutional research or news are designed to attract savings/capital, not to interrogate risk–reward tradeoffs. The information disseminated to the public is therefore shrouded in adverse selection and biased framing. 

Despite serious unintended consequences from excessive interventions—easy money distortions, fiscal crowding-out, regulatory interference, capital controls, bailouts, and capital-market price manipulation—this savings-depleting dynamic receives scant acknowledgment. 

III. Global Euphoria vs. Local Fragility: A Market That Failed to Respond—Despite Every Attempt to Boost It 

There is also little recognition that the Philippine Stock Exchange has vastly underperformed, despite extraordinary efforts to support it.

Figure 3 

As global central banks embarked on a historic easing campaign and global equities posted a third consecutive year of double-digit gains, the PSEi 30 closed 2025 as the second-worst performer in Asia, ahead of only Thailand. (Figure 3, topmost pane) 

Of 19 national bourses tracked by Bloomberg, 16 ended the year higher, averaging a striking 19.22% return—led by South Korea, Pakistan, Sri Lanka, and Vietnam. The Philippines, alongside Bangladesh and Thailand, stood out as an underperforming outlier. (Figure 3, middle graph) 

This flagrant underperformance—despite substantial engineered pumps in Q4—laid bare the market’s internal fragilities. 

IV. Engineered Rallies and the BSP’s Easing Cycle Elixir 

In December, a series of price-distorting late-session “afternoon delight” and pre-closing “rescue pumps” lifted the PSEi 30 by 0.51% MoM. 

These were concentrated in banks and property stocks, echoing the mainstream narrative that rate cuts should disproportionately benefit them. (Figure 3, lowest table) 

Additional support came from ICTSI, following its powerful October–November advance. Although the rally peaked on December 12 before a mild pullback, ICT’s surge drove the services sector up 10.5% and lifted the headline index by 1.67% in Q4.

Figure 4

For context, the BSP’s first rate cut in August 2024 was initially sold as an elixir, propelling the PSEi 30 up by a remarkable 13.4% in Q3 2024. Yet a surprise weak Q3 2024 GDP print (+5.2%) triggered a sharp reversal: –10.23% in Q4 2024 and –5.33% in Q1 2025. After another significant setback in Q3 2025 (–6.46%), the index fell –4.9% in 2H 2025. (Figure 4, topmost window) 

Despite repeated interventions, the PSEi 30 closed 2025 down 7.29%. 

V. Mounting Concentration Risk and the ICTSI Distortion 

Since peaking in 2018, the PSEi 30 has recorded six negative return years out of the last eight—an unmistakable sign of a debt-trapped, late-cycle economy. (Figure 5, middle chart) 

The index’s internals underscore this bearish backdrop: 24 of 30 constituents ended 2025 in the red, averaging a –6.87% decline. (Figure 4, lowest image)

Figure 5

Yet again, ICTSI—the PSE’s largest market-cap stock—nearly single-handedly prevented a deeper collapse. Its 46.9% full-year gain pushed its free-float weight to a record 17.8% in mid-December, ending the year at 16.5%. (Figure 5, topmost diagram) 

Consequently, the combined free-float weight of the top 5 heavyweights to a record 53% but closed at 52.16% still proximate to an all-time high. (Figure 5, second to the highest visual) 

Adjusted for the peso’s 1.6% YoY depreciation to a record low, the PSEi 30 fell 8.78% in USD terms—its seventh year of decline since 2017. (Figure 5, second to the lowest image) 

The dollar index DXY fell by about 9.6% in 2025. 

VI. Foreign Selling, CMEPA, and the Gaming Bubble 

The broader PSE fared no better. Outside a handful of names, most issues declined and market internals remained weak. (Figure 5, lowest chart) 

While synchronized “national team” pumping supported headline levels, it was largely offset by persistent foreign selling—a dominant force since 2018.

Figure 6 

Foreign participation rose to 49.18% of gross volume in 2025, the highest since 2021. (Figure 6, topmost window) 

That said, under globalization and financialization, “foreign selling” does not necessarily imply foreign fund liquidation. Many elite-owned firms operate through offshore vehicles and could be part of the ‘foreign’ trading activities. 

In the meantime, gross and main board volume (MBV) rose 14.64% and 19.13% in 2025, but most of this activity peaked around the CMEPA rollout in July and slowed materially thereafter. Ironically, the capital-consumption effects of the law generated unintended consequences: asset bubbles, negative returns, and corroding liquidity. (Figure 6 middle image) 

For example, as the government cracked down on digital gambling, the PLUS gaming bubble accounted for a staggering 11.65% of main board volume in Q3 2025, revealing how speculative excess merely migrated into the PSE—absorbing retail savings in the process. 

In 2025, concentration activities intensified: the top 10 brokers averaged 63.44% of Q4 main board volume; the top 20 accounted for over 82% both in Q4 and full-year 2025 MBV. 

VII. From Equities to Energy: Bailouts Without Calling Them Bailouts 

Engineered rescue rallies are not cost-free. They amplify concentration risk, intensify late-cycle fragility, and expose deeper balance-sheet stress driven by debt-financed asset support and misallocation. 

This pattern extends beyond equities. 

Authorities initiated a soft bailout of the energy sector—first indirectly via the SMC–AEV–MER asset-transfer triangle, and later through Real Property Taxes (RPT) waivers favoring elite-owned IPPs. This was followed by another buy-in: Prime Infrastructure’s acquisition of a 60% stake in FGEN’s Batangas LNG project, alongside higher consumer charges via GEA-All layered on top of FIT-All. 

VIII. A Lone Divergence: Mining and the War Economy 

For the first time, the mining sector not only outperformed but diverged meaningfully from the PSEi and broader market. Its performance reflects exposure to global commodity dynamics—finance, geopolitics, and the war economy—rather than domestic demand. (Figure 6, lowest graph) 

While retracements are possible given overbought conditions, current signals suggest any correction may be cyclical rather than trend-reversing. 

IX. The Philippine Treasury Market Confirms the Diagnosis 

The warning signs extend to Philippine treasury markets.

Figure 7

By end-2025, the Philippine BVAL curve had clearly steepened relative to the flattish 2023–2024 profile, though it remained less extreme than the pandemic-era 2022 BSP rescue year. This shift points less to growth optimism and more to rising risk premia. (Figure 7, upper diagram) 

While short-dated T-bill yields have not fallen back to 2022 levels—despite policy rate cuts, aggressive RRR reductions exceeding pandemic-era easing, and the doubling of deposit insurance—long-term yields remain materially higher than in 2023–2024, signaling mounting market concern over fiscal conditions, debt supply, and credibility. 

The resulting mixed yield configuration, occurring alongside slowing GDP growth and persistently elevated bank lending rates, reflects not selective liquidity management but a failure of monetary transmission: BSP sought genuine easing, yet impaired bank balance sheets, malinvestment, and fiscal overhang have rendered markets far less malleable than policymakers expected. 

X. Conclusion: When Policy Loses Its Grip 

Taken together, the events of 2025 expose a Philippine financial system increasingly governed by intervention rather than price discovery—and increasingly constrained by balance-sheet fragility rather than cyclical weakness. 

Despite aggressive policy easing activities, engineered equity support, regulatory inducements, and explicit and implicit bailouts, markets failed to respond as expected. Instead, concentration deepened, liquidity thinned, and monetary transmission weakened. 

The underperformance of the PSEi 30 was not an anomaly but a symptom. Equity pumps masked deterioration; index ‘strength’ concealed internal decay. 

The peso weakened, bond yields re-priced fiscal risk, bank lending rates remained elevated, and savings were quietly consumed through speculation and policy distortion. What appeared as support increasingly functioned as stress transfer—from institutions to households, from balance sheets to prices, and from the present to the future. 

In this sense, 2025 was not merely a bad year for Philippine equities. It was a year in which markets signaled—clearly and repeatedly—that policy credibility, strained by diminishing returns and collapsing transmission/tightening effective liquidity, had become the binding constraint. 

Until balance-sheet repair, fiscal discipline, and genuine price discovery are restored, further intervention may sustain appearances—but not balance-sheet health or durable confidence. 

XI. Epilogue: The Façade of January Effects 

January has historically been a strong month for the PSE, often reflecting the so-called ‘January effect’—seasonal inflows driven by year-end cash balance surpluses, portfolio reallocations, and tactical positioning. 

Using the January 2018 peak as the reference point, the PSEi 30 has posted January gains in five of the past eight years (62.5%). Yet over that same post-2018 cycle, full-year returns have been negatives/deficits in six of those years (75%). The implication is clear: early-year strength has repeatedly failed to translate into durable annual performance. (Figure 7, lower chart) 

Even so, institutional cheerleading is likely to intensify. Seasonal rallies will be framed as confirmation of recovery, even as stimulus-driven activity continues to deepen debt-led imbalances and erode household savings. 

This is not to suggest that the PSEi 30 must necessarily close 2026 in negative territory. Rather, when façade substitutes for structure—when form is elevated over substance—market fragility increases. 

Under such conditions, for the general market, the probability of risk and loss continues to outweigh potential gains, regardless of how loudly institutions beat the drum for a bull market. 

Meanwhile, the risk of a meltdown looms. 

____

Select References 

Prudent Investor Newsletters, The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy, Substack, December 07, 2025 

Prudent Investor Newsletters, Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop, Substack, November 23, 2025 

Prudent Investor Newsletters, PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility Beneath the Headline Growth, Substack, November 30, 2025 

Prudent Investor Newsletters, The Philippine Q3 2025 “4.0% GDP Shock” That Wasn’t Substack, November 16, 2025 

Prudent Investor Newsletters, The Philippine Flood Control Scandal: Systemic Failure and Central Bank Complicity, Substack, October 05, 2025 

Prudent Investor Newsletters, June 2025 Deficit: A Countdown to Fiscal Shock, Substack, August 3, 2025 

Prudent Investor Newsletters, The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback, Substack, July 27, 2025 

Prudent Investor Newsletters, The Ghost of BW Resources: The Bursting of the Philippine Gaming Stock Bubble Substack, July 6, 2025 

Prudent Investor Newsletters, How Surging Gold Prices Could Impact the Philippine Mining Industry (3rd of 3 Series), Substack, April 02, 2025