Peso volatility threatens Philippines fiscal space – economists

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January 14, 2026 | 12:00am

MANILA, Philippines — Peso volatility could put additional pressure on the government’s fiscal space, potentially increasing the national debt burden and limiting funding for key programs such as education and health care, according to economists.

Despite some fiscal breathing room from stable revenues and a greater reliance on peso-denominated borrowing, Reyes Tacandong & Co. senior adviser Jonathan Ravelas warned that the cushion has limits and could be quickly eroded if peso volatility persists.

“If the peso stays volatile, the P19 trillion debt projection can easily climb by another P150 billion to P250 billion without the government borrowing a single extra peso,” Ravelas said.

On Jan. 8, the Philippine peso fell to a record low of 59.355 per dollar.

Based on the 2026 Budget of Expenditures and Sources of Financing, the national government’s outstanding debt is expected to reach P19.057 trillion by the end of this year.

This figure accounts for almost 70 percent of the total domestic regular account, amounting to P13.281 trillion, while the remaining 30 percent is included as part of the external regular account, valued at P5.775 trillion.

However, the foreign exchange used in the year-end projection is only 57 per greenback.

With the fluctuating peso, Ravelas said that shorter debt maturities and higher investor yield demands are signs that foreign exchange risks are beginning to tighten pressure on the government’s finances.

“Policymakers should keep an eye on rising interest payments in the budget, shorter debt maturities and investors demanding higher yields. Those are the early warning signs that foreign exchange risks are starting to squeeze public finances,” Ravelas said.

Last year, the Department of Finance said that the country is adopting a borrowing mix of 80 percent local and 20 percent foreign debt to mitigate foreign exchange risks.

Finance Secretary Frederick Go stated that the government has calibrated its spending to meet debt targets for 2025. While he could not provide the exact foreign exchange figure, he said authorities remain confident of hitting expenditure and fiscal goals despite currency movements.

“All the new issuances now are 80 percent domestic and 20 percent international or foreign. So I think that’s already a very good number. So we should just stick to that. It helps give us more predictability in our debt amount,” Go said.

National Treasurer Sharon Almanza previously said that currency fluctuations will play a key role in the revaluation of the government’s foreign-currency debt portfolio.

Recent data from the Treasury showed that the country’s outstanding debt climbed to a fresh all-time high in November last year to P17.647 trillion, exceeding the full-year debt projection for 2025 by over P300 billion, driven by an increase in net issuance of debt and a weak peso.

For the Philippine Institute for Development Studies senior research fellow John Paolo Rivera said a weaker peso raises foreign debt servicing costs, potentially crowding out health, education and infrastructure spending, while persistent depreciation combined with weaker revenues could further tighten the government’s fiscal space.

“The current fiscal position can generally absorb moderate forex shocks because the debt mix is still largely domestic and NG can smooth financing, but persistent depreciation would still tighten fiscal space at the margin, especially if it coincides with weaker revenues,” he said.

Recent Treasury data showed that the country’s budget deficit reached P1.26 trillion from January to November last year, higher by nearly seven percent than the P1.18 trillion in the same period in 2024.

Rivera added that foreign exchange volatility could push the P19.05-trillion debt projection higher through valuation effects on foreign-currency debt and increased borrowing needs, with risks intensifying if peso weakness becomes prolonged rather than temporary.

Rizal Commercial Banking Corp. chief economist Michael Ricafort said that measures to stabilize the peso exchange rate against the US dollar would also help prevent further bloating foreign debt servicing and outstanding national debt.

“It is structurally better to keep the national government debt-to-gross domestic product ratio below the international threshold at 60 percent, from the current 63.1 percent as of the third quarter of 2025, to help better manage fiscal management sustainable,” he said.

BSP Governor Eli Remolona Jr. earlier said the central bank is already close to its desired policy rate, noting that while further cuts remain possible, holding rates steady is also an option and a rate hike is unlikely.

Ricafort added that the planned increase in foreign borrowings for 2026, amid persistent budget deficits requiring both local and foreign financing, could push national government debt to new record highs unless fiscal reforms and stronger tax collection efforts are implemented.

“The peso exchange rate has depreciated by about 16 percent over the past four years or since the Russia-Ukraine war started in February 2022, thereby could bloat the servicing and payments of foreign debt principal and interest,” he said.