Defending the Peso, Watching the Borrower

When President Ferdinand Marcos Jr. assured Filipinos that the government had the means to defend the peso, the currency had already breached ₱64 against the US dollar, bringing into sharper focus the economic pressures confronting households, businesses and financial institutions.

The Philippine peso's depreciation and rising inflation are testing household budgets and highlighting potential risks for banks with large consumer-lending portfolios.

The President's assurance was intended to calm markets and ease public anxiety. But the peso's depreciation raises a larger question: How far can monetary intervention protect an economy whose underlying weaknesses remain unresolved?

The Bangko Sentral ng Pilipinas (BSP) can intervene in the foreign-exchange market to moderate excessive volatility.

It can also adjust interest rates to contain inflation and help maintain confidence in peso-denominated assets.

Neither instrument, however, can manufacture the productive investments, export earnings or improvements in competitiveness that ultimately strengthen a country's external position. Both can also carry costs.

The Bangko Sentral ng Pilipinas (BSP) can intervene in the foreign-exchange market to moderate excessive volatility. [Photo: Bangko Sentral ng Pilipinas Facebook]

Selling dollars to support the peso draws on the country's foreign-exchange reserves.

Maintaining higher interest rates can increase borrowing costs, restrain investment and make debt repayment more difficult for households already struggling with rising expenses.

The predicament becomes more complicated when inflation is driven substantially by imported energy and other supply-side pressures.

The conflict in the Middle East has contributed to volatility in international oil markets, while the weakening peso magnifies the domestic cost of petroleum imports.

Higher fuel prices can work their way through transportation, electricity, food distribution and manufacturing. For households, the consequences are cumulative.

A worker does not experience inflation as a statistical percentage. It arrives through a higher electricity bill, a more expensive journey to work, increased grocery expenses and the shrinking amount left after essential purchases.

With September inflation reaching 7.2%, these pressures have become increasingly difficult to ignore.

The government's immediate concern is understandable.

Further depreciation could aggravate imported inflation and weaken consumer confidence. But protecting the peso's exchange rate is not necessarily the same as protecting the purchasing power of the people who earn and spend it.

That distinction becomes especially important when examining the Philippine banking system.

Selling dollars to support the peso draws on the country's foreign-exchange reserves.

Consider Union Bank of the Philippines. The bank has built a substantial consumer-lending business, distinguishing itself from lenders whose portfolios are more heavily concentrated in corporate credit.

Its financial results suggest that the strategy has generated considerable earnings.

For the first nine months of 2026, UnionBank reported net income of ₱9.9 billion, an increase of 53% from the comparable period last year.

Net interest income rose 9% to ₱51.9 billion, while its net interest margin reached 6.9%, among the highest in the industry, according to the bank. Consumer loans accounted for 62% of its total loan portfolio, nearly three times the industry average.

These figures describe a bank that has found a profitable position in a competitive financial market.

But the same lending concentration that helps generate attractive margins also creates a particular sensitivity to changes in household finances. The connection had already attracted the attention of Moody's Ratings.

In April, the credit-rating agency warned that UnionBank was more exposed to risks associated with the shrinking financial buffers of retail borrowers amid higher inflation.

At the end of 2025, retail lending represented approximately 60% of the bank's loan portfolio, while unsecured retail loans accounted for around 40% of total loans.

Moody's regarded the large unsecured component as a relative weakness because such loans had performed less favorably than corporate lending.

It also drew attention to UnionBank subsidiaries serving lower-income and underbanked borrowers, whose financial capacity could be particularly sensitive to rising living costs.

The agency expected the bank's problem-loan ratio to remain elevated at approximately 6% to 7%. It also observed that improvements in profitability would depend partly on the bank's ability to control credit costs.

That warning deserves to be read alongside UnionBank's more recent performance.

The bank reported that its gross nonperforming loan ratio had declined to 6.56% by September, while its net NPL ratio stood at 2.90%.

Credit costs also declined year on year, and its capital adequacy ratio reached 14.6%.

These are meaningful improvements. They indicate that the bank has been managing credit risks while expanding earnings.

Moody's April assessment and UnionBank's October results are therefore not necessarily contradictory. One identifies a structural exposure to household financial stress; the other documents how the bank has performed in managing that exposure so far.

UnionBank's figures describe a bank that has found a profitable position in a competitive financial market. [Photo: UnionBank]

The question is what happens if the economic headwinds persist.

Consumer lending rests on a relatively simple expectation: borrowers will continue earning enough to meet their obligations after paying for essential needs. But inflation can change that calculation.

When food, transportation and electricity absorb a larger share of household income, discretionary spending is usually among the first casualties. Families postpone purchases, reduce savings and cut expenses wherever possible.

Debt repayments may initially be protected through these adjustments. The danger arises when the adjustments are no longer sufficient.

A credit-card borrower who previously paid the full monthly balance may begin making only minimum payments. A salary-loan borrower may find that essential expenses leave less room for other obligations.

Another household may need to borrow to meet expenditures that were previously covered by regular income.

None of these developments automatically produces a nonperforming loan. But sustained pressure can increase the probability of missed payments, delinquency and eventual credit losses.

This is where the banking paradox emerges. The interest margins that make consumer lending attractive partly compensate banks for the higher risks associated with unsecured and other retail credit.

Yet the borrowers supporting those margins are exposed to the same inflationary pressures that the government is trying to contain.

A profitable lending model can therefore face rising credit costs even while reported interest income remains substantial.

UnionBank is not necessarily approaching such an outcome. Its improving asset-quality indicators and capital buffers provide important protection.

But profitability alone cannot establish how resilient a consumer-heavy portfolio will remain if household purchasing power continues to weaken.

The broader economy confronts a comparable problem.

The Philippines can draw on international reserves and monetary instruments to stabilize financial conditions. What those instruments cannot accomplish by themselves is the creation of new factories, stronger exports and sustained improvements in productivity.

Those require investment, reliable institutions and an environment in which businesses can operate without unnecessary regulatory delays.

Investors continue to encounter permitting requirements, administrative complexity and concerns about institutional predictability.

Such barriers can delay projects that might otherwise generate employment, exports and foreign-exchange earnings.

Addressing these weaknesses would not immediately reverse peso depreciation. Nor would stronger investment automatically eliminate consumer-credit risks.

But a more productive economy, offering sustainable employment and rising real incomes, would strengthen both the country's external position and the repayment capacity of its households.

The President has promised to defend the peso. UnionBank, meanwhile, has demonstrated that it can generate substantial profits from lending to Filipino consumers.

Both possess financial buffers. Both face pressures that cannot be resolved through financial instruments alone.

Beyond the exchange-rate quotations and bank earnings reports, millions of households are making their own adjustments.

The grocery bill is paid first. Transportation comes next. Electricity cannot wait. Then the borrower looks at the amount due on the credit card.

And beyond the exchange-rate quotations and bank earnings reports, millions of households are making their own adjustments.

The grocery bill is paid first. Transportation comes next. Electricity cannot wait. Then the borrower looks at the amount due on the credit card.

The bank's financial statements will record what happens afterward.

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