The Financial Stability Council (FSC) said in its latest Financial Stability Report that widening fiscal deficits were forcing government to rely more heavily on domestic funding sources, increasing banks’ exposure to sovereign debt and strengthening links between the health of public finances and the banking sector. With the country’s fiscal deficit expected to widen by P4.23 billion to P26.35 billion in the 2026-27 financial year, the country’s financial sector has in recent months had to fork out capital to meet government short term budget financing needs. “As government financing requirements expand, commercial banks are increasingly absorbing government securities, exposing them to sovereign default risk,” the multi-agency watchdog said in the report
. “The deepening sovereign-bank nexus has the potential to tighten liquidity conditions through the reduction of loanable funds available to the private sector and intensifying competition for domestic deposits as banks channel more resources towards supporting the fiscal budget”. “In turn, this pressure can influence sovereign yields and heighten the dependence of the fiscal framework on the banking sector’s balance sheet.” FSC warned that as government financing requirements expand, commercial banks are increasingly absorbing government securities, exposing them to a sovereign default risk. It added that increased government borrowing could ultimately affect the pricing of sovereign debt and deepen the banking sector’s dependence on government finances.
