After peaking at 6% in 2023 (a 15-year high), inflation declined to 3.2% in 2024 and further eased to 1.7% in 2025, in the context of the Bangko Sentral ng Pilipinas’ (BSP) monetary tightening cycle, which brought the policy rate to a peak of 6.5% at the end of 2023. In mid-2024, the BSP began its monetary-easing phase, implementing cumulative cuts of -200bps and bringing the policy rate to 4.5% by the end of 2025. With inflation expected to remain within the BSP’s 2-4% target range, at 2.3% in 2026 and 2.7% in 2027, we forecast only one additional -25bps rate cut in 2026.

Fiscal consolidation has been slow since the pandemic. From a pre-pandemic average of -0.5% of GDP, the fiscal balance deteriorated to -6.2% in 2021 and this deficit has been very slowly narrowing since – still at an estimated -3.6 % in 2025 and forecast at -3.1% in 2026. While the government has ambitious plans to bring the deficit to -3% of GDP in 2028, in part thanks to improving and expanding tax collection, high interest payments on debt and continued support through subsidies and cash assistance for low-income households will likely stall the progress.

The Philippines’ short-term financing risk is deemed broadly low, but close monitoring of public finances, domestic credit growth and the level of foreign direct investments is warranted. Regarding public finances, the fiscal deficit rose during the Covid-19 crisis and is unlikely to return to pre-pandemic levels in 2026-2027 while public debt is expected to remain around 60% of GDP, up from less than 40% in 2019. However, the reliance on domestic rather than external financing has kept short to medium-term risks contained. Looking at domestic credit growth, it is now growing faster than nominal GDP growth, having somewhat accelerated from +7.8% y/y in September 2024 to +8.9% y/y in September 2025 (while nominal GDP growth slowed), in the context of the BSP’s monetary easing cycle that started in 2024. On the external balances front, the current account deficit widened to a peak of -4.5% of GDP in 2022, due to high energy prices (the Philippines is a net energy importer), before narrowing somewhat but still likely remaining worse than -3% of GDP in 2026-2027. Additionally, reliance on remittances leaves the country exposed to external shocks, while its heavy dependence on electronics exports (over 50% of total exports) makes it vulnerable to sector-specific cycles. Further, the level of foreign direct investments remains relatively low, which will be worth monitoring as the country hopes to improve the business environment and raise its attractiveness to foreign investors. 

With a lower-than-average performance, the business environment in the Philippines broadly remains weak. The economy was ranked 82 out of 184 economies in the Heritage Foundation’s Index of Economic Freedom survey 2025, roughly stable from the 88th position based on the survey conducted in 2024. The Philippines’ ranking was primarily driven by weaknesses in the rule of law (property rights, judicial effectiveness and government integrity) and its fiscal health. However, on the positive side, indicators for government spending, tax burden and trade freedom performed well. Meanwhile, the World Bank’s Worldwide Governance Indicators show that issues related to the rule of law and corruption warrant serious attention, with both indicators having deteriorated since the previous year. Lastly, our proprietary Environmental Sustainability Index 2025 puts the Philippines at rank 130 out of 210 economies, with the energy use per GDP, renewable electricity output and the recycling rate remaining weak spots.

Politically, of particular concern is the continued tensions between the two main political camps, the Duterte and Marcos families. The rift began its escalation in early 2024, when former president Rodrigo Duterte alleged that the current president, Ferdinand Marcos, and his allies were trying to amend the constitution to remove term limits. In early 2025, the feud intensified, with Sara Duterte, Rodrigo’s daughter and Marco’s vice president, being removed from key appointments due to her perceived threat as a challenger in the 2028 election, and Rodrigo Duterte being transferred to the International Criminal Court in The Hague. The May 2025 mid-term election resulted in a status quo, with neither family being able to strengthen their position. These tensions could potentially risk delaying key structural reforms. At the same time, protests that broke out in the second half of 2025 in the context of the corruption scandal around flood-control infrastructures are expected to continue. Large-scale investigations and targeted support for the affected population are likely to remain governmental priorities.