Philippines

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. However, inflation has since proven the most stubborn in the region, running at 6% for several consecutive months despite 75bps of rate hikes already delivered by the BSP. The anticipated onset of El Niño poses a significant upside risk to inflation as it threatens to disrupt agricultural output and drive up food prices while compounding existing energy cost pressures. Inflation is now forecast at 5.5% in 2026, 3.7% in 2027 and 2.8% in 2028. In this context, the policy rate is expected to remain elevated at 5.00% in 2026, before gradually declining to 4.75% in 2027 and 4.25% in 2028 as inflationary pressures subside. 

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 with -4% in 2025 and forecast at -3.7% 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 stall the progress.

The Philippines' short-term financing risk has increased, warranting close monitoring of public finances, domestic credit growth and the level of foreign direct investments. The fiscal deficit rose during the Covid-19 crisis and is unlikely to return to pre-pandemic levels in 2026–2028. The debt-to-GDP ratio has breached the 60% threshold and continues to climb, up from less than 40% in 2019, reflecting persistent fiscal deficits and slowing growth. However, the reliance on domestic rather than external financing has kept short- to medium-term risks somewhat contained. On the external balances front, the current account deficit stood at -4.0% of GDP in 2024 and had begun to narrow to -3.3% in 2025, before the closure of the Strait of Hormuz inflated the oil import bill (the Philippines is a net energy importer), pushing the deficit back to an expected -4.4% of GDP in 2026, close to the -4.5% peak of 2022. A gradual narrowing is expected from 2027 as energy prices normalize, though the deficit is likely to remain higher than -3% of GDP. 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 remains broadly weak. The economy was ranked 82 out of 184 in the Heritage Foundation's Index of Economic Freedom survey 2025, roughly stable from the 88th position 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 deepening rift between the Duterte and Marcos families. Tensions escalated throughout 2024, with vice president Sara Duterte resigning from her cabinet positions and eventually issuing death threats against the president and his family. In early 2025, Rodrigo Duterte was transferred to the International Criminal Court in The Hague, and Sara Duterte was impeached for the first time by the House of Representatives. Although the Supreme Court halted the trial in July 2025, a second impeachment was voted in May 2026 on charges including misuse of public funds, unexplained wealth and threats against the president. The Senate trial has been ongoing since July 2026 and a guilty verdict would disqualify her from running for office. In parallel, Sara Duterte formally announced her candidacy for the 2028 presidential election in February 2026. These developments are undermining governance and policy coordination, casting doubt on the government's ability to implement credible fiscal consolidation and potentially delaying key structural reforms. At the same time, protests linked to the flood-control corruption scandal that broke out in the second half of 2025 are expected to continue, with large-scale investigations and targeted support for the affected population likely to remain government priorities.