The Philippine economy faces a precarious path forward, potentially prompting further easing of monetary policy by the central bank. A deepening corruption scandal, centered around questionable flood control projects, is casting a long shadow over growth prospects and government spending.
Analysts predict the central bank may implement two 25 basis point cuts in the coming months, responding to a widening “negative output gap” and a surprisingly benign inflation outlook. This cautious approach stems from a significantly lowered growth forecast, now projected below 4% in the final quarter of 2025.
This anticipated slowdown represents a stark contrast to the 5.7% growth experienced in 2024, and falls short of the government’s ambitious 5.5%-6.5% target. The core issue? A dramatic decline in public sector spending, triggered by intense scrutiny following the corruption allegations.
Government expenditures have been falling for four consecutive months, plummeting nearly 10% year-on-year in November. This contraction isn’t isolated to the public sector; household spending has also cooled, registering its slowest growth rate in over four years.
The scandal’s impact extends beyond immediate spending, threatening to stifle private investment as well. While a modest rebound is expected in the second half of the year, fueled by base effects and potential catch-up spending, significant risks remain.
A weakening global economy coupled with continued sluggish public spending could derail any recovery. Despite earlier signals that the easing cycle was nearing its end, the central bank hasn’t ruled out further cuts if growth falters unexpectedly.
Currently, key borrowing costs sit at a three-year low of 4.5%, having been lowered by a total of 200 basis points since August 2024. However, the central bank acknowledges that a substantial underperformance in growth could necessitate even more aggressive action.
Looking ahead, the government’s budget deficit is expected to narrow to 5.1% of GDP this year, driven by fiscal tightening measures. While this represents an improvement, it remains well above pre-pandemic levels.
The Philippines’ credit rating hangs in the balance. A swift and decisive resolution to the corruption issue within the next 12 months could pave the way for a much-coveted credit rating upgrade. However, inaction risks a downgrade or, at best, a stalled outlook.
S&P Global currently maintains a “positive” outlook on the Philippines’ “BBB+” rating, anticipating a growth recovery despite the current headwinds. The nation’s economic future, however, is inextricably linked to its ability to restore trust and transparency in government spending.
