Navigating structural challenges to unlock further growth potential

The Philippines has experienced strong GDP growth over the past decades, with +4.5% on average in the 2000s and +6.4% in the 2010s. The Covid-19 pandemic provoked the worst full-year recession on record in 2020 (with GDP contracting by -9.5%), followed by a patchy recovery in 2021 (+5.7%) and a stronger rebound in 2022 (+7.6%). 2023 and 2024 returned to more normal but slightly below-average rates of growth (around +5.6%) as for most of that period, the Philippine economy dealt with challenges in the external environment, high inflation and tight monetary policy. These headwinds are likely to alleviate somewhat in 2025 in the context of exports being supported by the global electronics cycle, private consumption improving on the back of lower inflation and monetary and fiscal easing and investment picking up thanks to public spending. GDP growth is thus likely to near +6% in 2025, before edging down to +5.7% in 2026 as US policies under President Trump create some challenges (through trade policy but also more restrained monetary easing). In the medium-term, post-pandemic economic scarring means that growth is likely to remain a little lower than the pre-pandemic average in the coming few years (we expect +5.7% on average in 2025-2029). For example, while the tourism sector used to be a boost to growth before the pandemic, the recovery in the past few years has lagged behind that of regional Southeast Asian peers and is likely to remain a drag to overall growth for the Philippines.

Fiscal consolidation has been slow in the post-pandemic years. From 1.5% of GDP and a pre-pandemic average of +0.5%, the fiscal balance deteriorated to -6.2% in 2021 and this deficit has been very slowly narrowing since – still at an estimated c.4% in 2024-2025. 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 support for low-income households will likely stall the progress.

In terms of prices, we expect inflation to stay within the target range of 2-4% of Bangko Sentral ng Pilipinas (BSP) – the central bank of the Philippines. After a recent peak of 6% in 2023 (a 15-year high), inflation declined to 3.2% in 2024 and should remain below 3% in 2025 and 2026. The BSP started its easing cycle in the second half of 2024 (with 3 cuts of 25bps each) and we expect -75bps further worth of policy rate cuts in 2025.

With a lower-than-average performance, the business environment in the Philippines broadly remains weak. The economy was ranked 89 out of 185 economies in the Heritage Foundation’s Index of Economic Freedom survey 2023, down from rank 73 based on the survey conducted in 2021. The decline was primarily driven by significant weaknesses in terms of judicial effectiveness, government integrity and property rights. However, on the positive side, indicators for government spending, tax burden and trade freedom performed well. Meanwhile, the World Bank Institute’s Worldwide Governance Indicators 2023 survey indicates that problems related to the rule of law and corruption warrant serious attention. Lastly, our proprietary Environmental Sustainability Index puts the Philippines at rank 78 out of 210 economies, suggesting that renewable electricity output, the recycling rate and climate change vulnerability remain weak spots for the economy, thereby limiting its potential for accelerating growth.

Of particular concern is the escalating tension between the two main political camps, the Duterte and Marcos families, heading into the midterm elections this year.  The rift began its escalation in early 2024, when former president Rodrigo Duterte alleged the current president, Ferdinand Marcos, and his allies of trying to amend the constitution to remove term limits. Since then, this feud has escalated between the two camps going with Sara Duterte, Rodrigo’s daughter and Marco’s VP, being removed from key appointments due to her perceived threat as a challenger in the 2028 election. This rift could potentially risk delaying key structural reforms. Furthermore, it has raised alarms over potential political violence: The government commission on elections (Comlec) has identified 400 cities and municipalities as areas of concern for political violence.