Moody’s Analytics slashes Philippine growth forecast to 3%

By Katherine K. Chan, Reporter

MOODY’S ANALYTICS slashed its 2026 growth forecast for the Philippines, amid weak consumption and a collapse in private investment.

In its latest Asia-Pacific Outlook report dated Aug. 24, the analytics firm said it now sees Philippine gross domestic product (GDP) expanding by 3% this year, slower than its 4% projection in June.

“We lowered our 2026 GDP growth forecast to 3% from 4% in the June vintage after incorporating the second-quarter GDP result, which was far weaker than expected,” Moody’s Analytics Assistant Director and Economist Sarah Tan said in an e-mailed reply to questions.

The Philippine economy slumped to its worst post-pandemic growth of 2.3% in the April-to-June period, as investments and public construction continued to reel from last year’s flood control corruption scandal. Rising prices from the Middle East war-driven oil shock also strained household spending.

“The economy expanded by just 2.3% year on year, with private consumption showing notable weakness and private investment collapsing,” Ms. Tan noted. “This points to softer underlying domestic demand than we had previously anticipated.”

As of the first half of 2026, the country’s GDP growth averaged 2.6%, well below the government’s 3.5%-4.5% full-year target.

If Moody’s Analytics’ forecast holds true, the government will miss its growth target for a fourth year in a row.

The economy would also further soften from last year’s post-pandemic low growth of 4.4%.

Economists earlier said that reaching even the bottom end of the government’s target entails a steep climb, as it means the economy must grow by at least 4.4% in the second half.

Moody’s Analytics sees growth recovering over the next two years to 4.6% in 2027 and 5.1% in 2028. The government wants full-year expansion to be between 5% and 6% from 2027 to 2030.

Meanwhile, GlobalSource Partners Country Analyst Diwa C. Guinigundo noted that the Philippines could face a more complicated path toward fiscal consolidation if growth remains below potential.

“Slower growth would make fiscal consolidation and debt reduction more difficult,” he said in a Viber message. “The issue is not simply that government revenues would grow more slowly; a weaker economy also means a smaller denominator for the debt-to-GDP ratio.”

This came after Moody’s Ratings, the company’s credit rating arm, affirmed the Philippines’ “baa2” investment-grade rating with a “stable” outlook, but said the economy might struggle to grow above 6% over the medium term.

The country’s debt-to-GDP ratio swelled to an over two-decade-high of 66% in the second quarter as its debt stock hit a fresh high of P19.07 trillion at end-June.

Mr. Guinigundo said a weak growth backdrop means lowering the debt-to-GDP ratio could take longer and may further narrow the government’s fiscal space for infrastructure and social spending.

“In short, lower growth makes the fiscal adjustment more painful and potentially more protracted. The priority, therefore, should be to restore potential growth while maintaining credible fiscal discipline,” he added.

The bleak medium-term growth outlook and lingering fiscal constraints also cloud the government’s target to achieve an “A” level credit rating by 2028, Mr. Guinigundo noted.

“They clearly make the ‘A’ rating target more challenging, because rating agencies look not only at the government’s fiscal numbers but also at the economy’s capacity to generate sustained growth and revenues,” he said.

“If growth remains below the pre-pandemic trend while fiscal pressures persist, the improvement in debt metrics and fiscal strength may be slower than expected. An ‘A’ rating by 2028 should therefore not be treated simply as a fiscal consolidation target; it ultimately depends on convincing markets and rating agencies that the Philippines can deliver stronger, more durable, and more inclusive growth while keeping debt and deficits firmly under control,” he added.

STICKY INFLATION
Meanwhile, Moody’s Analytics slightly raised its inflation forecast for this year to 5.2% from 5.1% previously, citing sticky price pressures.

“Recent data has shown that inflation has been elevated, initially driven by the oil price shock, with price pressures subsequently spilling over into food and other categories,” Ms. Tan said.

“While headline inflation is easing, price pressures remain sticky, with inflation having stayed firmly above the BSP’s target range for the past five months,” she added.

In July, headline inflation eased for a third straight month to 6.2%, but remained above the central bank’s 3% target for the fifth consecutive month. This brought the seven-month inflation print to 5%.

By next year, Moody’s projects inflation to ease to 3.5% before cooling further to 3.2% in 2028.

In a separate report, Bank of America (BofA) Global Research said the BSP may tighten anew as underlying price pressures remain strong.

“Though Indonesia and the Philippines’ inflation surprised to the downside (substantially lower than 10-year historical norm) the underlying cost pressures remain elevated,” BofA said.

“Given their relatively higher betas with oil and dollar, their tightening decision would likely be contingent upon oil and USD (US dollar) swings in the near-term,” it added.

However, BofA said the weak second-quarter growth could prompt the central bank to render its August hike the last for the current cycle.

“In the case of the Philippines, our economists are expecting BSP to hike by 25 bps (basis points) to 5% this month, probably its last hike in the hiking cycle while its GDP growth slowed in 2Q,” it said. “However, the market’s pricing in 50 bps of cumulative hike over six months suggests market-implied expectation of an extension of the hiking cycle beyond the upcoming meeting.”

Based on a BusinessWorld poll conducted last week, 19 of 24 analysts project another 25-bp rate increase on Thursday, while five others are expecting the BSP to stand pat.

The Monetary Board has delivered a total of 50 bps in hikes since it reversed into tightening in April, with the benchmark rate now at 4.75%.

After its Aug. 27 meeting, it is scheduled to review its monetary policy again on Oct. 22 and Dec. 17.