S&P, ADB sharply downgrade Philippine growth outlook

By Katherine K. Chan, Reporter and Justine Irish D. Tabile, Senior Reporter

S&P GLOBAL RATINGS and the Asian Development Bank (ADB) sharply downgraded their Philippine growth forecasts for this year as a weaker-than-expected first half and persistent economic headwinds threaten to stall the country’s recovery.

Based on its latest Economic Outlook for Asia-Pacific published on Wednesday, S&P cut its Philippine gross domestic product (GDP) growth projection for this year to 2.9% from 4.1%.

“We have lowered our growth forecast for 2026, reflecting the weaker-than-expected first-half growth and a more gradual recovery trajectory,” S&P Global Ratings Asia-Pacific Senior Economist Vishrut Rana said in an e-mailed response to questions. “It will take some time for the economy to recover its footing.”

At the same time, ADB trimmed its 2026 Philippine GDP growth projection to 3.3% from the 3.8% forecast it made in July.

“In the Philippines, weak public investment contributed to the 2026 downgrade from 3.8% to 3.3%, although a rebound is expected to support growth of 5.1% in 2027,” the Manila-based multilateral lender said in its Asian Development Outlook report released on Wednesday. 

The ADB said that household consumption remained subdued amid high inflation and weak consumer confidence.

According to the ADB report, the Philippines is expected to be one of the slowest-growing economies in developing Southeast Asia this year, ahead only of Brunei Darussalam (1.2%), Thailand (2%) and Myanmar (2.2%). Vietnam is expected to post the fastest growth this year with 7.8%, followed by Indonesia (5.2%), Malaysia (4.9%), the Lao People’s Democratic Republic (4%), Timor-Leste (4%) and Cambodia (3.9%).

The lower growth projections from S&P and ADB come after the Philippine economy grew by 2.3% — a new post-pandemic low — in the second quarter, bringing first-half growth to 2.6%.

If S&P and ADB’s estimates hold, GDP growth will be slower than 4.4% in 2025, when a massive flood control corruption mess dampened the country’s spending and investments.

This year could also mark the fourth straight year that the government will miss its full-year growth goal. For this year, the Development Budget Coordination Committee (DBCC) is targeting 3.5%-4.5% GDP growth. 

“The economy is facing a sharp pullback in public capital expenditure, a steep energy price shock, and elevated food prices, partly due to El Niño conditions,” S&P’s Mr. Rana said.

He noted that S&P’s gloomier outlook for the Philippine economy reflected expectations of a slow recovery in public spending.

“We expect public capital expenditure to normalize gradually as various public infrastructure works are initiated,” he said. “Given strong reforms in the space to increase transparency and efficiency, it will take time for disbursements to ramp up.”

Infrastructure spending has contracted since the flood control scandal broke out late last year. Based on the latest Department of Budget and Management (DBM) data, infrastructure and other capital outlays slumped by 40.8% annually to P367.4 billion in the first half from P620.2 billion.

The DBM has said that the government will go full throttle on infrastructure spending in the third quarter. 

OUTLOOK FOR 2027
Meanwhile, S&P sees the Philippine economy expanding by 5.4% in 2027, slower than its previous 5.8% estimate. It cut its GDP growth projections for 2028 to 6% from 6.2%, and for 2029 to 5.8% from 6.1%.

However, these are still within the government’s 5%-6% growth targets for 2027 to 2030.

S&P’s Mr. Rana noted that the Philippines’ growth drivers over the medium-term remain intact, supported by the business process outsourcing (BPO) and energy sectors.

“The BPO sector is competitive, leveraging a skilled labor force, and there is strong private sector interest to invest in upcoming special economic zones in industries such as energy, electronics, and BPO,” he said.

“The energy sector will likely see strong expansion as the Philippines aims to become more resilient to external energy shocks,” he added.

The ADB also trimmed its 2027 growth forecast to 5.1% from 5.3% previously, placing it at the lower end of the government’s target.

“The economy continues to feel the impact of the Middle East conflict, but business indicators point to expected improvements in economic activity, with the industry sector still looking to expand next year,” ADB Philippines Country Director Andrew Jeffries said on Wednesday.

“For the Philippines to ride through the effects of external and domestic shocks in the near term, timely government spending on planned investments especially in the social sector and critical infrastructure projects will be important,” he added.

ADB Philippines Country Office Senior Economics Officer Teresa Mendoza said household consumption is expected to continue growing, but at a more tempered pace as households remain vulnerable to higher prices.

The ADB maintained its inflation forecast for 2026 at 5.9%, but raised its 2027 projection to 4.4% from 3.9% in July.

Ms. Mendoza said remittances and the recent minimum wage increase in Metro Manila should provide some support to household spending. Remittances could also increase during periods of economic stress, while peso depreciation raises their value in local currency terms.

“We’re expecting (public investment) to improve gradually by the start of the fourth quarter of 2026. This is in line with the government’s move to accelerate ongoing flagship infrastructure projects, particularly rail projects,” Ms. Mendoza said.

Asked how much of the expected rebound in 2027 would come from base effects, Mr. Jeffries pointed to higher infrastructure spending and a recovery in public investment.

“We’ve already seen indications of more government outlays for infrastructure projects, including large transportation projects,” he said.

“I know there’s an intent to rebound public investment and get it back on track compared with what happened in the second half of last year and earlier. I think that’s a big part of it,” he added.

The ADB sees room for manufacturing and exports to play a bigger role in growth, although initiatives such as Pax Silica and the Luzon Economic Corridor are unlikely to have an immediate impact.

Mr. Jeffries said the initiatives are aimed at attracting higher value-added foreign direct investment (FDI), which could support jobs and economic growth.

“It would be a positive for job creation and growth, but it’s not immediate. There would be a lag,” he said. “Foreign direct investment, generally, depending on what it is, can take several years to build and construct.”

He said expanding manufacturing and exports could also help diversify the Philippine economy, where these sectors account for a smaller share of output compared with some neighboring economies.

“Increased exports would have a positive effect on economic growth and jobs and the like over time,” Mr. Jeffries said.

RISING PRICE PRESSURES
Meanwhile, S&P’s Mr. Rana said rising price pressures from costlier food and fuel may keep domestic demand sluggish in the near term, especially as the Bangko Sentral ng Pilipinas (BSP) tightens its monetary policy to curb inflation.

“Elevated energy and food prices, together with the resulting tighter monetary policy, will continue to weigh on domestic demand,” the S&P economist said.

In its latest outlook, S&P said it expects headline inflation to accelerate to 5.5% this year from its prior estimate of 4.8% amid sticky price pressures from food and energy items.

In August, headline inflation eased to a five-month low of 6.1% amid lower food and utility prices. However, it stayed above the central bank’s 3% target for a sixth straight month, bringing the year-to-date average inflation to 5.2%.

S&P also raised its inflation projections for 2027 to 3.6% from 3.3% and for 2028 to 3.2% from 3%, but left its 2029 forecast unchanged at 2.9%.

“Given persistent price pressures in food and energy; we expect inflation to be elevated this year before gradually easing next year,” Mr. Rana said.

This, he added, may prompt the BSP to deliver one final 25-basis-point (bp) policy rate hike this year before it shifts to easing next year.

“The BSP is likely to remain focused on the inflation mandate and, as such, we expect modest further monetary policy tightening this year,” Mr. Rana said. “We expect interest rates to be lowered in 2027 as inflation eases following dissipation of the energy and food price shocks.”

Tightening once more could help economic managers curb inflationary pressures and support the peso, S&P Asia-Pacific Chief Economist Louis Kuijs and Mr. Rana said in their report.

S&P expects the local unit to trade at P62 to the dollar by yearend, before rebounding to P60.50 next year.

In August, the central bank tightened for a third straight meeting as it sought to preemptively contain inflation risks from the looming severe El Niño, wage hike, and global oil price swings.

It lifted its key interest rate by 25 bps to an over one-year high of 5%, bringing its cumulative hikes to 75 bps since it first tightened in April.