By Justine Irish D. Tabile, Senior Reporter
THE PHILIPPINES, over the past year, faced shock after shock that has tested its strength. From a flood control corruption scandal that shackled state spending, to geopolitical issues overseas that caused a global energy shock that continues to feed into domestic prices, these put in focus the structural vulnerabilities that continue to plague the economy.
Gross domestic product (GDP) growth slowed to 4.4% in 2025 from 5.7% in 2024 as the graft scandal weighed on confidence, dragging public and private investments in the second half of the year.
Growth weakened to 2.8% in the first quarter of 2026, and then further to 2.3% in the second quarter as the Middle East conflict added to an already long list of economic concerns.
The government has already lowered its full-year 2026 growth target to 3.5%-4.5% from 5%-6%, while expecting the economy to recover and expand by 5%-6% annually from 2027 to 2030.
It now also expects inflation to average 6%-7% this year under its updated macroeconomic assumptions, well above the Bangko Sentral ng Pilipinas’ (BSP) 2%-4% tolerance band, as elevated global fuel prices and supply disruptions squeeze household consumption and investment.
At the same time, the government is trying to support growth while pursuing its fiscal consolidation agenda following a borrowing surge during the coronavirus pandemic. It expects to post a budget gap of 5.4% of GDP this year, which it wants to gradually narrow to 3.5% by 2030.
The darkening outlook underscores a central question for the Philippine economy: whether the resilience that allowed it to withstand earlier crises is enough to deliver sustained growth in an era when shocks have become more frequent and unprecedented.
“We are already living in an age where disruption is the norm, not the exception,” Kearney Senior Partner and Philippines Country Head Marco de la Rosa said in an e-mailed response to BusinessWorld.
“While the Philippines has remained resilient, some characteristics of our economy make us more exposed to external shocks.”
According to Mr. de la Rosa, the country’s heavy reliance on imported energy makes it vulnerable to global price volatility and geopolitical events.
The risks from imported energy have become more apparent amid the conflict in the Middle East, which has pushed up fuel prices and raised the cost of construction materials, transportation, and food.
The Philippines has been under a state of national energy emergency since March to address energy supply and price risks arising from the conflict involving the United States, Israel and Iran.
Inflation averaged 6.1% from March to July, as rising global oil prices fed into transport, electricity and food costs, with the BSP expecting it to continue breaching the tolerance band until next year, showing that the war’s impact is not expected to ease any time soon. This has also forced the central bank to tighten its policy stance anew to ensure price stability.
Apart from being a net importer of oil, the country also relies heavily on remittances and receipts from the information technology and business process management (IT-BPM) industry, “both of which could face increasing disruption from artificial intelligence (AI), changing global demand, and geopolitical shifts,” Mr. de la Rosa said.
Despite the Middle East conflict, cash remittances have remained resilient, growing by 2.5% in the first five months to $14.11 billion from $13.77 billion in the same period a year ago, with inflows from the Middle East rising by 3.6% to $2.49 billion from $2.41 a year prior.
On the other hand, AI and competitiveness challenges are clouding the outlook for the IT-BPM industry. The IT and Business Process Association of the Philippines now projects revenues to reach $43.3 billion by 2028 under a worst-case scenario, down 26.6% from its previous projection of $59 billion. This scenario took into account policy uncertainty, the depth of the country’s talent pool, infrastructure quality and ease-of-doing-business constraints.
Under the best-case scenario, the industry could generate $50.5 billion in revenues, down 14.4% from its previous projection.
Mr. de la Rosa added that longstanding problems involving infrastructure, governance and policy execution continue to weigh on the country’s ability to attract investments.
ENERGY SECURITY
The country’s exposure to volatile oil prices has also raised questions about how the government should manage fuel prices and secure supplies during external disruptions.
University of Asia and the Pacific School of Economics Dean Peter L. U said a proposal for the Department of Energy to announce a single fuel price adjustment instead of a range could pressure oil companies to follow the government’s figure, effectively creating a “soft price ceiling.”
“If I am an oil company, I would not want the negative optics of setting a price above what the government announced,” he told BusinessWorld in a Viber message.
“In the short run, the oil companies can probably live with this additional ‘soft regulation.’ It remains to be seen if they will find it attractive to continue operating or expanding in the industry.”
Beyond fuel price monitoring, Mr. U said the government could maintain strategic petroleum reserves, although these should primarily cover the requirements of the armed forces and other critical government operations.
Commercial oil supply should remain largely in the hands of private companies, which have an incentive to maintain adequate inventories, he said.
“No company wants to be caught out of stock with nothing to sell when a profit can be made.”
The government could instead negotiate with other countries to ensure that Philippine oil companies retain access to supplies during disruptions, he added.
Such measures could help manage immediate supply risks, but they would not shield the broader economy from the investment and fiscal consequences of a prolonged energy shock.
Ateneo Center for Economic Research and Development Senior Research Fellow Ser Percival K. Peña-Reyes said higher global oil prices and geopolitical uncertainty could further fuel inflation, raise the cost of imported fuel and construction materials, and weaken private investment.
FISCAL SUPPORT
At the same time, the government has limited fiscal space as it continues to manage a relatively large budget deficit and elevated public debt compared with pre-pandemic levels.
“Under these conditions, every peso of public spending has to generate the highest possible economic and social return,” Mr. Peña-Reyes said via Facebook Messenger.
“The priority should, therefore, be not simply to spend more, but to spend better.”
He said the government should protect high-multiplier investments, particularly infrastructure projects that are “shovel-ready” and have undergone rigorous cost-benefit analysis.
“Delaying well-prepared projects often imposes larger economic costs than the savings generated from postponing them,” he said.
This is particularly important following the flood control controversy, which weakened confidence in public infrastructure spending and prompted closer scrutiny of government projects.
In the January-to-May period, infrastructure spending declined by 42.9% to P269.4 billion from P471.5 billion a year ago, which the Department of Budget and Management attributed to enhanced governance measures and stricter review of infrastructure projects.
Mr. Peña-Reyes said spending should focus on projects that reduce the country’s vulnerability to future disruptions, including energy infrastructure that diversifies power sources, irrigation and logistics facilities that improve food security, properly designed and independently monitored flood control systems, and digital infrastructure that raises productivity.
Improving governance would be just as important as determining which projects receive funding.
“A peso lost to corruption or inefficiency is more costly today because fiscal resources are scarce,” he said.
Strengthening project evaluation, digital procurement, real-time monitoring and independent auditing could ensure that public funds translate into actual infrastructure and services rather than leakages, he added.
At the same time, Mr. Peña-Reyes said the government should avoid across-the-board spending cuts that could weaken productive investment and further slow the economy.
“Such measures may improve headline fiscal numbers in the short run but can weaken growth if they reduce productive public investment,” he said.
“Instead, expenditure rationalization should distinguish between spending that generates long-term economic returns and spending that is poorly targeted or of low value.”
Targeted and temporary support should be maintained for lower-income households that bear a disproportionate share of higher food and fuel prices, he added. Aside from cushioning vulnerable groups, such assistance could help sustain household consumption, which remains the Philippine economy’s main growth engine.
STRUCTURAL CONCERNS
Beyond the immediate fiscal response to crises, economists said the country must also address weaknesses in infrastructure, human capital, the business environment, and capital markets.
The Philippines’ transition to upper-middle income status in July after remaining a lower-middle income economy since 1987 reflects decades of progress, but World Bank Lead Economist Gonzalo Varela said much work still needs to be done despite the significant reforms and growth achieved over the past 15 years.
Better connectivity could generate large economic gains by allowing goods and workers to move more efficiently across the country, Mr. Varela said. It could also narrow regional disparities by helping low- and middle-income regions grow faster and create more opportunities outside major urban centers.
Human capital is another pressing concern, from early childhood development to the skills of workers already in the labor market.
Mr. Varela said the full implementation of the Enterprise-Based Education and Training Framework Act would be crucial to improving workforce skills by making it easier for companies to provide on-the-job training.
“This is an important reform. Fully implementing that reform is going to be crucial to increase the skills of the workforce of the Philippines,” he said at a media briefing on Aug. 3.
Such reforms have become more urgent as AI transforms industries and changes the kinds of skills required by employers.
The business environment must also become more conducive to the entry and expansion of firms, which could generate jobs and strengthen competition.
“If we want more firms to come in to create competitive pressures on incumbents, if we want more jobs to be created, then we need a business environment that is conducive to that,” he said.
“Simplifying business registration processes is an agenda in which the Philippines can learn from what other countries have done,” he said, citing the one-day processing in Singapore. “It’s something that can be done, and that is going to help the economy become more competitive and more dynamic.”
The Philippines must also deepen its capital markets, which remain relatively shallow. As the economy moves toward more innovation-driven growth, firms will require greater access to capital to finance new technologies and business models.
External shocks should provide greater impetus for these reforms rather than become a reason to postpone them, World Bank Division Director for the Philippines, Malaysia and Brunei Zafer Mustafaoğlu said.
“When we talk about external shocks and when things get difficult abroad, it’s really important to do more reforms at home,” he said.
“The question is how to counterbalance, not accommodate — in the sense of not accepting it — so that you can still continue growing.”
Countries that respond to crises by implementing reforms could emerge stronger and grow faster over the long term, Mr. Mustafaoğlu said.
Despite the risks, he said the Philippines continues to benefit from a young population, a strategic location, and strong connections to the global economy.
The challenge is to use these advantages while improving efficiency, policy execution, and the allocation of resources, he said.
Building on these advantages, Mr. de la Rosa said the government should pursue three priorities to strengthen economic resilience over the next decade: invest in infrastructure and energy security, improve governance and regulatory predictability, and diversify the economy while preparing businesses and workers for AI.
These reforms would allow the country to build on its talent pool, natural resources and established global services industry while reducing its dependence on a narrow set of growth drivers.
Ultimately, resilience should not simply mean enduring one crisis after another. It should mean using each disruption to correct structural weaknesses before the next one arrives.
Doing so will require the government to maintain fiscal discipline without sacrificing productive investments, Mr. Peña-Reyes said.
“Fiscal discipline and growth are complements, not substitutes,” he said.
“In a constrained fiscal environment, success will depend less on the amount the government spends than on whether it spends on the right priorities — and whether those projects are delivered efficiently and transparently.”
