The Philippines: Policy Actions to Navigate Cyclical Headwinds and Structural Challenges

The Philippine economy is facing a challenging combination of external and domestic headwinds and structural pressures. Even so, the economy continues to draw strength from resilient exports and stable remittance inflows. Growth has slowed over the past year as weaker domestic demand—especially subdued public investment—has weighed on economic activity, while inflation has risen sharply following the Middle East conflict. At the same time, rapid advances in artificial intelligence (AI) are reshaping the global economy, bringing both competitive pressures and new opportunities for the Philippines’ key export industries, including the semiconductor and information technology and business process management (IT-BPM) sectors.

With growth expected to weaken and inflation to remain elevated this year, a timely and balanced response is needed to prevent the adverse effects of external and domestic headwinds from becoming persistent. Sustaining resilience will require swift action to revive public investment and contain second-round inflation effects, while helping the economy adapt to structural challenges.

This preliminary assessment follows AMRO’s Annual Consultation Visit to the Philippines from August 7 to 27, 2026. The mission was led by Group Head and Lead Economist Jinho Choi, with AMRO Director/CEO Yasuto Watanabe and Chief Economist Dong He participating in key policy meetings with the authorities.

Economic developments and outlook

“The Philippine economy is expected to grow by 3.4 percent in 2026, down from 4.4 percent in 2025, before rebounding to 4.8 percent in 2027,” said Choi. “Growth this year will be weighed down by weaker private consumption amid higher inflation and subdued investment, although a gradual recovery in public construction in the second half of the year and resilient exports should provide some support.”

Inflation is expected to rise sharply to 5.4 percent in 2026 from 1.7 percent in 2025, before moderating to 3.8 percent in 2027. Elevated headline inflation reflects global oil prices remaining above pre-conflict levels, alongside second-round effects on non-energy items, including food and services.

The current account deficit is projected to widen in 2026, driven by higher energy import bills. The Philippine peso has weakened further amid heightened external pressures, although external buffers remain adequate.

Monetary policy has been tightened in response to the sharp rise in inflation. The banking sector remains sound and resilient, although asset quality pressures were more evident in selected sectors. The fiscal deficit is expected to narrow, reflecting a sharp contraction in capital spending, although the medium-term fiscal consolidation path has been recalibrated to a slower pace in light of external challenges.

Risks and vulnerabilities

The near-term outlook is subject to several downside risks:

• Higher global energy prices remain the most immediate macroeconomic risk, adding pressures on inflation, growth, and the external balance.
• Extreme weather events, including the potential emergence of a very strong El Niño, could disrupt agricultural production, raise food prices, and weigh on economic activity.
• Any delay or weaker-than-expected recovery in public investment could further dampen growth momentum and prolong the current economic downturn.

Over the medium term, structural challenges could pose greater obstacles to the economy’s growth potential. Climate change and dependence on imported fossil fuels remain key vulnerabilities. Meanwhile, rapid AI adoption is intensifying competition in the IT-BPM sector, while also creating opportunities for the industry to expand into new and higher-value services.

Policy recommendations

Against this backdrop, the policy mix should carefully balance the need to contain inflation with support for economic growth.

• Fiscal policy should remain responsive to cyclical downturns by restoring well-governed infrastructure investment, while maintaining a firm commitment to medium-term fiscal consolidation.
• Monetary policy should remain data-dependent. Further rate hikes would be warranted if core inflation remains elevated and persistent or inflation expectations show signs of becoming de-anchored.
• Financial supervision should remain vigilant and forward-looking, with close monitoring of credit and interest-rate risks.

Structural reforms are also needed to help the economy adapt to technological change and strengthen its medium-term growth potential. To capture the opportunities presented by AI while managing potential disruptions, the Philippines should create conditions for its semiconductor industry to expand into higher-value-added activities and facilitate the transition of the IT-BPM sector toward more knowledge-intensive and AI-complementary services. This will require stronger digital infrastructure and sustained investment in workforce upskilling, reskilling, and digital capabilities.

Infrastructure priorities should include continuous strengthening of energy security through a more diversified energy mix and reliable power supply; ensuring that climate resilience initiatives are guided by measurable outcomes; and institutionalizing improvements in flood-control governance throughout the public investment cycle.

The AMRO mission team expressed its appreciation to the Philippine authorities and other stakeholders for their cooperation and insightful discussions.