- The Philippine economy is facing a challenging outlook, as commodity-related inflationary pressures compound a growth deceleration, with GDP growth expected at 3.4 percent in 2026 before recovering to 5.1 percent next year. Risks to growth are tilted to the downside.
- Although inflation rose well above the Bangko Sentral ng Pilipinas (BSP) target this year, monetary tightening has kept inflation expectations anchored, and inflation is expected to move towards the target range next year. Further tightening should be conditional on inflation remaining elevated and intensifying second-round effects.
- The pace of fiscal consolidation is appropriate but should be rebalanced toward revenue mobilization and underpinned by public financial management reforms to speed up the execution of high-quality capital spending.
Manila - September 25, 2026: An International Monetary Fund team, led by Mr. Andrea Pescatori, held meetings in Manila from September 15 to 25, 2026, for the 2026 Article IV Consultation. At the conclusion of the discussions, Mr. Pescatori issued the following statement:
"The Philippine economy is facing a challenging conjuncture. Growth slowed to 2.3 percent year-on-year in the second quarter of 2026, as public construction investment fell sharply following stricter public infrastructure project reviews, weaker confidence, which hampered private investment, and natural disasters. A protracted property sector slowdown added to the drag. The Middle East war has compounded these headwinds, given the Philippines' reliance on imported oil and gas. Growth is projected to slow to 3.4 percent in 2026 and recover to 5.1 percent in 2027 as the shocks fade and investment partly rebounds. Headline inflation is projected to average 5.6 percent in 2026 before moderating to 4.1 percent in 2027, while core inflation is expected to peak at 4.0 percent. The current account deficit is projected to widen to 4.8 percent of GDP in 2026 on account of a higher oil import bill and the impact of the El Niño on global rice prices.
"Risks to growth are tilted to the downside and risks to inflation to the upside. The main external risks stem from a prolonged Middle East conflict, tighter global monetary conditions, and weaker remittances. Domestically, a weaker rebound in public investment and confidence and more frequent climate events would weigh on growth, while rising leverage and a prolonged property downturn pose financial stability risks. On the upside, faster implementation of structural and governance reforms would foster stronger investment.
"The fiscal stance is broadly appropriate in the near term, with the fiscal deficit projected to fall only slightly by 0.2 pp to 5.4 percent of GDP in 2026 and by an additional 0.3 pp in 2027. The resulting fiscal tightening stems from delays in executing capital projects that are beyond authorities' near-term control-the unspent capital budget has been in part reallocated to current spending including time-bound, targeted measures to cushion the energy shock. The medium-term consolidation path, targeting a deficit of 3.5 percent of GDP by 2030, remains appropriate. Anchoring it in concrete tax and expenditure measures and, over time, a well-designed fiscal rule would strengthen fiscal credibility.
"The composition of medium-term fiscal adjustment should be rebalanced toward revenue mobilization to protect priority social spending and create space for higher public investment than currently envisaged by the authorities. Options include broadening the VAT base, excises on luxury goods and goods detrimental to health and the environment, and improving the governance and design of tax incentives, while avoiding tax amnesties. Accelerating public financial management reforms, including streamlining procurement, appraisal, and project selection and adopting the draft Budget Code, is key to executing planned capital spending and restoring business confidence.
"The BSP's tightening has kept inflation expectations anchored, and the current monetary policy stance is approximately neutral. Given pervasive uncertainty, policy should remain nimble and data dependent, with further tightening conditional on headline inflation staying elevated or second-round effects intensifying. The exchange rate should continue to play its role as a shock absorber, with intervention limited to smoothing abrupt movements. Reforms to deepen capital markets and enhance monetary policy transmission should be prioritized.
"Systemic financial risks remain contained, and the banking system is well capitalized, profitable, and liquid. Nonetheless, weakening asset quality in the construction sector, rising leverage among the largest corporates, and strong bank interconnectedness with conglomerates warrant close monitoring. Enhancing financial surveillance capacity and expediting the operationalization of the macroprudential framework would help preempt the build-up of vulnerabilities. Efforts to improve the Anti-Money Laundering / Countering the Financing of Terrorism (AML/CFT) framework should continue.
"Should downside risks materialize, a coordinated policy response would be needed. If inflation expectations remain anchored, monetary policy should look through the first-round of a further commodity price shock, while fiscal policy should temporarily provide targeted support to vulnerable households, with a clear commitment to resume consolidation once the shock subsides.
"Reforms to raise productivity, crowd in private investment, and improve education outcomes are critical to unlock the Philippines' significant growth potential, which combined with gradual fiscal consolidation would also strengthen the medium-term external position. Priorities include upgrading the electrical grid, tapping renewable energy potential, and effectively implementing recent legislation to improve the business environment, including to harness gains from artificial intelligence. Deeper regional integration in goods and services would further boost growth and resilience.
"The IMF team would like to thank officials in the government, the central bank, other public agencies, and private sector participants for their constructive and open engagement and dialogue."
