Moody’s Analytics slashes Philippine growth forecast to 3%

MANILA, 27 AUGUST 2026 —

Moody’s Analytics Cuts Philippine 2026 Growth Forecast to 3% as Weak Demand and Investment Weigh on Economy

In its latest Asia-Pacific Outlook report dated Aug. 24, the analytics arm of the global credit rating agency reduced its Philippine gross domestic product (GDP) growth forecast to 3% from a previous projection of 4% made 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,” said Sarah Tan, Assistant Director and Economist at Moody’s Analytics, in an emailed response to questions.

The downgrade follows a sharp slowdown in the Philippine economy, which posted its weakest post-pandemic growth of 2.3% year-on-year in the second quarter of 2026. The contraction was driven by a collapse in private investment and continued weakness in household spending, compounded by rising oil prices linked to geopolitical tensions in the Middle East.

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

For the first half of 2026, the country’s GDP growth averaged 2.6%, well below the government’s full-year target range of 3.5% to 4.5%. If Moody’s revised forecast holds, it would mark the fourth consecutive year the government misses its growth target, further underscoring the challenges facing policymakers.

The slowdown comes after the economy grew by just 4.4% in 2025, already a post-pandemic low. To meet even the lower end of the government’s 2026 target, the economy would need to expand by at least 4.4% in the second half—a significant acceleration from the first half’s performance.

Despite the near-term gloom, Moody’s Analytics expects a gradual recovery, with growth projected to rise to 4.6% in 2027 and 5.1% in 2028. The government, however, has set a more ambitious medium-term target, aiming for GDP growth between 5% and 6% annually from 2027 to 2030.

Fiscal Strains and Debt Concerns

The weaker growth outlook raises concerns about the Philippines’ fiscal consolidation efforts, particularly as public debt continues to climb. The country’s debt-to-GDP ratio reached a two-decade high of 66% in the second quarter of 2026, with total debt stock hitting P19.07 trillion by end-June.

Diwa C. Guinigundo, Country Analyst at GlobalSource Partners, warned that prolonged weak growth could complicate efforts to reduce debt and restore fiscal health.

“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.”

Guinigundo added that a prolonged period of subpar growth could delay the government’s goal of achieving an “A” credit rating by 2028, as rating agencies assess not only fiscal metrics but also the economy’s capacity to generate sustainable growth and revenue.

“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.”

Inflation Remains Sticky Despite Easing Trends

Amid the growth slowdown, inflation pressures have proven more persistent than anticipated. Moody’s Analytics slightly raised its 2026 inflation forecast to 5.2% from 5.1%, citing ongoing price pressures driven by elevated oil prices and spillover effects into food and other sectors.

“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,” Tan said.

While headline inflation eased for a third consecutive month in July to 6.2%, it remained above the Bangko Sentral ng Pilipinas’ (BSP) 3% target for the fifth straight month. The seven-month average inflation rate stood at 5%.

Moody’s projects inflation to moderate to 3.5% in 2027 and further to 3.2% in 2028, assuming global commodity prices stabilize.

Bank of America (BofA) Global Research noted that while headline inflation in the Philippines and Indonesia has surprised to the downside compared to historical norms, underlying price pressures remain elevated.

“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 in a research note.

“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.

Central Bank Policy Outlook

The weak second-quarter growth data has raised questions about the future path of monetary policy in the Philippines. BofA’s economists expect the BSP to deliver a final 25-basis-point rate hike to 5% at its August meeting, potentially marking the end of the current tightening 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,” BofA said.

However, market pricing suggests a higher probability of additional tightening, with traders expecting up to 50 basis points of cumulative hikes over the next six months.

A BusinessWorld poll conducted last week found that 19 of 24 analysts project another 25-basis-point rate increase on Aug. 27, while five others expect the BSP to hold rates steady. Since April, the central bank has raised its benchmark rate by a total of 50 basis points, bringing it to 4.75%.

The Monetary Board is scheduled to review monetary policy again on Oct. 22 and Dec. 17.

Regional and Domestic Implications

The Philippines’ growth slowdown comes at a time when other Southeast Asian economies are also grappling with weaker domestic demand and external headwinds. While Malaysia and Thailand have reported more resilient growth in 2026, the Philippines’ struggles highlight the broader challenges facing export-dependent and consumption-driven economies in the region.

Domestically, the weaker outlook underscores the need for structural reforms to boost private investment, improve public spending efficiency, and address supply-side constraints in key sectors such as agriculture and infrastructure.

For now, policymakers face a delicate balancing act: supporting growth through targeted stimulus while maintaining fiscal discipline and ensuring that inflation pressures do not derail the recovery.

As Moody’s Analytics and other analysts caution, the path to stronger, more inclusive growth will require not just short-term interventions but sustained efforts to enhance productivity, attract investment, and restore confidence in the economy’s long-term prospects.

Related: Sarah Tan · Manila