Philippines may face below-target growth for longer without reforms

By Katherine K. Chan, Reporter

THE PHILIPPINES could remain below its growth potential for longer even with the government’s catch-up measures if it does not address the structural issues that are eroding its economic foundation, GlobalSource Partners said.

In a commentary, GlobalSource country analysts Diwa C. Guinigundo and Wilhelmina C. Mañalac said the government should focus on rebuilding its capacity to create sustainable conditions that support investment and boost productivity, not on merely reaching its growth targets.

“A stronger second half would certainly be welcome. But the real test of economic management is not whether GDP (gross domestic product) can be pushed back toward 4% for a few quarters,” Mr. Guinigundo and Ms. Mañalac said on Tuesday.

“It is whether the government can restore the conditions for sustained, investment-led, and productivity-driven growth. Otherwise, the Philippines should prepare not merely for another disappointing GDP number, but for a more persistent period of disappointing, but entirely expected, economic growth,” they added.

The economy saw its worst performance since the pandemic after expanding by only 2.3% in the second quarter from 2.8% in the first quarter and 5.4% a year earlier.

Public construction contracted in the second quarter amid the lingering fallout from the flood control graft scandal, worsening the decline in investment, while elevated inflation kept household spending subdued and further weighed on economic activity.

In the first half, GDP expanded 2.6%, below the government’s 3.5%-4.5% full-year goal.

Department of Economy, Planning, and Development Secretary Arsenio M. Baliscan earlier said the economy would have to expand by at least 4.4% in the second semester to achieve the lower end of the target.

The GlobalSource analysts noted that hitting even the lower end of this year’s growth target is a tough task, with compounding governance issues and global energy shocks keeping economic momentum weak.

Mr. Guinigundo and Ms. Mañalac said 4.4% growth in the second half may be achievable “in numbers” but requires a faster and broad-based rebound across the economy.

“That is possible in numbers. But economics is not merely arithmetic,” they said. “It would require a substantial turnaround in investment, stronger household demand, a revival of business confidence, continued export growth and much faster execution of government programs.”

The National Government has vowed to ramp up its spending and project implementation, particularly on infrastructure, to compensate for the slowdown caused by last year’s flood control mess.

This came on the back of still muted infrastructure spending, with the latest data showing a 42.9% decline to P269.4 billion as of May from P471.5 billion a year ago. Infrastructure spending has fallen for an 11^th consecutive month on an annual basis.

According to the government, infrastructure and other capital outlays could decline by 15.1% year on year to P931.54 billion this year from P1.1 trillion in 2025. It could rise slightly in 2027 but remain under a trillion, it added.

However, Mr. Guinigundo and Ms. Mañalac said the so-called catch-up measures are insufficient to resolve deep-seated structural gaps such as policy uncertainty, educational divide, food and energy insecurity, and unstable governance.

“This is where the government’s economic narrative needs to become more ambitious,” they said. “The Philippine economy does not merely need more spending in the second half of the year. It needs a stronger foundation for private investment and productivity.”

The GlobalSource analysts said the government must prioritize tackling the country’s investment environment, flagging longer term risks from declining gross capital formation.

“Investment is what expands productive capacity. It creates jobs, improves productivity, introduces new technology and raises future potential output,” they said. “When investment contracts sharply, the consequences extend well beyond the quarter in which the decline is recorded.”

Gross capital formation, the economy’s investment component, dropped by 9.2% in the second quarter. This was steeper than the 3.1% contraction in the previous quarter and marked a reversal of the 0.91% growth a year ago.

“The Philippine government’s proposed response, such as faster infrastructure spending and catch-up programs, may help produce a second-half rebound, but it will not by itself address the deeper structural weaknesses,” Mr. Guinigundo and Ms. Mañalac said.

“Restoring sustained growth requires rebuilding investor confidence, accelerating legitimate public investment without compromising anti-corruption efforts, improving the regulatory and permitting environment, strengthening education and human capital, addressing food and energy vulnerabilities, and pursuing a clearer industrial policy focused on productivity and higher-value investment,” they added.

PRICE PRESSURES
Meanwhile, Nomura Global Markets Research kept its headline inflation forecast at 5.1% for 2026 but sees room for more policy rate hikes amid the spillovers of high energy prices.

Nomura research analysts Euben Paracuelles and Nabila Amani said they continue to see lingering pressures from the oil shock feeding into other commodities, though they held their full-year core inflation estimate at 3.9%.

“In our view, headline inflation has already peaked, partly underpinned by our crude oil price assumption, but core inflation has not, as we expect persistent second-round effects from energy prices,” they said in an Aug. 11 report.

Headline inflation eased for a third straight month to 6.2% in July, while core inflation cooled for the first time in eight months to 4.2%. Both remain well above the central bank’s 3% target.

Mr. Paracuelles and Ms. Amani said the Monetary Board may still raise its benchmark rate by 25 basis points (bps) each during its Aug. 27 and Oct. 22 meetings.

If realized, this would bring the BSP’s key policy rate to 5.25%.

“The latest CPI (consumer price index) inflation reading is unlikely to reduce BSP’s concerns but justifies its preference for a measured approach to its hiking cycle,” the Nomura analysts said.

This also came even after Nomura slashed its GDP growth forecast last week for the Philippines to 3.8% from 4.6% for this year following the weaker-than-expected print in the April-to-June period.

Mr. Paracuelles and Ms. Amani said they are banking on a second-half recovery driven by low base effects and potentially increased government spending but cautioned against risks from political uncertainty and the looming “Super El Niño.”

Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. has left the door open for further hikes to bring inflation back to their target but noted that the tepid second-quarter growth print eased some pressure off their tightening prospects.

Mr. Remolona said inflation remains their top consideration but noted that they do not ignore growth concerns in adjusting their monetary policy to maintain price stability.

The Monetary Board has so far delivered two 25-bp hikes since it began tightening in April, with the benchmark interest rate now at 4.75%