‘Difficult’ policy choice for PH: slower growth or miss fiscal target - Fitch unit

Manila, Philippines – With the Philippine economy’s performance so far off-target and the budget gap yawns wider than desired, President Ferdinand “Bongbong” Marcos, Jr.’s economic team is caught between a rock and a hard place, said BMI, a unit of Fitch Group.

In a research note released on Monday (Aug. 11), days after second-quarter gross domestic product (GDP) data showed economic growth averaging 5.4 percent in the first half, BMI said it is keeping its fiscal deficit forecast for the Philippines at 6 percent this year “as a more challenging external environment will challenge fiscal consolidation efforts.”

The government is aiming for the economy to expand within a 5.5 percent to 6.5 percent range this year, which means it would need at least 5.6 percent growth in the second half to meet the low end of that full-year goal.

The key risk, BMI said, are the Trump tariffs on all imports from the Philippines set at 19 percent, which “would further dampen external demand and add to existing structural weakness.”

To offset those global headwinds, the economy will need fiscal support, or government spending, but policymakers have very limited room to maneuver given “already high public debt levels” as the ratio of debt to GDP rose to around 60 percent from the pre-pandemic level of 40 percent.

The Marcos government had wanted too to get its fiscal house in order, but faced with setbacks, at the last interagency Development Budget Coordination Committee (DBCC) meeting in June, the economic team recast its 2025 deficit-to-GDP ratio to a wider 5.5 percent from just 5.3 percent during its December review.

The DBCC also revised the debt ratio for the next three years to a wider 5.3 percent for 2026 (from 4.7 percent); 4.8 percent for 2027 (from 4.1 percent); and 4.3 percent for 2028 (from 3.7 percent), signalling a “clear slowdown in fiscal consolidation efforts and reinforces our view that the government faces growing constraints in reducing its budget shortfall over the medium term,” BMI wrote.

That situation would force policymakers to choose between two undesirable choices.

“Ultimately, the Philippines faces a difficult policy choice: accept structurally slower GDP growth or prolong the fiscal adjustment timeline,” BMI said.

“With limited fiscal headroom and rising external risks, the government’s ability to strike a sustainable balance will be tested in the years ahead,” it added.