Philippines faces stagflation risk as S&P flags weak growth and persistent inflation

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Philippines faces stagflation risk

Highlights

S&P Global Ratings projects Philippine headline inflation at 5.5% in 2023, with a return to the BSP's 3% target not expected until 2026.
Philippine GDP grew only 2.6% in the first half of 2023, significantly below the government’s 3.5%-4.5% target, with S&P forecasting just 2.9% expansion for the year.
Bangko Sentral ng Pilipinas lifted its key policy rate by 50 basis points in October to 5.5%, extending tightening as El Niño-related supply shocks and high inflation persist.

Inflation outlook and policy path

As reported by BusinessWorld, citing S&P Global Ratings, the Philippines is in a scenario of sharply below-trend growth combined with high inflation, a mix that senior economist Vishrut Rana says fits the agency's definition of stagflation.

Based on its latest outlook as of September, S&P sees Philippine headline inflation accelerating to 5.5% this year from 1.7% in 2025. It expects inflation to ease closer to the Bangko Sentral ng Pilipinas' 3% target at 3.6% next year, 3.2% in 2028 and 2.9% in 2029.

Rana says the current inflation episode is largely supply-driven, with global energy price shocks linked to the Middle East conflict adding pressure. He adds that a strong El Niño is lifting food prices and could push them higher as dry weather strains farm output.

In October, Philippine headline inflation hit a near four-year high of 7.8%, driven by higher fuel, transport and utility costs. It was the eighth straight month above the BSP's target and lifted the year-to-date average to 5.6%.

S&P says regional efforts to cushion agriculture from El Niño may prevent a dramatic jump in food prices, but food costs are still expected to rise further. That is likely to squeeze household incomes, weaken consumer demand in the first half of 2027 and keep monetary policy tight through that period.

Growth slowdown and broader economic impact

Philippine gross domestic product growth slowed to a post-pandemic low of 2.4% in the second quarter, bringing first-half expansion to 2.6%, below the government's 3.5% to 4.5% full-year target. A BusinessWorld poll of 16 analysts puts median third-quarter growth at 2.7%, with official data due on Nov. 9.

S&P forecasts Philippine GDP growth at 2.9% this year before a rebound to 5.4% next year. Even so, elevated inflation is expected to keep the BSP hawkish, although easing supply-side pressures over the course of 2026 may reduce the case for more aggressive rate increases.

Last month, the Monetary Board raised its key policy rate by 50 basis points to 5.5%, extending its tightening cycle for a fourth straight meeting and bringing cumulative increases since April to 125 basis points. BSP Governor Eli M. Remolona, Jr. says the central bank remains on a tightening path as inflation runs hot, though a wider negative output gap based on third-quarter GDP data could lower the odds of further hikes.

The Philippine Atmospheric, Geophysical and Astronomical Services Administration says a very strong El Niño is active in the tropical Pacific, is expected to peak before the end of the year and last until the first quarter of 2027. The Monetary Board is due to hold its last rate-setting meeting of the year on Dec. 17.

Our earlier coverage on rising sovereign borrowing risks explained how persistent geopolitical tensions and elevated fiscal spending are straining governments in a higher interest-rate environment. We noted that conflicts such as Russia-Ukraine and the war in the Middle East have pushed up energy and food prices, lifting inflation and complicating credit and refinancing conditions—pressures that tend to hit emerging markets hardest.

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