Fitch sees slower Philippines fiscal consolidation

As growth falters

MANILA, Philippines — The Philippines may take a slower fiscal consolidation path as sluggish economic growth complicates the country’s ability to trim its budget deficit, according to Fitch Ratings. 

In a report, Fitch said the proposed 2027 budget signals “modestly slower fiscal consolidation as weaker growth complicates the government’s ability to reduce deficits.’’

“While the upward revisions to deficits relative to our earlier assumptions are small, medium-term debt stabilization and the evolution of the ‘BBB’ sovereign rating will depend increasingly on how sharply growth and investment recover from subdued levels,” it said.

The economy grew by 2.3 percent in the second quarter, its weakest growth in five years, as investment slowed amid an oil price shock that dampened private spending and subdued public infrastructure disbursements following the flood control graft scandal.

Along with submitting the P7.2-trillion National Expenditure Program for 2027, economic managers revised their deficit-to-GDP target for 2026  to 5.4 percent from the original target of 5.3 percent.  

The deficit-to-GDP ratio is targeted at 5.1 percent in 2027, a slower pace of consolidation than the 4.8 percent forecast under the previous medium-term fiscal framework.

“Repeated upward revisions to medium-term deficit targets suggest the government continues to prioritize supporting growth over a faster pace of consolidation, leaving risks tilted toward a more gradual reduction in deficits over the next few years,” it said.

Fitch also noted that the government’s deficit target for 2030 is now 3.5 percent of GDP, wider than the previous 3.1 percent target.

“While headline deficits are only marginally higher, significant changes are underpinning these deficit forecasts. Lower revenue expectations are driving a significant adjustment in the government’s fiscal plans,” it said.

Government revenue is now projected to average around 15.5 percent of GDP over the medium term, below the 16.5 percent average under the earlier framework, Fitch said.

To compensate, the Philippines also slashed its infrastructure disbursement plans to around four percent of GDP over the medium term, about one-percentage-point lower than the level assumed under the previous program.

“Weaker public infrastructure spending could weigh on medium-term growth, although the extent to which lower disbursements will affect growth remains unclear,” Fitch said.

Despite this, Fitch said governance reforms may support spending efficiency and help restore the economic impulse from infrastructure spending even at lower spending levels.

The Marcos administration’s plan to lean toward public-private partnerships and local government units to drive infrastructure investment may help offset lower central government disbursements, it said.

“Fitch expects general government debt to GDP to rise slightly in the near term before stabilizing over the medium term. Achieving that outcome will depend considerably on growth performance, investment recovery and the effectiveness of efforts to sustain infrastructure investment,” it said.