S&P warns of stagflation as Philippines growth falters

MANILA, Philippines — The Philippines is already experiencing stagflation, a combination of sluggish economic growth and high inflation, as surging energy costs and weak government spending weigh on the economy, according to S&P Global Ratings.

During a webinar yesterday, S&P senior economist Vishrut Rana said growth had fallen sharply below the country’s long-term trend of 5.5 to six percent, while rising prices were squeezing household incomes.

“If we think of stagflation as being roughly below growth trend combined with high inflation, then we are in that scenario where there is significantly weak growth and high inflation,” Rana said.

Gross domestic product (GDP), the value of goods and services produced in the economy, expanded by just 2.3 percent in the second quarter.

Meanwhile, inflation, or the pace of consumer price increases, accelerated to 7.8 percent in October from 7.2 percent in September, its highest since February 2023 and well above the Bangko Sentral ng Pilipinas (BSP)’s two- to four-percent target. 

S&P’s existing growth forecasts point to an expansion of 2.9 percent this year and a recovery to 5.4 percent in 2027.

Rana attributed the slowdown partly to weaker construction and real estate activity following a pullback in public spending. Higher fuel and food prices have also dampened household demand.

Although government spending is expected to recover next year, Rana warned that a prolonged El Niño could further hurt agricultural yields in the Philippines and major rice exporters Thailand and Vietnam, keeping food prices elevated.

“We expect that weakness in consumer demand to come through in the first half of 2027,” he said.

S&P also does not expect the BSP to cut rates for the rest of 2026, although it sees limited need for substantial additional hikes. The central bank raised its benchmark policy rate to 5.50 percent in October.

S&P associate director Pauline Tang said its newly released oil price assumptions put Brent crude at $105 per barrel for the rest of 2026 and $85 in 2027, prolonging pressure on fuel-importing economies.

The economic strain could also affect banks. 

S&P director Nikita Anand said the sector’s nonperforming loan ratio, or the share of loans in default, could rise to 3.5 percent by year-end and to a range of 3.5 to four percent in 2027, from about 3.1 to 3.2 percent currently.

Still, S&P expects banks to remain resilient because of their earnings and capital buffers.