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Two global banking giants have flagged political and fiscal challenges posing near-term risks to the Philippine economy, especially in the aftermath of a corruption scandal involving massive public spending on ineffective flood control projects in recent years.
While “there is a strong pipeline of infrastructure projects” in the Philippines, “recent developments on flood control projects’ corruption raise some risk,” MUFG Global Markets Research senior currency analyst Michael Wan said in a Sept. 19 report.
“One key risk factor to watch for the Philippine peso is the scheduled protests on the 21st of September, which are tied to the anniversary of the declaration of martial law in the Philippines. These follow from recent but likely smaller-scale protests that happened [last] week across different places” in the country, Wan said.
“These protests are in response to recent corruption issues around flood control projects, even as we don’t think it is a major driver of markets today for Philippine assets. Markets will be watching closely for the size of the protests, and to see if the political pressure results in any changes in government policy, which ultimately could flow through to Philippine peso foreign exchange (FX) and rates markets,” Wan added.
The MUFG report noted that a series of Senate hearings on corruption allegations in flood control projects last week culminated in House Speaker Martin Romualdez—a cousin of President Ferdinand R. Marcos Jr.—resigning from his post to supposedly help restore public trust, amid intensifying speculation over lawmakers’ alleged involvement in kickbacks.
The report also noted that since 2022, the Philippine government allocated nearly ₱545 billion for flood control, but many projects turned out to be “ghost” works or substandard, with allegations that contractors, lawmakers, and Department of Public Works and Highways (DPWH) officials colluded to inflate project costs and pocket kickbacks of up to 30 percent.
Since the scandal implicated senior government officials and lawmakers, the public backlash prompted the President to pledge transparency, publish project lists, launch a public reporting portal, and implement reforms, including the resignation of the former DPWH chief, dismissal of engineers, and blacklisting of contractors, the Japanese financial giant added.
Wan noted that the Philippine peso last week “traded in a reasonable range but weakened toward with regional Asian currencies to some extent as the United States (US) dollar strengthened.” The peso shed about 0.4 percent versus the greenback last week.
As for Asian equities, MUFG said that “we saw some slowing from last week, with some local stories dominating such as in Indonesia’s surprise rate cut coupled with flood control projects’ controversies in the Philippines.”
In a Sept. 18 report, Deutsche Bank Research economist Junjie Huang said that “downside risks to the Philippine economy have not faded in our view, despite the Bangko Sentral ng Pilipinas (BSP) suggesting that it has reached the policy rate ‘sweet spot’ of five percent.”
For Huang, the key interest rate “remains high, and with fiscal constraints and subdued economic sentiment, we think that the BSP still has some room to further ease.”
Huang said that the Philippines is currently in a “fairly delicate Goldilocks” state, despite BSP Governor Eli M. Remolona Jr. claiming that last month’s 25-basis-point (bp) rate cut brought monetary policy to a “sweet spot.”
Amid emerging risks that still warrant close monitoring, as the BSP itself had noted, Huang believes that the central bank will cut interest rates some more, likely by another 25 bps at its last monetary policy meeting of the year in December.
“Remolona mentioned that the central bank was looking at a real interest rate of two percent. The current real rate stands at 3.5 percent, and we forecast it only approaching about two percent in mid-2026, suggesting that the BSP could continue on its accommodative monetary policy path,” Huang said.
Huang also noted that while goods exports surged in recent months on the back of strong Asian demand for electronics and front-loading of shipments to North America, the looming United States (US) semiconductor tariffs threaten the Philippines, where electronics make up about 60 percent of total exports, with semiconductors comprising 40 percent.
Also, Huang cautioned that while the Marcos Jr. administration reins in the national government’s (NG) budget deficit under its Medium-Term Fiscal Program (MTFP), fiscal consolidation is now at a slower pace, with the 2026 deficit target at 5.3 percent of gross domestic product (GDP)—wider than the original program of 4.7 percent for next year, albeit narrower than the 5.5 percent programmed for 2025.
Deutsche Bank Research projected the budget deficit hitting up to 5.4 percent of GDP in 2026 due to this fiscal consolidation slowdown.
With next year’s public expenditures seen at 21.5 percent of GDP, or only slightly above the programmed 2025 spending level at 21.4 percent of GDP, Huang believes this reflects “limited fiscal impulse,” hence likely requiring BSP support to sustain economic growth amid weak consumer sentiment.
Both MUFG and Deutsche Bank expect the Philippine economy to grow by 5.7 percent this year, within the government’s downscaled 5.5- to 6.5-percent target and matching the real GDP growth rate recorded in 2024.
