Philippines faces stagflation threat, says S&P

By Katherine K. Chan, Reporter

THE PHILIPPINES is facing potential stagflation as economic growth remains weak while inflation runs hot, which could keep interest rates higher for longer, global credit watchdog S&P Global Ratings said.

S&P Global Ratings Senior Economist Vishrut Rana said the Philippine economy is showing signs consistent with what they consider as stagflation.

“So, if we think of stagflation as being sharply below trend growth combined with high inflation, then we are in that scenario where there is significantly weak growth and high inflation,” Mr. Rana told a webinar on Friday.

Based on its latest outlook as of September, S&P sees headline inflation in the Philippines accelerating to 5.5% this year from 1.7% in 2025.

It then expects the headline print to ease and move closer to the central bank’s 3% target at 3.6% next year, 3.2% in 2028, and 2.9% in 2029.

Mr. Rana said the recent inflation episode is largely supply-driven and continues to be jolted by the global energy price shock amid the Middle East conflict.

The strong El Niño has also pushed up food prices, with risks of further increases as dry weather conditions strain agricultural output, he added.

In October, Philippine headline inflation sizzled to a near four-year high of 7.8% as the renewed energy shock sharply drove up costs of fuel, transport, and utilities.

This marked the eighth straight month that inflation was above the Bangko Sentral ng Pilipinas’ (BSP) target, also breaching this year’s previous peak of 7.2% recorded in April and September. This pushed the year-to-date average to 5.6%.

S&P said regional efforts to cushion the agricultural sector from El Niño may prevent a “dramatic jump” in food prices.

However, El Niño-driven risks could still weigh on the Philippine economy as elevated food prices dampen consumer demand, Mr. Rana said.

“There has been strong ASEAN (Association of Southeast Asian Nations)-level effort to mitigate the effect of the food crisis, and that means that we think that agricultural supplies will be secured. So, we don’t see a dramatic jump in food prices, but it will still be higher than the current 7% rate that we are at currently,” he said.

“So, putting all that together, we expect food prices to be further higher. It should squeeze consumer incomes a little bit more. We expect that weakness in consumer demand to come through in the first half of 2027, and for monetary policy it means we anticipate tighter monetary policy to persist through H1 2027.”

The Philippine Atmospheric, Geophysical and Astronomical Services Administration this week said a very strong El Niño is active in the tropical Pacific, which is expected to peak before the year ends and last until the first quarter of 2027.

Philippine gross domestic product (GDP) growth slumped 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%-4.5% full-year target.

The economy likely rebounded slightly in the third quarter, with the median GDP growth estimate in a BusinessWorld poll of 16 analysts standing at 2.7%. The government will release the third quarter data on Monday (Nov. 9).

S&P forecasts the Philippine GDP growth to come in at 2.9% this year before rebounding to 5.4% next year.

For Mr. Rana, elevated inflation will keep the BSP hawkish, but expectations that price pressures would eventually ease could reduce the case for more aggressive rate hikes.

“Overall, we anticipate that monetary policy will remain tight,” he said. “On the other hand, we don’t think that there’s going to be significant further tightening or increases in the monetary policy rate just given the expectations for supply-side inflation to ease over the course of 2026 as we currently do in our forecast.”

Last month, the Monetary Board tightened for a fourth straight meeting to quell broadening oil-driven price pressures and intensifying risks from a strong El Niño.

It raised its key policy rate by an outsized 50 basis points (bps) to a near two-year high of 5.5%, bringing its cumulative hikes to 125 bps since it first tightened in April. This was the first 50-bp increase in nearly four years or since February 2023.

BSP Governor Eli M. Remolona, Jr. on Tuesday said the central bank remains on a tightening path as inflation continues to run hot.

However, a wider negative output gap based on third-quarter GDP data would reduce the odds of additional hikes, he added.

The Monetary Board will hold its last rate-setting meeting this year on Dec. 17.