When the Philippines took over the chairmanship of the Association of Southeast Asian Nations (ASEAN) from Malaysia, expectations ran high that its one-year term could be used to attract investment and catch up with the more successful neighbors powering the region's growth story. With two months left in 2026, those hopes have been dashed. The country has been Southeast Asia's worst hit by high energy prices since the U.S.-Iran war began in February.

"For decades, the Philippines has been described as a country of enormous promise. It has a young population, a large domestic market, a strategic location, and a highly capable workforce," said Ruben Carlo Asuncion, chief economist of the Union Bank of the Philippines. "Yet it has often struggled to convert these advantages into sustained gains in investment, productivity, and competitiveness."

The start of 2026, he noted, had brought expectations of strong growth supported by easing inflation, lower interest rates, resilient household spending, and infrastructure investment. "Instead, the economy faced a series of shocks that slowed momentum and reignited inflation pressures," he said.

What was meant to be a breakout year—highlighted by the Philippines' turn as ASEAN chair—has instead become a case study in how the country keeps falling short, as corruption, institutional dysfunction, and energy insecurity outweigh its structural advantages.

Some of the Philippines' woes, particularly energy prices, are beyond its control and may ease in 2027. The World Bank expects a rebound to 5.2% growth in 2027, on higher public spending and easing inflation. Even so, Asuncion sees larger challenges ahead. "The more important question is whether the country can finally break free from its recurring cycle of underachievement."

Middle-income status a 'milestone, not a destination'

Peter L. U, dean of economics at the University of Asia and the Pacific in Manila, said the university's early forecasts had put GDP growth above 5% this year, similar to the World Bank's estimates. But high oil prices and cuts in public spending—enacted in the wake of a billion-dollar flood control infrastructure scandal last year—have since dragged that forecast down to a meager 3.7%.

The one bright spot is the World Bank's reclassification of the Philippines as an upper-middle-income economy this year—a label the bank assigns to economies in the second-highest of its four income groups, based on gross national income per capita. Yet Asuncion calls it a "milestone, not a destination."

"Many countries reach middle-income status. Far fewer successfully make the transition to becoming high-income economies…the challenge for the Philippines is no longer how to achieve growth, but how to sustain and improve the quality of that growth," Asuncion said.

The Philippines' sluggishness contrasts with Vietnam, the other Southeast Asian country to receive upper-middle-income status this year. Vietnam is expected to grow 7.8% in 2026, according to Asian Development Bank forecasts, and its exports are booming, reaching about $375 billion in the first eight months of the year. The Philippines, by comparison, exported just $64 billion.

U put the milestone in more domestic terms. "It's like a child who turned 13, yet is still the same person with the same maturity they had yesterday. That child will need to continue working hard to continue learning more, acquiring more skills and virtues to become an adult," he said.

One of the biggest obstacles to climbing the income ladder is that investors still struggle to find projects worth backing. Steep electricity costs—among the highest in Southeast Asia—along with bureaucracy and corruption also raise the cost of doing business.

Exposing decades-old problems

The biggest drag on the Philippine economy, however, may lie entirely outside its control. Continued tensions in the Middle East will keep energy prices elevated for the foreseeable future, driving inflation in the Philippines.

"Oil prices had already begun to come down but spiked again on renewed clashes around a month ago," U said. Inflation is back at its April peak of 7.2%.

The country is still absorbing sharply higher prices for fuel and fertilizer, along with a peso trading at record lows against the dollar. Those pressures feed into prices across the board, said Michael Ricafort, chief economist at the Rizal Commercial Banking Corporation.

Ricafort cautioned that inflation could pick up further through second-round and pass-through effects, including higher transport costs, businesses pushing for higher prices, rising inflation expectations, and wages. September's increase in Metro Manila's daily minimum wage from 695 to 755 Philippine pesos ($10.91 to $11.85) could also lead to pay hikes in other parts of the country, he added.

Bangko Sentral ng Pilipinas, the central bank, has also been hiking interest rates to rein in inflation—moves that will dampen the consumption spending that has traditionally driven the economy. On Oct. 22, the BSP raised its benchmark rate by 50 basis points to 5.5%. More hikes could follow: Nomura now expects the Philippine central bank to lift rates by another 75 basis points to 6.25% by February.

Yet Asuncion argued that these external events merely exposed weaknesses that were already there. "Economies inevitably face external shocks. What differentiates successful economies from struggling ones is the strength of their institutions and their ability to respond effectively," he said. "The energy shock highlighted the country's dependence on imported fuel, while the flood control controversy reinforced concerns about governance, accountability, and the efficient use of public resources."

U made a similar point: the Gulf conflict and last year's flood-control scandal mirror challenges long familiar to the Philippines. "The Middle East conflict and the resultant oil price spikes have been recurrent going back to the 1970s. Similarly, corruption scandals in the Philippines seem to also be recurrent," he said.

Turning the tides

With just a few months left in the year, attention is turning back to whether the Philippines can reverse course, starting with the ASEAN Summit in November and into 2027.

"The ASEAN Chairship has opened important economic opportunities, although many of the benefits will take time to materialise and build on initiatives already underway," said Victor Andres Manhit, president of the Manila-based consultancy group Stratbase. Key developments include the signing of the ASEAN Digital Economy Framework Agreement—a regionwide pact intended to set common rules for digital trade—expected during the summit, he added.

While the ASEAN chairmanship may have provided a platform to raise the Philippines' profile on the investment stage and position it as a key regional player, "whether the Philippines walks through them depends largely on governance and execution at home," Asuncion said.

The Philippines does retain structural advantages despite the grim short-term outlook. "The country's geostrategic location, abundant natural resources, large and young population, and investment opportunities remain important strengths," Manhit said.

Ricafort also sees opportunity in what has long been touted as one of the Philippines' greatest strengths: a young population of more than 115 million, with an average age below 25. "The Philippines has been in a demographic sweet spot since 2015, with the majority of the population already of working age," he said.

Yet that window is narrowing fast. U warned that declining birth rates, slipping educational quality, and the rise of AI could affect sectors that rely on young workers, such as the business process outsourcing industry, a mainstay of Philippine services exports and one of the country's largest private-sector employers.

If the past year offers one insight, it is that institutions remain the foundation of a well-functioning economy. "The lesson from 2026 is straightforward: there is no shortcut around good governance," Asuncion said. "That is ultimately the difference between an economy that is perpetually promising and one that finally fulfills its promise."

This story was originally featured on Fortune.com.