Philippines Faces Stagflation Threat, S&P Global Ratings Warns

By Katherine K. Chan, BusinessWorld Reporter

The Philippines is confronting a potential bout of stagflation, with economic growth remaining weak even as inflation runs hot — a combination that could keep interest rates elevated for longer, according to global credit watchdog S&P Global Ratings.

S&P Global Ratings Senior Economist Vishrut Rana said the Philippine economy is already displaying signs consistent with what the firm considers 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.

Stagflation is among the toughest setups for a central bank, since defending purchasing power and supporting growth pull policy in opposite directions — the balance Philippine policymakers have been striking this year.

Based on its latest outlook as of September, S&P expects headline inflation in the Philippines to accelerate to 5.5% this year from 1.7% in 2025. The rating agency then projects the headline print to ease back toward the central bank's 3% target, reaching 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. A strong El Niño has also pushed up food prices, with the risk of further increases as dry weather conditions strain agricultural output, he added.

In October, Philippine headline inflation climbed to a near four-year high of 7.8% as the renewed energy shock sharply drove up the cost of fuel, transport, and utilities. It marked the eighth straight month that inflation ran above the Bangko Sentral ng Pilipinas' (BSP) target, also breaching this year's previous peak of 7.2% recorded in April and September. The reading 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. Even so, 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 said this week that a very strong El Niño is active in the tropical Pacific. The weather event is expected to peak before the end of the year and persist through the first quarter of 2027.

Economic growth has already lost considerable momentum. 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 is scheduled to release the third-quarter data on Monday (Nov. 9).

S&P forecasts Philippine GDP growth of 2.9% this year before a rebound 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."

The supply-side distinction is central to that judgment: interest rates restrain inflation mainly by curbing demand, which makes them a blunt tool against price increases that originate in energy markets and weather rather than in overheated spending.

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

BSP Governor Eli M. Remolona, Jr. said on Tuesday that the central bank remains on a tightening path as inflation continues to run hot. However, he added that a wider negative output gap — a measure of slack indicating the economy is producing below its potential — based on third-quarter GDP data would reduce the odds of additional hikes.

The Monetary Board will hold its final rate-setting meeting of the year on Dec. 17.

Source: BusinessWorld