S&P cuts PHL outlook to ‘stable’ on Middle East risks

By Katherine K. Chan, Reporter

S&P GLOBAL RATINGS revised the Philippines’ credit outlook to “stable” from “positive,” citing risks to the country’s external and fiscal position from surging energy prices due to the Middle East conflict and a slowdown in infrastructure spending.

“We revised the rating outlook on the Philippines to stable from positive because the war in the Middle East has increased risks for the trajectory of the country’s external and fiscal metrics,” the rating agency said in a report by analysts YeeFarn Phua and Andrew Wood released late on Wednesday.

A stable outlook means the Philippines’ credit rating will likely be maintained over the next two years, reflecting expectations that the country will “maintain healthy economic growth rates that will allow fiscal performance to improve gradually while external metrics deteriorate slightly.”

S&P noted that “elevated energy prices will widen the Philippines’ current account deficit this year, reducing cushion on its net external asset position.” Global oil prices have risen to over $100 per barrel following the Middle East conflict, up from about $60-70 per barrel earlier this year, increasing import costs for energy-dependent economies such as the Philippines.

The current account deficit is projected to widen to 4% of gross domestic product (GDP) in 2026, as higher energy import costs offset reduced capital goods imports following the suspension of some infrastructure projects.

The energy shock has also bucked the country’s easing inflation trend.

After inflation cooled to 1.7% in 2025, S&P said the “trend has bucked since the outbreak of the Iran war led to a surge in oil prices,” with inflation projected to rise to 3.4% in 2026. Inflation averaged 2.8% in the first quarter, as back-to-back oil price hikes pushed March inflation to a near two-year high of 4.1%, the first time since July 2024 that it breached the central bank’s 2%-4% target.

On the domestic front, the credit watcher said the “investigations into flood control projects that commenced in August 2025 have severely hit the Philippines’ growth momentum,” leading to a “temporary reduction in public infrastructure spending.”

This contributed to GDP growth slowing to 4.4% in 2025, though S&P expects a rebound to 5.8% in 2026 as these factors ease in the second half.

Still, S&P affirmed the country’s “BBB+” long-term investment grade rating, two notches above the minimum investment grade, and its “A-2” short-term rating, citing “above-average economic growth potential,” anchored by a “strong external position.” This is supported by foreign exchange reserves that reached $107.5 billion in March and record-high remittances of $35.6 billion in 2025, the agency said.

However, S&P also noted that the “prolonged fiscal consolidation path also warrants” the shift to a stable outlook, pointing to the December 2025 recalibration of deficit targets, which signals a slower path to fiscal recovery over the next four years.

The credit watcher said the Middle East conflict is expected to continue disrupting global economies in the coming months, although it assumes the intensity of the war will peak and disruptions to key oil supply routes such as the Strait of Hormuz may ease within April.

“However, uncertainty over how the situation will unfold is high,” it added, noting that external and fiscal support may not improve sufficiently over the next two to three years to provide a meaningful boost to the country’s credit profile.

Consumer spending may weaken in the near term amid higher oil prices.

“The ongoing energy price shocks that started in March 2026 will further dampen economic activity in the Philippines,” S&P said. “We expect consumer sentiment to be undermined, with decreased growth in household spending.”

Despite these headwinds, S&P said the Bangko Sentral ng Pilipinas (BSP) is likely to maintain a “neutral stance” on monetary policy for the rest of the year.

“We believe the central bank will take a broadly neutral stance on monetary policy for the rest of the year, given its need to balance inflationary risk with a slowing economy,” it added.

The BSP kept its benchmark interest rate unchanged at 4.25% in an off-cycle meeting last month following market volatility triggered by the Middle East conflict, marking its first pause since June 2024 after nearly two years of policy easing.

Over the medium term, S&P expects the Philippine economy to remain resilient, projecting GDP growth to average 6.2% from 2027 to 2028 and 6.1% in 2029, driven by strong household consumption, investment recovery, and sustained remittance inflows.

“Solid household and corporate balance sheets, and sizable remittance inflows underpin the Philippine economy’s positive medium-term trajectory,” it said, adding that ongoing infrastructure development and regulatory reforms should further boost productivity.

However, the agency warned that fiscal pressures could persist, particularly if the government implements measures such as fuel tax cuts that may reduce revenues amid elevated global oil prices.

Last month, President Ferdinand R. Marcos, Jr. signed a law authorizing the Executive branch to temporarily suspend or reduce excise taxes on fuel to cushion the impact of oil price shocks driven by the Middle East conflict.

However, Malacañang has yet to announce whether it will implement the measure.

“Additionally, if the economic situation worsens, the government could be compelled to absorb a higher deficit with a supplementary budget to support the economy,” S&P said.

The agency said it could lower the ratings if the country’s long-term growth trend “erodes significantly” or if “persistently large current account deficits” lead to a structural weakening of the external balance sheet.

S&P also said it may raise the ratings if the Philippines’ current account deficits “taper over the next two years such that the narrow net external balance maintains a structural net asset position,” and if “the government achieves more rapid fiscal consolidation than we currently anticipate.”

“The BSP will continue to monitor local and overseas data to effect policies aimed at safeguarding price and financial stability amid a challenging economic and geopolitical landscape,” BSP Governor Eli M. Remolona, Jr. said in a statement on Thursday.