While other developing countries in Southeast Asia could suffer severely from looming US tariff rate hikes, HSBC sees the Philippines as well-positioned to weather these risks.
During a media briefing on Jan. 8, Aris Dacanay, ASEAN economist at HSBC Philippines, said that unlike its neighboring countries such as Vietnam and Thailand, the Philippines remains "very insulated" due to its negligible trade surplus with the United States, making it less likely to face significant economic repercussions from tariff adjustments.
"More importantly, even with the risk of global trade shrinking, the Philippines remains relatively insulated," Dacanay said, noting that among ASEAN countries, the Philippines has the "smallest" exposure to export goods but the "highest in services."
Dacanay said this is a major advantage because "you cannot put a tariff on services," including those driven by digitalization and artificial intelligence (AI).
Philippine service exports, according to Dacanay, face no risk of tariffs, offering a tax-free advantage.
This trend aligns with the global economy, where foreign direct investment (FDI) in services, including new greenfield projects, is now surpassing investments in manufacturing.
"The name of the game today is services—and that's where the Philippines is in the position to rise and shine," he stressed, noting that the country ranks second in the services sector, following India.
Additionally, the country has a strong fiscal space, "robust enough to weather the challenges ahead."
"Tax revenue to GDP [gross domestic product] is falling everywhere else in ASEAN. It is only in the Philippines where the tax revenue to GDP ratio is actually rising. And because of that, we do have space to invest in our long-term goals," Dacanay explained.
Similarly, he stressed that infrastructure spending is rising only in the Philippines and Vietnam within ASEAN, with these investments being independent and unaffected by tariffs.
With the country's key growth drivers—public services, infrastructure spending, and consumption—dodging the tariff risks, Dacanay still expects the country's economy to expand at an average rate of 6.3 percent in 2025.
This outlook falls comfortably within the government's 6.0 to 8.0 percent target range. The Marcos administration's economic team recently widened its growth assumptions for 2025 to 2028 given both domestic and global uncertainties.
Incomplete risk immunity
Although Dacanay said that the Philippines is "the most insulated" country compared to its regional peers, he also said that the country is "not completely insulated." The challenge that the country now faces is the indirect impact of tariff risks through monetary policy.
Rising US interest rates impact the Philippines, as it limits how much the country can lower its own rates without falling below the US Federal Reserve, the economist explained.
"Cutting too much ahead of the Fed will introduce risks, [such as] currency volatility, which of course as we saw in October 2022 when the peso hit 59 for the first time, there were financial risks that occurred during that time," Dacanay said.
Dacanay expects the Bangko Sentral ng Pilipinas (BSP) to follow the Fed's easing cycle, with policy rates now projected to reach 5 percent by the third quarter of 2025, revising his earlier forecast of the second quarter.
This shift is mainly driven by the BSP's need to follow the Fed's gradual rate cuts to manage higher US interest rates and maintain peso stability.
Dacanay expects the peso to weaken past 59 "most probably" around the second quarter of this year.
He noted, however, that while all Asian currencies are expected to depreciate, the peso is likely to remain more resilient due to its stronger immunity from tariff risks, the BSP's stronger reserves compared to other ASEAN central banks, and robust economic growth.
Meanwhile, Dacanay projects the country's 2025 full-year inflation to settle at 2.5 percent, citing the continuous decrease in rice prices.
"You also have the deflationary impulse from Chinese goods," Dacanay added, noting that cheaper Chinese goods, alongside weaker global demand for energy, contribute to easing global inflation.