Constrained fiscal and monetary policy space, along with increasing reliance on foreign debt, has placed the Philippines at the highest sovereign risk, or the greatest risk of failing to meet its debt obligations, among its Asian peers.

According to a Sept. 10 report by the think tank Oxford Economics, the Philippines recorded the highest sovereign risk score among 12 Asian economies, at 4.5 out of 10. The biggest contributor to this risk is limited internal policy space, referring to the country’s relatively narrow fiscal and monetary flexibility compared with its peers.

The second-largest factors are external imbalances—measured by current account and trade deficits—along with the size of the economy, and institutional risks. Other contributors include political risks, the business environment, vulnerabilities in the banking sector, and corporate debt.

India ranked second in sovereign risk, followed by China, Vietnam, Malaysia, Thailand, and Indonesia. Meanwhile, Japan, Singapore, South Korea, Hong Kong, and Taiwan were assessed to have the lowest risk levels.

Sovereign risk refers to the possibility that a government may default on its debt by failing to meet interest or principal payments.

“On the fiscal front, the stubborn bias towards fiscal conservatism is likely to persist, following the broad unwinding of pandemic-era discretionary support,” Oxford Economics lead economist Alexandra Hermann said.

However, given that “around half of the region’s economies are likely to fall short of their official growth estimates this year, and the remainder only just meeting stated targets, the political economy of growth underperformance could tilt authorities towards further incremental easing going into 2026.”

For the Philippines, the government is targeting a growth rate of 5.5 to 6.5 percent for 2025—a downscaled version of the more ambitious goal of six to eight percent previously.

While governments in Asia, including the Philippines, could implement measures to soften the impact of weaker exports, the think tank noted that economic growth would still be slower than normal. Philippine gross domestic product (GDP) growth averaged 5.4 percent in the first half of the year.

“On the monetary side, most central banks have room to cut further as real rates are still elevated compared to pre-pandemic norms, despite pre-emptive cuts this year particularly in emerging Asia,” Hermann said.

To recall, the Bangko Sentral ng Pilipinas (BSP) aggressively hiked lending rates to as high as 6.5 percent in 2024 to tame raging increases in consumer prices brought about by the Covid-19 pandemic.

Hermann expects the Philippine central bank alongside other Southeast Asian central banks to further reduce key borrowing costs by as much as three quarters of a point by early next year, similar to what they did previously during economic slowdowns.

“We anticipate an additional 25-75 bps [basis points] of rate reductions across India, Indonesia, the Philippines, and Thailand, completing an easing cycle by early 2026 that is broadly consistent in scale with prior non-recessionary slowdowns,” Hermann said.

Should the BSP reduce the key policy rate by up to 75 bps though the first half of 2026, the current five percent could be brought down to 4.25 percent. For this year alone, the BSP has so far lowered rates by a cumulative 75 bps, citing still subdued inflation and risks to slower growth.

In another Sept. 10 report of the think tank, the BSP and other central banks are seen to be “hawkish despite low inflation.” BSP Governor Eli M. Remolona Jr. earlier signaled a still accommodative stance but now less dovish.

While inflation remains within the government’s target band of two to four percent, Oxford Economics head of global emerging market (EM) research Gabriel Sterne expects this to elevate in the coming months.

Inflation quickened to 1.5 percent in August from 0.9 percent in July, which was the slowest in nearly six years. Inflation was faster in August despite the continued drop in rice prices, as supply chain disruptions from weather disturbances stoked food costs.

On the trade front, meanwhile, the Philippine economy is seen to have a relatively low exposure risk—around nine percent—linked to trade giants the United States (US) and China next year.

In comparison, Indonesia, Japan, and India have even lower exposure (all less than eight percent), while Singapore (around 58 percent) and Vietnam (around 45 percent) are considered highly exposed economies.

Hermann argued that the cushion of other Asian countries against the hit of lingering trade threats would be their high performance in services sectors that were slapped with relatively low tariffs.

For the Philippines, output gains would come from its business process outsourcing (BPO) industry, “which now extends into higher-value IT [information technology] and knowledge services.” Hermann noted that this sector has consistently supported household spending and brought in steady inflows from foreign exchange (forex).