Pervasive corruption in the Philippines is preventing the country from realizing its full economic potential, despite President Ferdinand R. Marcos Jr. making “steady progress” on his reform agenda, according to the think tank Capital Economics.

In its Asia Economic Outlook report for the fourth quarter of 2025, Capital Economics said that while the midterm of the Marcos Jr. administration saw the passage of key reforms aimed at improving the ease of doing business and infrastructure development in the country, “corruption and political instability remain a concern for foreign investors.”

“Unless these areas are addressed, the Philippines risks not fully capitalizing on the significant opportunities arising from the realignment of global supply chains driven by United States (US)-China decoupling,” Capital Economics warned in its Sept. 25 report.

Finance Secretary Ralph G. Recto, who heads the economic team, had lamented that the Philippine economy could have grown by six percent if flood control projects had not been hijacked by corruption, resulting in a loss of as much as ₱119 billion in economic output.

On top of massive losses to corruption, Capital Economics cautioned that “tighter fiscal policy will weigh on economic growth in both Malaysia and the Philippines,” referring to their narrower space for spending on public goods and services.

Despite these headwinds, Capital Economics expects Philippine GDP to expand at a steady pace of around 5.5 percent over the coming quarters, at the lower end of the government’s 5.5- to 6.5-percent target for the year.

“GDP growth has held steady at around 5.5 percent year-on-year in recent quarters, and we expect growth to remain at around this pace over the coming year,” it said.

Consumption is projected to remain resilient, supported by lower interest rates. However, this will be offset by weaker external demand and fiscal tightening, the think tank said.

Capital Economics also cautioned that export sales are likely to struggle due to the weaker economic outlook for the country’s top trading partners, China and the US, which are also embroiled in intensifying trade tensions. For net importer Philippines, China is the No. 1 source of the goods it consumes, while the US is the leading destination of Philippine exports.

The think tank added that US tariffs on Philippine exports, at 19 percent, pose an additional risk.

While the Bangko Sentral ng Pilipinas (BSP) has already cut interest rates by 150 basis points (bps) so far in this easing cycle, Capital Economics expects more reductions in the months ahead given weak inflation.

“The headline rate was just 1.5 percent year-on-year in August, below the BSP’s two- to four-percent target and is likely to remain subdued over the forecast period,” the report said. “We are forecasting a further two 25-bp cuts this cycle.”

With headline inflation projected by Capital Economics falling to a below-target 1.6 percent in 2025, it expects the BSP’s policy-setting Monetary Board (MB) to cut the policy rate to 4.75 percent, from the current five percent, before year-end.

After another 25-bp cut next year, the key borrowing rate is expected by the think tank to stay at 4.5 percent for the rest of 2026.

(Ricardo M. Austria)