Nomura Holdings Inc. warned that the Philippines’ credit rating outlook faces a potential downgrade to “negative” if lingering corruption scandal involving flood control funds remains unresolved, threatening to derail the country’s progress toward an “A” grade rating.

In a monthly report published by the Japanese investment and brokerage giant on Friday, Jan. 9, Nomura Analysts Euben Paracuelles and Yiru Chen characterized the current environment in the Philippines as one of high uncertainty.

“We think uncertainty is high: if a resolution to the corruption scandal is reached, a one-notch upgrade to A- is possible. Otherwise, the outlook risks returning to ‘stable’ or even being reduced further to ‘negative,’” Paracuelles and Chen wrote in their report.

Former Finance Secretary Ralph G. Recto said S&P Global Ratings could have upgraded the Philippines’ credit rating in 2025 if not for the eruption of alleged corruption cases involving flood control funds.

Recto had said the rating agency held back on upgrading the sovereign credit rating from BBB+ to A-.

Meanwhile, Nomura has projected the country’s fiscal deficit to narrow to 5.1 percent of gross domestic product (GDP) this year from 5.5 percent in 2025. This is narrower than the economic team’s 2026 target of 5.3 percent.

Nomura, however, noted that this remains “well above” the budget gap average before the Covid-19 pandemic of 2.4 percent. It expects this to continue narrowing to 5 percent in 2027, still wider than the government’s projection of 4.8 percent.

Output growth, which highly influences the country’s fiscal targets, is expected to pick up to 5.3 percent this year from an anticipated 4.7 percent in 2025.

“We believe the ‘bad scenario’ continues to play out regarding the impact on growth of the ongoing government corruption scandal via a sharp drop in public sector spending amid increased scrutiny,” said Nomura.

Such a growth rate would fall within the lower end of the government’s freshly slashed goal of five to six percent.

As if that were not enough, Nomura has warned that domestic economic growth could further bear the brunt of extended weakness in government spending and a moderation in global output expansion.

“Political risks may also be rising with the approval ratings of President Marcos declining,” Nomura added.

Meanwhile, Nomura expects the Bangko Sentral ng Pilipinas (BSP) to deliver a cumulative 50 basis points (bps) reduction in the benchmark rate, bringing the current 4.5 percent to 4 percent by the first semester of 2026.

BSP Governor Eli M. Remolona Jr. earlier said the central bank has no capacity to directly tackle flood control corruption, “but it can compensate for its effects on business sentiment and investor confidence.” Confidence is expected to return this year.

Two additional cuts in February and April would contrast with the central bank’s signal of a policy easing cycle nearing its conclusion.

“Our forecast is underpinned by our more cautious view on the growth outlook, which is the overriding policy consideration for BSP. The negative output gap has widened sharply, adding to a benign inflation outlook,” Nomura said.

Following a below-target inflation print in 2025 at 1.7 percent, Nomura sees price movements averaging 2.5 percent in 2026, returning within the target band of 2 to 4 percent—deemed manageable and conducive to growth.