The Philippines is grappling with entrenched institutional weaknesses and rising geopolitical volatility that threaten to undermine its credit profile, according to global debt watcher Moody’s Ratings.

While the credit watcher maintained the nation’s investment-grade rating at ‘Baa2’ with stable outlook, Moody’s warned that the persistent lack of progress in strengthening the rule of law and curbing corruption remains a primary drag on the sovereign's fiscal health.

Moody’s noted that the Philippines’ rankings in the Worldwide Governance Indicators still lag behind other economies that have also been assigned a ‘Baa’ rating by the credit rating agency.

Moody’s said that volatility in global developments is worsening these domestic challenges, noting that “the conflict in the Middle East has increased downside risks to the Philippines’ economic outlook by raising global energy prices and external cost pressures.”

“Higher energy and broader import costs are expected to erode real incomes amid high pass-through, dampen consumption, and weigh on industrial activity, reinforcing a firmer inflation trajectory,” it added.

Moody’s raised its inflation forecast to 3.7 percent in 2026 from three percent previously, and to 3.5 percent in 2027 from 3.2 percent.

It also slashed its gross domestic product (GDP) growth forecast for 2026 to 4.9 percent from 5.5 percent, and for 2027 to 5.3 percent from 5.6 percent.

For its part, the Marcos administration has taken steps to manage emerging risks. Last month, the Philippines was placed under a state of national energy emergency to enable a whole-of-government strategy to secure alternative fuel supplies and roll out subsidies.

These emergency measures are critical as inflation surged above target to 4.1 percent in March, “reducing policy flexibility and increasing the risk of policy tightening.”

Despite these headwinds, Moody’s retained its “stable” credit outlook for the Philippines, supported by a “large, domestically driven emerging economy with strong medium-term growth potential.”

This growth is propped up by favorable demographics and a stable, well-capitalized banking system, according to Moody’s.

Moody’s, however, cautioned that a “material erosion in the quality of legislative and executive institutions” or a “deterioration in fiscal and government debt metrics relative to peers” would exert downward pressure on the rating.

For an upgrade, Moody’s said it is looking for a faster improvement in fiscal and government debt metrics, alongside sustained strong economic growth, to bring down the pandemic-era debt peak of 60.9 percent of GDP recorded in 2022.

In 2025, government outstanding debt climbed to a record ₱17.71 trillion, pushing the debt-to-GDP ratio to 63.2 percent—the highest since 2005’s 65.7 percent level.