The Philippines entered 2026 saddled with the widest budget deficit in Southeast Asia, leaving Manila alongside Jakarta facing the most severe market pressure in the region to scale back state spending as borrowing costs climb.

Artie Lam, Oxford Economics assistant economist, wrote in a June 2 research commentary that the constrained fiscal landscape across the Association of Southeast Asian Nations (ASEAN) is being driven by elevated interest rates, which have been stoked by market volatility and persistent geopolitical tensions.

The macroeconomic squeeze is acutely exposing the region’s two most prominent emerging economies, with the think tank noting that the Philippines and Indonesia “will face the most market pressure to rein in spending.”

For infrastructure spending alone, a contraction of more than two-fifths to ₱147.8 billion was seen in the first quarter of the year, dealing a significant blow to state-led economic momentum as agencies tightened oversight following a high-profile corruption scandal.

Meanwhile, overall spending for the first quarter reached ₱1.49 trillion, a modest 3.2 percent increase compared to the same period last year, according to the Department of Budget and Management (DBM).

Lam noted that the Philippines had the widest fiscal deficit in the region when it entered the year. The gap stood at 5.6 percent of the country’s gross domestic product (GDP), exceeding the government’s target of 5.3 percent.

This fiscal gap appears to be worsened by the government’s approach to addressing the national energy crisis. “There are no fuel subsidies or price caps in the Philippines akin to those in other countries,” Lam said.

While the government ordered a three-month suspension of the excise tax on liquefied petroleum gas (LPG) and kerosene, it “ruled out a similar suspension for diesel and gasoline” because suspending excise taxes on all fuels would have cost upwards of ₱44 billion.

What the administration did instead was implement targeted measures, such as disbursing ₱20 billion from the Malampaya gas fund to purchase additional fuel supplies.

While the Philippines is not required to meet certain deficit targets, the government has committed to narrowing the deficit to below four percent by 2028, the end of President Ferdinand Marcos Jr.’s term.

Narrowing the fiscal deficit is necessary, as it could help prevent sovereign credit rating downgrades. Recall that global debt watchers recently downgraded the country’s sovereign debt outlook to negative from stable, pulling the country further away from its goal of attaining an ‘A’-level rating by 2028.

Despite the government’s reassurance that it will narrow the gap, the cost of previous obligations is mounting. Lam said the Philippines is now “set to spend more than 15 percent of government revenue on interest.”

This fiscal squeeze also comes alongside pressure on the Bangko Sentral ng Pilipinas (BSP) to adopt an aggressive monetary policy stance due to persistent price spikes.

According to the think tank, the Philippines is expected to be the “most affected by inflation in the region.” This would likely necessitate another 75 basis points (bps) of interest rate hikes by the end of 2026, bringing the current 4.5 percent rate to 5.25 percent.

Meanwhile, Oxford Economics warned that the notable increase in borrowing costs “would limit” the country’s ability to respond to economic pressures, adding that “persistently high yields may even force the government to rein in future spending, weighing on government consumption and public investment.”