The Marcos administration’s decision to limit consumer subsidies shields the government budget from global price shocks but threatens to choke off private consumption and derail domestic demand, according to global debt watcher Moody’s Ratings.

In its latest Asia-Pacific (APAC) report published on June 19, Moody’s explained that while allowing fuel prices to swing freely in the market protects the state budget, it ultimately places the financial burden on the public.

“In the Philippines, limited subsidies and high pass-through to domestic prices will erode real incomes and dampen consumption, while investment remains subdued amid the ongoing flood-control probe,” Moody’s said.

It added that while the approach limits the pressure on the country’s fiscal space, it threatens to “dampen economic activity and risks heightening social tensions.”

To recall, Philippine economic growth slumped to 4.4 percent in 2025 as the unearthing of anomalies in flood control projects raised a glaring red flag for businesses, consumers, and investors alike. Domestic growth subsequently slowed to a five-year low of 2.8 percent in the first quarter of 2026.

This fiscal strategy stands in contrast to regional neighbors like Indonesia, where the government has maintained significant subsidies amid high oil prices. While the Philippine approach protects the state budget and keeps the national debt profile stable—currently at Baa2—it creates a unique set of headwinds at a clear cost to the average citizen’s purchasing power.

Beyond the direct impact on consumers, the broader financial landscape is tightening. Moody’s noted that “tighter monetary policy to manage inflation and support currencies will gradually worsen debt affordability as borrowing costs rise.”

This follows a trend where policy interest rates were increased in the Philippines in April to stabilize the peso. This June, the Bangko Sentral ng Pilipinas (BSP) delivered its second interest rate hike of the year, raising the benchmark rate to 4.75 percent from 4.5 percent, citing persistent price pressures.

Even amid these pressures, the country maintains relative resilience against external shocks through its moderate currency buffers. According to the report, “Indonesia and the Philippines have foreign-exchange reserves to cover around five months of imports.” However, this safety net is under pressure, as “sustained higher energy import bills are likely to narrow current account surpluses or widen deficits.”

Looking ahead, Moody’s believes the Philippines’ reliance on its massive business process outsourcing (BPO) sector presents a complex challenge.

Moody’s noted that while the sector may utilize AI to automate routine cognitive tasks, the shift is likely to be slower compared to other economies. It added that low local labor costs could delay worker replacement and weaken incentives for firms to invest quickly in AI.

Furthermore, the agency suggests that transitioning to a high-productivity, AI-enhanced economy “will require significant upfront investment in infrastructure and digital connectivity, at a time of already constrained fiscal space.”

Moody’s recently maintained its “stable” credit outlook for the Philippines in April, supported by a “large, domestically driven emerging economy with strong medium-term growth potential.” This growth is underpinned by favorable demographics and a stable, well-capitalized banking system.