S&P Global Ratings has sharply reduced its economic growth forecast for the Philippines this year, delivering the largest downward revision among Asia-Pacific economies as the country grapples with prolonged infrastructure spending slump and acute energy shock from the Middle East conflict.

According to S&P’s updated third-quarter economic outlook, the gross domestic product forecast for the Philippines was slashed by 1.7 percentage points to 4.1 percent from a previous estimate of 5.8 percent.

The revision is a deceleration from the 4.4 percent growth recorded in 2025 and places the Philippines below the broader Asia-Pacific regional growth average of 4.4 percent.

However, this aligns with the government’s recent revision of its macroeconomic assumption to between 3.5 and 4.5 percent, down from the previous minimum target of five percent.

But the downgrade positions the Philippines as a regional laggard; peer economies in the Association of Southeast Asian Nations are projected to maintain stronger momentum, with Vietnam expected to expand by 6.7 percent, Indonesia by 5.1 percent, and Malaysia by 4.9 percent.

Emerging Asia’s growth outlook remains supported by steady demand despite risks from higher energy prices, S&P noted, prompting the agency to maintain its stable outlook for the region—with the sole exception of the Philippines.

Domestically, the primary culprit behind this underperformance is the stalling of vital development projects. “Growth has been persistently weak since the third quarter of 2025 on the back of a sharp reduction in public infrastructure investment following misutilization of funds,” S&P said.

This fiscal drag is exacerbated by the fact that an “expected pickup in public spending has not materialized in a large way, and domestic demand has weakened.”

External pressures, specifically the energy shock stemming from the protracted Middle East war, have also hit the Philippines harder than its neighbors due to how costs are passed through to consumers.

“Energy price passthrough is significant in the Philippines as end-user fuel prices have increased by about 25 percent compared with prewar levels, weighing on consumers,” S&P reported. This contrasts sharply with Malaysia and Indonesia, where policymakers have utilized public resources to cushion citizens from global price spikes.

Looking ahead, the Philippines faces a compound economic headwind as it remains highly vulnerable to climate-related disruptions—especially its high exposure to El Niño, which is expected to drive food inflation higher in the coming months.

Monetary tightening is already underway to tame these persistent price pressures. As of June, the Bangko Sentral ng Pilipinas (BSP) has raised its key interest rate by a quarter point to 4.75 percent. Given these tightening efforts, S&P projects Philippine headline inflation to average 4.8 percent in 2026, notably below the central bank’s own projection of 6.4 percent.