Despite the Philippine government’s declaration that it has completed its offshore borrowing program for the year, British banking giant Barclays expects the country to raise an additional $2 billion in foreign debt by year-end to help finance the record ₱6.793-trillion 2026 national budget and sustain state spending.

This comes after the Bureau of the Treasury (BTr) raised $5.25 billion through foreign currency-denominated bond issuances this year, including a $2.75 billion triple-tranche United States (US) dollar offering in January and a $2.5 billion triple-tranche issuance in June.

While this amount aligned with Barclays’ expectations, the country’s funding requirements for the budget and government spending could prompt a return to the external debt market in the second half of 2026.

“We now think the sovereign could look to issue another $2 billion by the end of the year to address fiscal needs,” Barclays economists wrote in a June 24 report obtained by Manila Bulletin.

Barclays currently holds an “underweight” rating on Philippine sovereign credit, citing internal challenges and external pressures. Such a rating suggests that Philippine government bonds are expected to provide lower returns than general emerging market (EM) bonds over the next six months.

These concerns were validated in April when S&P Global Ratings lowered the sovereign’s outlook from “positive” to “stable” while affirming the BBB+ rating, and Fitch Ratings moved its outlook to “negative” while maintaining a BBB rating.

These outlook revisions reflected “elevated risks to the Philippines’ medium-term growth trajectory and current account deficit,” Barclays said.

According to Barclays, this cautious outlook hinges on the country’s fiscal performance, noting that the “fallout from the alleged corruption in flood-control projects continues to weigh on government spending and, in turn, on growth.”

State infrastructure spending plunged in the first four months of 2026, failing to recover from a high-profile flood-control corruption scandal that triggered aggressive regulatory oversight and disrupted the processing of state funds.

Capital outlays shrank by 45.6 percent to ₱189.3 billion at end-April from ₱347.6 billion recorded in the same period last year, the latest Department of Budget and Management (DBM) data showed.

Further, economic growth clocked in at a five-year low of 2.8 percent in the first quarter of 2026. This moderated further from the already anemic 4.4-percent gross domestic product (GDP) growth recorded in 2025, owing to governance concerns.

Despite these risks, Barclays sees opportunities in the bond market, suggesting investors pivot toward certain long-term debt papers. It recommends that investors sell their Indonesian government bonds maturing in 2056 and switch to Philippine counterparts maturing in 2049, as the latter offer a higher return of 5.6 percent versus the former’s 5.475 percent.

On monetary policy, the Bangko Sentral ng Pilipinas (BSP) raised its policy rate to 4.75 percent following a 25-basis-point (bp) hike this month.

While displaying a hawkish tone, Barclays believes the central bank is entering a “prolonged pause,” although members of the policy-setting Monetary Board (MB) are expected to manage disagreements.

“We suspect that such an [inflation] profile amid weak GDP data will divide the MB—which includes Finance Secretary Frederick Go—leading its more dovish members to favor restraint and hold the policy rate back from further hikes to support still-subpar economic growth,” Barclays said.

For the lender, the BSP could shift back to an easing cycle beginning in June 2027, or a year later, eventually settling at four percent. Lower borrowing costs generally benefit economic growth, as Filipino consumers are encouraged to take out cheaper loans and accelerate their spending.

Barclays said the local economy is defined by “one battle after another.” It noted that supply-driven inflation has been constraining Filipinos’ capacity to spend more, a pressure that has combined with dampened confidence amid the flood-control controversy.

For this year, Barclays forecasts GDP expansion to average three percent, significantly trailing the government’s lowered target of 3.5 to 4.5 percent. This moderation follows the disappointing GDP outturn in the first quarter.

“We were a little surprised that the Philippines did suffer a further visible hit to its GDP growth in the first quarter, unlike most of its peers in the region—not only was its economy relatively more vulnerable in the first place, it was still struggling to recover from the corruption allegations in public-sector flood-control projects when the conflict erupted in the Middle East,” Barclays said.

Further, since the Philippines imports 96 percent of its oil requirements, it is particularly sensitive to shocks linked to the Strait of Hormuz. This critical waterway has been Iran’s leverage in its protracted rift with the US.

Any disruption to traffic through the strait threatens global oil security, with potential shortages driving up oil prices.

For the Philippines, which saw inflation peak at 7.2 percent in April, Barclays expects average full-year inflation to reach 5.7 percent. This is slightly more optimistic than the BSP’s own projection of 6.4 percent.

While lower crude oil prices and easing rice costs may help temper inflation, Barclays said inflation risks linked to El Niño could still put pressure on prices.

Barclays believes the fiscal deficit could widen from 5.5 percent of GDP last year to 5.9 percent in 2026 as the government faces persistent pressure to cushion vulnerable communities from elevated consumer prices. This projected deficit is significantly wider than the target of 5.3 percent.