OECD Economic Surveys: Philippines 2026

Economic activity is set to pick up gradually as inflation remains low and financial conditions ease. As growth returns to trend, fiscal policy should remain prudent to prepare for future shocks and rising expenditure pressures, including from infrastructure investment, social protection and the climate transition.

Following strong growth in the first half of 2025, momentum weakened in the second half of the year, with growth slowing to 3.0% year-on-year in the fourth quarter (Figure 2, Panel A). Investment has slowed markedly due to a sharp contraction in public construction amid a corruption scandal linked to public works, and household consumption has weakened. Exposure to higher US tariffs is relatively limited, with merchandise exports to the United States amounting to around 2½ per cent of GDP, but high borrowing costs continue to weigh on investment.

Inflation has receded below the central bank’s target range, reaching 1.8% in December (Figure 2, Panel B). The decline has partly been driven by lower food and fuel prices, while core inflation has eased on the back of moderate domestic demand growth. The currency has depreciated by about 6% since May.

Looking ahead, growth and inflation are expected to pick up over 2026-27. Real GDP is expected to grow by 5.1% in 2026, before picking up to 5.8% in 2027 (Table 1). Investment will recover over 2026-27 as public investment normalises and borrowing costs decline, but the recent escalation of global trade tensions is expected to weigh on external demand and export revenues. Robust labour market performance amid low inflation will support real household incomes. Inflation is expected to rise gradually to the mid-point of the central bank’s target range, as temporary effects from lower food and global energy prices fade, the recent depreciation of the currency feeds into domestic prices, and activity gradually recovers.

Risks are tilted to the downside. A more persistent-than-expected weakness in public investment related to tighter corruption controls and weaker investor confidence could weigh on domestic demand over 2026. On the upside, the recent easing of foreign investment rules and enhanced fiscal incentives offer a chance to offset headwinds from exports with higher capital inflows.

The central bank has reduced the policy rate by 200 basis points during the ongoing easing cycle, bringing it to 4.5% by December 2025. With core inflation below the mid-point of the central bank’s inflation target band, well-anchored inflation expectations, and GDP expected to grow below trend in the short term amid global trade headwinds, there is room to further reduce the policy rate to support demand while maintaining price stability and continuing to strengthen supervision of mixed conglomerates to maintain financial stability. Structural reductions in reserve requirements and better awareness of alternatives to bank deposits would enhance the transmission of policy rates to bank lending rates.

Public debt is well above pre-pandemic levels, and the fiscal deficit remains elevated. The authorities plan fiscal consolidation amounting to 0.2% of GDP in 2026, followed by an acceleration in the annual pace of deficit reduction to 0.5% of GDP in 2027 and 2028, mainly relying on slower expenditure growth. Stepping up the pace of fiscal consolidation and greater reliance on revenue measures, while maintaining infrastructure investment of around 5% of GDP, would allow to maintain growth momentum, rebuild fiscal room to address possible future shocks and help bring debt on a more prudent path. Phasing out VAT exemptions for private healthcare, education and senior citizens, combined with targeted social transfers, would raise revenues while improving the efficiency and equity of the tax and benefit system.

Corporate tax incentives currently consist primarily of tax holidays. This risks granting generous, untargeted benefits that accrue to highly profitable firms without stimulating additional investment. A gradual shift toward expenditure-based incentives, such as accelerated depreciation and investment tax allowances, would reduce leakage and boost productivity-enhancing investment.

The efficiency of public spending could be enhanced by improving fiscal governance across levels of government and ensuring more rigorous infrastructure project planning, procurement, monitoring and evaluation. Decentralisation has contributed to spending inefficiencies, in part due to limited administrative capacity at the local level. A two-pronged approach — combining capacity-building with a stronger link between top-down transfers and performance — would help address these shortcomings. Infrastructure investment remains essential for boosting productivity but should be guided by systematic cost-benefit analysis and transparent governance to maximise impact.

The Philippines needs to raise productivity growth by around three-quarters of a percentage point above the pre-pandemic average to reach its 2040 income per capita target. Structural reforms to foster stronger competition across a wide range of areas are key to boosting productivity.

The electricity sector remains characterised by high prices, which is widely seen as a crucial constraint on doing business. While past reforms unbundled generation and retail from the natural monopoly segments of transmission and distribution and created the necessary conditions for competitive markets, they were not sufficient for effective competition to flourish. Vertical integration persists, with dominant distribution firms owning generation assets and engaging in retail activities, allowing them to shut competitors out of the market. Structural separation should be central to reform, requiring distribution utilities to divest from generation assets and exit retail supply activities.

Telecommunications services remain costly, with fixed broadband and mobile internet prices significantly exceeding those in regional peers and the OECD. This partly reflects persistent barriers to competition, as a small number of incumbents dominate the market. A key constraint is the lack of transparent, non-discriminatory access to critical infrastructure. Introducing open-access network mandates — requiring incumbents to share infrastructure on regulated terms — would foster competition. A clear policy framework, overseen by a National Telecommunications Commission with full operational independence, is essential to ensure pricing transparency and prevent anti-competitive practices.

The Philippines has recently lifted foreign investment restrictions across a range of sectors, including telecommunications, air and maritime transport, airports, and railways. However, burdensome administrative procedures continue to deter foreign participation, even in sectors that are formally open. Lengthy processes, overlapping agency mandates, and regulatory decentralisation generate uncertainty and raise transaction costs, as local governments can impose separate requirements in areas such as business permits and construction approvals. These administrative burdens act as de facto barriers to investment. Establishing a single-window approval platform with streamlined procedures, strict turnaround times, and digital tracking would significantly improve the investment climate.

Corruption perceptions among citizens and businesses remain high, influencing trust in institutions and deterring investment. Ongoing efforts to combat corruption should be continued through stronger prevention mechanisms, more proactive and well-resourced investigations, and consistent prosecution of offenders to demonstrate accountability and deter misconduct across all levels of government.

Only about one-third of the employed population in the Philippines works in formal-sector jobs with full social and labour market protections. Enhancing social protection requires expanding non-contributory pensions and a comprehensive package of reforms to reduce the cost of formal employment.

The Philippine labour market is characterised by a dual structure, with only about one-third of workers in formal-sector jobs offering comprehensive social and labour protections, while the remaining two-thirds work informally with limited protection (Figure 3). High formalisation costs — driven by mandatory social contributions of around 23% of gross wages, binding minimum wage rules, and strict dismissal regulations — discourage compliance, particularly for low-skilled workers. The large share of informal employment suggests that existing labour code provisions are misaligned with prevailing skill and productivity levels. Calibrating protections to more market-compatible levels would reduce informality and extend effective coverage to a broader segment of the workforce.

The key challenge is to extend social protection to informal workers currently excluded from both contributory social security and non-contributory schemes, while improving incentives for formal employment. Transitioning to a unified, multi-tiered system would broaden coverage without raising formal sector labour costs. This system could consist of a first tier of universal basic benefits funded through general taxation and a second tier of top-up benefits financed by progressive social contributions, implying substantially lower contributions for low-wage workers. Expanding non-contributory pensions currently targeted to vulnerable people could help achieve universal old-age income support. Similarly, shifting the financing mix of universal healthcare from social security contributions to general taxation would reduce non-wage labour costs and strengthen incentives for businesses to create formal jobs.

Despite its apparent flexibility, the Philippine minimum wage system has struggled to protect workers from in-work poverty. While differentiated minimum wages can, in principle, better accommodate regional and sectoral differences than a uniform national minimum wage, current differentiation appears insufficient to address large regional productivity gaps. In many low-productivity regions, minimum wages remain high relative to local productivity, contributing to high shares of the workforce working informally and earning less than the minimum wage. In regions where minimum wages are misaligned with productivity, minimum wage moderation would limit adverse effects on formal employment.

Employer surveys indicate that hiring and dismissal regulations remain a significant barrier to doing business. To avoid the uncertain cost of dismissals, many employers rely on informal arrangements or repeated short-term contracts (“endo” hiring). Dismissals for authorised cause require burdensome documentation and, in the event of an adverse court ruling, can expose employers to reinstatement, backpay, and legal costs. Legal certainty could be improved by capping compensation payments and limiting reinstatement and backpay to specific cases, such as discrimination or protected categories of workers.

The Philippines faces growing risks from extreme weather, with global warming projected to raise output losses, inflation, and hardship for the poor. Addressing these risks requires investing in long-term adaptation while contributing to global mitigation efforts.

As a tropical island nation, the Philippines is highly vulnerable to climate change, with projections pointing to more frequent and intense typhoons, accelerated sea-level rise, and increasingly extreme rainfall events. These pose significant risks to businesses, infrastructure, ecosystems, and communities — particularly the most vulnerable. In response, the government is advancing a dual strategy of adaptation and mitigation. While preparing for the long-term consequences of a warmer climate, it is also implementing measures to curb greenhouse gas emissions.

Adaptation efforts should be focused on hotspot areas where poverty coincides with high climate risk — such as flood-prone coastal and low-income areas. Households living in poverty and those in informal employment are disproportionately vulnerable to climate extremes — such as heatwaves, heavy rainfall, and landslides — due to limited resources and safety nets. Key investments include resilient infrastructure, such as coastal seawalls to protect against storm surges, robust early warning systems for floods and landslides, and improved land‑use planning, such as coastal setback zones.

Land subsidence in Metro Manila, largely driven by excessive groundwater extraction, poses growing threats to infrastructure integrity, flood resilience, and long-term urban sustainability. Addressing this challenge requires a shift to volumetric water pricing, using price signals to manage demand. Tiered tariffs that reflect the true cost of extraction would incentivise conservation and encourage alternative water sourcing. Strengthened regulatory enforcement — through mandatory metering, strict permitting, and penalties for illegal extraction — will need to support such reforms. Investing in digital monitoring systems and improving coordination among local governments and water utilities would further enhance compliance, transparency, and the effectiveness of groundwater management.

Despite increasing climate risks, home insurance coverage remains weak. Microinsurance uptake is high but concentrated in life and vehicle insurance, leaving most households exposed to economic damages from typhoons and floods. Mandatory coverage applies mainly to mortgaged homes, creating a large protection gap. Expanding property insurance is essential. Public–private risk-sharing schemes, deeper reinsurance markets, and a dedicated fund to subsidise premiums for low-income households would diversify risk more efficiently, stabilise insurer balance sheets, and make climate adaptation financially viable for vulnerable communities.

In 2020, the Philippines imposed a moratorium on new coal-fired power plants to reduce emissions and meet climate targets. However, coal remains the dominant source of electricity, and low excise taxes undermine incentives to shift to cleaner energy. The moratorium alone has proven insufficient to halt the expansion of coal-based generation capacity, as it does not prevent expansion through existing facilities. Halting all expansions of coal-based generation while promoting the early retirement of existing plants would accelerate the transition to renewable energy. Increasing the coal excise tax and aligning all energy excise taxes with CO₂ content would strengthen price signals and support climate objectives.

The introduction of an Emissions Trading System (ETS) is currently under review in the Philippine Congress. ETS represent a cost-effective, market-based approach to reducing greenhouse gas emissions, providing price signals that incentivise cleaner production and energy use. In addition to driving emissions reductions, well-designed ETS schemes can generate substantial public revenues that may be recycled to support vulnerable groups, finance green investments, or offset the broader fiscal impact of climate policies. The authorities should move forward with full implementation, initially covering high-emitting sectors such as power generation and heavy industry, where mitigation potential and cost-effectiveness are highest.