December 26, 2025 l The Manila Times
As we end the year, I want to count our blessings and highlight the good things that happened, for which we should be grateful despite our troubles. I would also like to share the evolving risks that we may face in 2026.
First, the consensus economic forecast points to continued growth for the full year of between 5.1 percent and 5.3 percent. Although this is below target, this still makes the country one of the fastest growing economies in Southeast Asia, which is almost hard to believe but is true. In fact, according to the Organization for Economic Cooperation and Development (OECD), the country is projected to post the second-fastest growth in Southeast Asia after Vietnam in 2026. This is primarily driven by private consumption, which contributed 74 percent to gross domestic product (GDP) this year and is expected to remain this way because of a strong labor market and contained inflation.
The OECD also sees headline inflation averaging 2.6 percent next year. The Bangko Sentral ng Pilipinas (BSP) is expected to continue lowering its policy rate to 4.25 percent in 2026. This is the second reason we are thankful this year. Inflation stays benign and is expected to be contained in the near term. This has eased the consumer burden.
The third reason to be grateful is the continuing political stability despite governance issues and the massive protests that followed. We should give the credit to the Armed Forces of the Philippines (AFP) for affirming its commitment to the constitution and the rule of law. The AFP has rejected attempts by various groups to involve them in unconstitutional actions. This has provided the stability and assurance necessary for the nation to move forward despite all the noise.
We are noticing some possible problems in the financial markets that could pose some challenges next year. While major institutions support strong capital buffers, the BSP and international observers are seeing a gradual rise in nonperforming loans (NPLs), particularly in the consumer and small and medium enterprise segments. Over the past two years, banks have moved aggressively toward high yield unsecured loans such as credit cards and personal loans.
Analysts at credit rating agencies S&P and Moody’s have flagged “loan seasoning risks.” This is the increase in the probability of default as these loans age since consumer credit is more sensitive to economic shifts. If the labor market weakens, or inflation spikes because of external or supply chain shocks, the NPL ratio for these retail segments could rise unexpectedly, which would force banks to increase provisioning costs, affecting profitability and their ability to fund new credit applications.
Global trade uncertainly and tariff shocks pose the second risk for 2026 as these threaten our exports and business process outsourcing sectors. Projections for 2026 include possible downward revisions to GDP growth due to high tariffs on Philippines exports, particularly to the United States. This could dampen foreign exchange earnings that many corporations need to pay down their debts. A slowdown in the export sector will reduce the disposable income of employees across the supply chain. This could create a ripple effect and a secondary wave of NPLs as households struggle to keep up with their mortgage and auto loans.
An unintended consequence of the flood control project scandal is the slowdown in government spending. Fitch Ratings has cautioned that large-scale investigations into government projects can lead to “fiscal freeze.” When public works are delayed, construction firms and contractors tied to these projects, including legitimate ones, could face liquidity problems. Philippine banks that have significant exposures to these construction and real estate sectors may face difficulties in collection. These may lead to “lumpy” corporate NPLs that might be harder for banks to absorb than the relatively smaller consumer defaults.
Despite these risks, the Philippine banking sector is still one of the best capitalized in Southeast Asia. The big three banks (BDO, Metrobank and BPI) have NPL coverage ratios often exceeding 100 percent, providing a significant safety net for these emerging risks. We believe it will stay this way all through the new year as we look ahead with hope and optimism.
***The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as FINEX. For comments, email rsgoseco@gmail.com. Photo is from Pinterest.