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The Philippines might miss its target of achieving an “A”-level credit rating within the next two years as another debt watcher cut its outlook for the country, with the Middle East war and slowing public investments putting the country’s growth prospects at risk.

On Monday, Fitch Ratings affirmed the Philippines’ long-term foreign-currency issuer default rating at “BBB” but downgraded its outlook to “negative” from “stable.”

“The outlook revision reflects rising risks to the Philippines’ strong medium-term growth prospects from recent disruptions to public investment, exacerbated in the near-term by elevated exposure to the ongoing global energy shock. These challenges could narrow the country’s GDP (gross domestic product) growth outperformance relative to peers, amid higher post-pandemic government debt and a gradual and sustained deterioration in its external finance position,” it said.

“The affirmation reflects our baseline that, despite rising risks, medium-term GDP growth will remain robust, supporting a gradual reduction in government debt.”

A “negative” outlook from a credit rater means it sees a higher likelihood of a downgrade over the next two years.

The government is aiming to achieve an “A” level rating by 2028 or the end of the Marcos administration.

Fitch last gave the Philippines a “negative” outlook in 2021 during the coronavirus pandemic, which it later affirmed throughout 2022. This was revised back to “stable” in May 2023.

Earlier this month, S&P Global Ratings also revised its outlook for the Philippines to “stable” from “positive” but affirmed the country’s “BBB+” long-term rating as it expects the country’s fiscal and external position to come under pressure due to the Middle East conflict.

War-driven shocks are likely to upset growth and inflation outcomes as they discourage investment and household consumption, said GlobalSource Partners Philippine Analyst and Principal Advisor Diwa C. Guinigundo, who is also a former central bank deputy governor.

“In the process, it might also increase the country’s risk profile and further moderate the growth momentum,” he said in a Viber message.

“If these geopolitical risks should continue beyond this year, and no decisive policy actions are forthcoming, achieving an ‘A’ investment grade rating could not happen in the last two years of this administration.”

Fitch’s move to downgrade its rating outlook reflects the country’s high exposure to risks from the Iran war, he added.

“We are overly dependent on imported oil, our fiscal space continues to narrow, and inflation is likely to breach the target for 2026.”

Reyes Tacandong & Co. Senior Adviser Jonathan L. Ravelas said the “negative” outlook is a “reality check” rather than a crisis.

“The upgrade story is clearly over, and the Philippines is now in defense mode. Other agencies could revise outlooks, but a downgrade is not imminent as long as growth stabilizes, inflation is contained and fiscal execution improves,” he said in a Viber message.

“The risk is clear: if oil prices stay high and the current-account deficit widens without a strong policy response, the cushion protecting our ‘BBB’ rating gets very thin.”

Surging oil prices and dwindling fuel reserves have pushed the Philippine government to put the country under a one-year state of national energy emergency and suspend excise taxes on liquefied petroleum gas and kerosene.

The Bangko Sentral ng Pilipinas (BSP) expects inflation to average 5.1% this year, well above its 2%-4% target and last year’s 1.7% print, as the conflict’s impact on global crude oil prices is likely to push up domestic food, energy, and transport costs.

In March, the consumer price index already breached the central bank’s goal as it accelerated to 4.1% due to rising fuel prices.

For its part, Fitch sees inflation averaging 4.1% in 2026. “Risks are tilted towards higher inflation if the shock is prolonged, adding to affordability challenges for households.”

Fiscal concerns

Mr. Guinigundo added that interventions needed to cushion the economic impact of the war could affect the country’s fiscal position.

“The medium-term fiscal consolidation may be delayed because of the need for fiscal support to the economy, including those for vulnerable sectors,” he said. “That could further erode market confidence in the country’s economic prospects.”

He said, “mitigating measures may be difficult to establish at this point because the problems are structural, and they cannot be done in the short term.”

“We should have done our homework decades ago.”

Fitch said it expects the government’s fiscal consolidation plan to continue gradually over the next few years.

“We expect the general government fiscal deficit to be steady at 3.7% of GDP in 2026. This is consistent with a stable National Government deficit of 5.6% of GDP, slightly above the 5.3% budget target, as we expect weaker growth to weigh on revenues. Targeted energy subsidies limit fiscal risks, though a protracted energy shock could lead to fiscal risks from greater social pressures to boost spending,” it said.

“Risks are tilted toward a slower pace of deficit reduction as we believe the government is likely to prioritize GDP growth objectives and social stability.”

The conflict’s impact on the country’s credit profile will likely manifest through “lower GDP growth, higher inflation and a rising current account deficit, with modest risks to public finances,” it added.

It expects the economy to expand by 4.6% this year, below the government’s 5%-6% goal, as it sees public spending — which was stalled by a graft scandal tied to flood control projects, leading to a post-pandemic-low GDP growth of 4.4% in 2025 — recovering only gradually. Higher energy costs amid the war could also hit household consumption, a key growth engine.

“Investment, in level terms, since 2021 has run below its pre-pandemic trend and is under further pressure amid the recent pullback in public investment. This adds headwinds to our just over 6% medium-term growth assumption. Public capex (capital expenditure) is an important component of our medium-term outlook as it addresses infrastructure gaps and crowds in private investment,” Fitch added.

“Efforts to improve governance around capex disbursements are positive but could result in lower infrastructure spending and GDP growth multipliers in the coming years. However, successful capex governance reforms, and efforts to deepen private sector involvement, could enhance the quality and efficiency of spending that would keep GDP growth multipliers high even if spending is lower.”

Long-term prospects intact

Palace Press Officer Clarissa A. Castro, citing the Department of Finance, said that the “negative” outlook does not mean an impending sovereign rating downgrade.

“Fitch also explicitly highlighted the government’s decisive and proactive response to global challenges, particularly the energy shock,” she said at a news briefing on Tuesday.

The government’s efforts to declare a state of national energy emergency and implement fuel-saving strategies “demonstrate agile and responsible economic management, which continues to strengthen market confidence.”

“Aside from that, the Philippines continues to enjoy strong access to global capital markets supported by a diversified investor-based and sustained demand for its Republic of the Philippines issuances,” she said.

“These are clear indicators of investors’ trust in the country’s long-term trajectory.”

The Finance department largely attributed the outlook cut to the situation in the Middle East.

“The revised outlook was caused by the external geopolitical shock coming from the Middle East. The affirmation of our rating reflects our strong economic fundamentals and sound fiscal position,” it said. “The Philippine economy remains on solid footing with a robust domestic market, stable financial system, and recognized reforms.”

“The economy remains in a good position because growth is strong, and banks are in good shape,” BSP Governor Eli M. Remolona, Jr. said in a statement on Monday. “The BSP is closely monitoring the impact of higher oil prices and geopolitical developments, particularly the conflict in the Middle East, on inflation and the overall Philippine economy.”

The central bank’s policy-setting Monetary Board will meet on Thursday (April 23), where some analysts expect a preemptive rate hike to help keep inflation expectations in check as they expect second-round price effects from the war-driven oil shock to emerge soon. — Justine Irish D. Tabile, Senior Reporter