Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains PHILIPPINES ECONOMIC UPDATE Small Business, Big Impact: Catalyzing Philippine Growth June 2025 Edition Photo: World Bank Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains PREFACE The Philippines Economic Update (PEU) summarizes key economic and social developments, important policy changes, and the evolution of external conditions over the past six months. It also presents findings from recent World Bank analyses, situating them in the context of the country’s long-term development trends and assessing their implications for the country’s medium-term economic outlook. The update covers issues ranging from macroeconomic management and financial-market dynamics to the complex challenges of poverty reduction and social development. It is intended to serve the needs of a wide audience, including policymakers, business leaders, private firms and investors, and analysts and professionals engaged in the social and economic development of the Philippines. The PEU is a biannual publication of the World Bank’s Economic Policy (EP) Global Practice (GP), prepared in partnership with the Finance, Competitiveness and Investment (FCI); Poverty; and Social and Protection Global Practices. Lars Christian Moller (Practice Manager for the EP GP) and Gonzalo Varela (Lead Economist and Program Leader) guided the preparation of this edition. The team consisted of Jaffar Al-Rikabi (Senior Economist and Task Team Leader), Remrick Patagan (Economist), Kevin Cruz (Economist), Chenyu Mao (Young Professional), Patrizia Benedicto (Research Analyst), Ludigil Garces and Angela Diana (Consultants) from the EP GP; Ou Nie (Financial Sector Economist) from the FCI GP; Liliana Sousa (Senior Economist) and Irene Arzadon (E T Consultant) from the Poverty GP; and Monica Melchor (Consultant) from the Social GP. A World Bank team from the FCI GP, consisting of Jaime Frias (Senior Economist), Luis Andres Razon Abad (Senior Private Sector Specialist) and Kimberly May Baltao Chandra (Senior Private Sector Specialist) led Part III on Philippine SMEs and global value chains, under the guidance of Ilias Skamnelos (Practice Manager) and Lars Moller. The report was edited by the graphic designer was Pol Villanueva (Consultant). Peer reviewers were Smita Kuriakose (Lead Economist, EAEF2), Mehwish Ashraf (Senior Economist, EEAM2) and Adnan Ashraf Ghumman (Senior Economist, ESAC1) Logistics and publication support were provided by Geraldine Asi (Team Assistant). The External Communications Team, consisting of David Llorito (External Affairs Officer), Mario Villamor (Senior External Affairs Officer), Stephanie Margallo (External Affairs Associate), and Justine Espina Letargo (Consultant) prepared the media release, dissemination plan, and web-based multimedia presentation. The team would like to thank Zafer Mustafaoglu (Division Director for Philippines, Malaysia, and Brunei) for his advice and support. The report benefited from the recommendations and feedback of various stakeholders in the World Bank as well as from the government, the business community, labor associations, academic institutions, and civil society. The team is grateful for their contributions and perspectives. The findings, interpretations, and conclusions expressed in the PEU are those of the authors and do not necessarily reflect the views of the World Bank’s executive board or any national government. If you wish to be included in the email distribution list for the PEU and related publications, please contact Geraldine Asi (gasi@worldbank.org). For questions and comments regarding the content of this publication, please contact Jaffar Al-Rikabi (jalrikabi@worldbank.org). Questions from the media should be addressed to David Llorito (dllorito@worldbank.org). For more information about the World Bank and its activities in the Philippines, please visit www.worldbank.org/ph. Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains TABLE OF CONTENTS Preface ii Table of Contents iii List of figures iv List of tables v List of boxes v Abbreviations and acronyms vi Executive Summary 7 Recent Economic Developments 7 Outlook and Risks 8 Policy Challenges 9 Special Focus Chapter: Philippine SMEs and global value chains: the case for strategic support 9 Part I. Recent Economic and Policy Developments 11 1.1 Recent Global Developments: Softening Activity amid Heightened Uncertainty 12 1.2 Output and Demand in the Philippines: Slower Growth amid Increased Uncertainty and Headwinds 15 1.3 Inflation and Monetary Policy: Monetary Easing amid Slower Inflation 18 1.4 External Sector: External sector: Higher Imports, Stronger Peso 22 1.5 Fiscal Sector: Widening Deficit 25 1.6 Employment and Poverty: Labor Market Resilience and Poverty Alleviation 28 Part II. Outlook and Risks 32 2.1 Growth Outlook 33 2.2 Poverty Outlook 39 2.3 Risks and Policy Challenges 40 Part III. Philippine SMEs and global value chains: the case for strategic support. 45 3.1 SMEs: missing out on the benefits of export supply chains 46 3.2 Restricted access to testing facilities and certification services 51 3.3 Limited access to finance 54 3.4 Limited market information 56 3.5 A strategic approach to supporting SMEs’ potential in exports and global value chains 57 References 60 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains LIST OF FIGURES Figure 1. Global activity continued to grow in Q1… 13 Figure 2. …but global policy uncertainty heightened. 13 Figure 3. PMI continues to slow down… 14 Figure 4. …and commodity prices have also fallen in tandem. 14 Figure 5. The growth contribution of services declined substantially. 16 Figure 6. Slower export growth dragged down its contribution to domestic demand. 17 Figure 7. Lower rice and transport fuel prices led to a decline in headline inflation in the first five months of 2025. 20 Figure 8. The BSP reduced the key policy rate in April amid continued decline in inflation. 20 Figure 9. System-wide NPLs remain manageable and the banking sector has adequate buffers. 21 Figure 10. Sovereign-bank nexus risks are higher in the Philippines than in many peers. 21 Figure 11. Higher merchandise imports fueled the rise in CA deficit in Q1 2025. 23 Figure 12. The larger CA deficit led to a BOP surplus in Q1 2025 23 Figure 13. The peso and currencies of regional peers strengthened amid a broad weakness of the US dollar due to global policy uncertainty. 24 Figure 14. The Q1 fiscal deficit was the highest in recent year 26 Figure 15. Public debt recorded an uptick as the fiscal deficit widened. 26 Figure 16. The fiscal deficit widened as public spending surged. 27 Figure 17. While unemployment continues to decline underemployment has been more volatile and has seen a recent uptick. 28 Figure 18. Female labor force participation continues to trend slightly upward despite small dips. 29 Figure 19: Poverty rate has declined in 2023 31 Figure 20. … and inequality is at an all-time low. 31 Figure 21. Commodity prices are driven by both supply and demand shocks 37 Figure 22. Philippine headline inflation declines as commodity prices increase, while the pass-through is stron- ger with supply shocks 37 Figure 23. Actual and projected poverty rates using the LMIC poverty line ($4.20/day) 39 Figure 24. Q1 deficits have been lower than the full-year outturn since 2019. 43 Figure 25. The fiscal deficit is set to decline over the medium term, driven by lower spending. 44 Figure 26. Selection and learning explaining productivity premium of internationally linked firms. 47 Figure 27. SMEs are widespread and contribute significantly to services, employment, and value-added, but less so in manufacturing and exports. 48 Figure 28. Filipino SMEs are less likely to export than their peers in other economies. 48 Figure 29. FDI inflows have been rising, but have yet to benefit local firms and the broader economy. 49 Figure 30. Philippine firms obtain fewer international quality certifications than their peers. 53 Figure 31. Filipino firms are more likely to be rejected for credit than their peers in other countries. 54 Figure 32. The case for meeting market requirements 56 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains LIST OF TABLES Table 1. Fiscal indicators, Q1 2024 vs Q1 2025. 27 Table 2. Economic indicators for the baseline projections 34 Table 3. Key fiscal indicators for the baseline projections. 43 LIST OF BOXES Box 1. Understanding the impact of commodity prices on Philippine inflation. 36 Box 2. Exporters and foreign firms tend to be more productive due to selection and learning processes. 47 Box 3. Finding competent suppliers in the electronics sector can lead to collaboration opportunities to improve the capacity of domestic firms. 50 Box 4. How troubled compliance with buyer requirements holds Philippine agribusinesses back. 52 Box 5. How can policy programs engage the type of firms that have the potential to compete? 59 PHILIPPINES ECONOMIC UPDATE JUNE 2025 V Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains ABBREVIATIONS AND ACRONYMS AEs Advanced Economies ICT Information and Communication Technology AI Artificial Intelligence IT-BPO Information Technology - Business Process Outsourcing AML/CFT Anti-money-laundering and combating the LFPR Labor Force Participation Rate financing of terrorism BOP Balance of Payments LFS Labor Force Survey B-READY Business Ready LGUs Local Government Units BSP Bangko Sentral ng Pilipinas LMIC Low and Middle-income Countries BTr Bureau of Treasury MNCs Multinational corporations CA Current Account MOOE Maintenance and Other Operating Expenditures CAR Capital Adequacy Ratio MRAs Mutual Recognition Agreements CIT Corporate Income Tax MTFF Medium-term Fiscal Framework CTRP Comprehensive Tax Reform Program MUP Military and Uniformed Personnel DSPs Digital service providers NFIs Non-financial institutions DTI Department of Trade and Industry NPL Non-performing loan EAP East Asia and Pacific NTR Non-tax revenues EMDEs Emerging Markets and Developing OFWs Overseas Filipino Workers Economies EU European Union OPEC+ Organization of the Petroleum Exporting Countries Plus FA Financial Account PDP Philippine Development Plan FATF Financial Action Task Force PIT Personal Income Tax FDI Foreign Direct Investment PMI Purchasing Managers Index FSAP Financial Sector Assessment Program PPPs Public-Private Partnerships FTA Free Trade Agreement PS Personnel Services GDP Gross Domestic Product QI Quality Infrastructure GEPU Global Economic Policy Uncertainty RRR Reserve Requirement Ratio GIR Gross International Reserves SDP Supplier Development Program GOCCs Government Owned and Controlled SMEs Small and Medium-sized Enterprises Corporations GOP Government of the Philippines SPS Sanitary and Phytosanitary HGFs High-growth firms TFP Total Factor Productivity HICs High-income countries VAT Value-Added Tax PHILIPPINES ECONOMIC UPDATE JUNE 2025 VI Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains EXECUTIVE SUMMARY Recent Economic Developments due to higher spending ahead of elections. Investment also contributed positively to GDP growth. However, export demand weakened, particularly in electronics and Global conditions deteriorated in early 2025. machinery, dragging overall growth. The global economy is facing significant challenges due to escalating trade tensions and heightened Lower inflation and monetary policy that policy uncertainty, which weigh heavily on growth. continues to normalize. Global growth is slowing rapidly due to heightened trade and policy uncertainty. Inflation remains elevated, Headline inflation fell in the first five months of 2025, particularly in advanced economies, with core inflation with lower rice and fuel prices benefiting the poorest persistently high due to tight labor markets and trade households the most. Inflation averaged 1.9 percent policy uncertainty. Energy and agriculture commodity over this period, below the lower bound of Bangko prices have significantly declined, driven by worsening Sentral ng Pilipinas (BSP)’s target range. The decline growth prospects and a global oil supply glut. However, in food inflation was largely due to reduced rice prices energy markets remain volatile given high uncertainty. from increased domestic harvests and supportive pricing Financial conditions have tightened globally, with rising policies. Concurrently, global energy price drops led to sovereign spreads and increased risk premia in equity lower transport fuel prices. Given their disproportionate and corporate credit markets. share in the consumption basket of low-income households, changes in rice and transport fuel prices Slower growth amid increased uncertainty and helped bring inflation for the poorest 30 percent down by 3.4 ppts to an average of just 1.0 percent. headwinds. Monetary policy continues to normalize to bolster The Philippines experienced a slowdown in economic the economy. In response to the continued decline in growth to 5.4 percent in the first quarter (Q1) of 2025. inflation and broader domestic and global factors, the This growth rate is lower than the 5.9 percent observed BSP resumed monetary easing in April. It cut its key in Q1 2024 and pre-pandemic averages. The deceleration policy rate by 25 basis points to 5.5 percent and reduced is attributed to heightened global policy uncertainty banks’ reserve requirement ratio. While rates remain and slowing growth in services and industrial sectors. higher than they were on average in pre-pandemic years, Nevertheless, the Philippines’ growth outpaced regional these recent measures can help increase investments. peers like Indonesia, Malaysia, and Thailand, but lagged Viet Nam. The banking sector remains resilient with adequate capital and liquidity, and recent reforms led to the Growth in services and industrial sectors decelerated country’s exit from the Financial Action Task Force’s due to external and domestic challenges, while grey list. The non-performing loan ratio was stable at 3.4 consumption remained resilient, driven by a dynamic percent in April 2025, with a capital adequacy ratio above labor market, low inflation, and supportive monetary 15 percent and provisions to NPLs over 95 percent. The and fiscal policy. The services sectors’ contributions to sector’s funding liquidity remains ample. Importantly, GDP growth declined, particularly in accommodation thanks to important reforms undertaken since 2021, the and food services, while the industrial sectors faced Philippines was removed from the Financial Action Task weaker external demand for electronics and chemicals. Force’s grey list in February 2025. This is expected to However, agriculture showed recovery from previous reduce cross-border transaction costs, enhance investor adverse weather conditions. Domestic demand was confidence, and lower compliance burdens for financial bolstered by easing inflation, which supported increased institutions. household spending, and government consumption rose PHILIPPINES ECONOMIC UPDATE JUNE 2025 7 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Fiscal consolidation remains a challenge as Economic growth in the Philippines is expected at 5.3 percent in 2025, with the global activity slowdown pre-election spending surged weighing against the recovery in domestic conditions. This 2025 projection marks a downward revision The fiscal deficit in the Philippines widened from previous forecasts, with exports and investment significantly in Q1 2025 due to increased pre-election growth facing challenges due to the impact of elevated public spending, while total revenues remained uncertainty, rising trade barriers, increased financial stable. The deficit grew from 4.5 percent of GDP in volatility, and deteriorating business and consumer Q1 2024 to 7.3 percent in Q1 2025, driven by a rise in confidence. Yet, consumption growth is anticipated to expenditures. As a result, national government debt remain solid, supported by a strong labor market, low increased to 62 percent of GDP by end-March 2025. and stable inflation, and favorable fiscal and monetary Nevertheless, debt metrics remain sustainable. Despite policies. The government’s commitment to public a decline in non-tax revenues, robust tax collection kept investment and public-private partnerships (PPPs) is public revenues stable at 15.2 percent of GDP. Public set to bolster investment activity over the medium term. spending surged, mainly due to higher allocations to From the supply side, decelerating industry growth and local government units, interest payments, and capital moderating services growth drive the downward growth outlays, with disbursements rising to 22.4 percent of revision. GDP in Q1 2025.The Q1 figures are larger than expected but partly reflect a pattern in pre-pandemic election This economic outlook faces external risks which are years. Certain expenditures are brought forward in Q1 tilted to the downside. Higher or more persistent global due to a 1.5-month spending ban in Q2 that applies policy uncertainty and trade restrictions could lead to before the scheduled date of elections (and which, this greater-than-expected weakening in investment, trade, year, took place on 12 May). and confidence. The four main channels of transmission of these global developments on the Philippines are The current account widened significantly. (1) direct effects on exports (reduction); (2) direct effects on investment (reduction); (3) indirect effects The balance of payments turned negative due to a on investment and trade through global growth effects widening current account (CA) deficit. The CA widened (reduction); and (4) effects through exchange rates due to increased imports, rising from 1.9 percent of and interest rates (mixed). In addition, conflict and GDP in Q1 2024 to 3.7 percent of GDP in Q1 2025. The geopolitical tensions could impact global commodity merchandise trade deficit expanded, driven by higher prices, adding inflationary pressure. On the other hand, imports of telecommunications equipment, electrical resolving trade tensions and fiscal policy stimulus in machinery, and consumer goods, while export growth major economies could boost confidence and counteract remained modest. The services trade surplus narrowed, demand pressures. Advances in technology, including reflecting a decline in transport services exports automation and artificial intelligence (AI), may enhance and increased spending by Filipino tourists abroad. investment growth and productivity. Meanwhile, the financial account recorded higher net inflows despite a decline in foreign direct investment The domestic economic outlook for the Philippines is (FDI). The balance of payments shifted from a surplus to marked by high uncertainty, but with more balanced a deficit, as the rapid expansion of the current account risks. Inflation is expected to remain low and stable, but deficit outpaced the growth in financial account inflows. adverse weather could disrupt supply and increase food inflation. Proactive government policies are essential to mitigate these impacts and support vulnerable Outlook and Risks communities. Lower-than-currently projected global commodity prices would benefit the Philippines as a A robust but decelerating growth outlook net importer. Automation and AI present opportunities for productivity but also risks, potentially reducing that faces high uncertainty demand for Overseas Filipino Workers (OFWs) and the PHILIPPINES ECONOMIC UPDATE JUNE 2025 8 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains BPO sector. The pace of economic reforms is uncertain. the Philippines would benefit significantly from the Mid-term elections and subsequent changes in the following three-part approach to its structural reform composition of government may slow or accelerate agenda: reforms that are crucial for both building the economy’s (i) establish the infrastructure foundation necessary resilience to shocks and to elevating the country’s for jobs, with connectivity infrastructure and medium-term growth potential. skills gaps two critical binding constraints for higher growth (World Bank, 2025a); Poverty continues to decline. (ii) strengthen governance and support business- enabling policies and a predictable regulatory Poverty is decreasing, but climate and food inflation environment; and risks persist. Poverty rates are projected to fall by 1.3 (iii) mobilize private capital, because public funds ppts to 14.4 percent in 2025 and then continue this are insufficient to meet the Philippines’ vast trend to reach 12.1 percent by 2027. This decline is development needs. driven by workers moving from agriculture to wage jobs, boosting incomes for poorer households. However, Parts two and three of this structural reform extreme weather and food inflation threaten progress, agenda are a focus of this report, with the aim of with over 60 percent of Filipinos vulnerable to climatic encouraging more dynamic firms to grow and thrive shocks and rice inflation impacting the poorest. in the Philippines. Previous editions of The Philippines Economic Update highlighted the importance of Part Policy Challenges one of this reform agenda. In this issue, the report focuses on reforms relevant to parts two and three. This Medium-term Stabilization. is because despite recent pro-liberalization reforms, foreign and domestic investors continue to face The Philippines has monetary policy space to hurdles like lengthy registration processes. Addressing address a possible economic downturn, but fiscal bureaucratic delays and inefficient services is essential space is limited, necessitating deeper reforms. The for a business-ready environment. BSP’s policy rate is higher than pre-pandemic levels, making monetary policy loosening a viable response to GDP shocks. In contrast, given the pressing need Special Focus Chapter: Philippine to implement fiscal consolidation, the fiscal space to SMEs and global value chains: the act will likely be highly constrained. By accelerating case for strategic support the rebuilding of fiscal buffers during good times, the government can provide added assurance that it can Too few Philippine small and medium-sized credibly stabilize the economy in a downturn. To rebuild enterprises (SMEs) export and participate in fiscal buffers faster, deeper tax reforms can focus on global value chains, undermining their growth and modernizing revenue administration and phasing out productivity. SMEs are essential to the Philippine inefficient tax expenditures. These reforms aim to raise economy, sustaining many livelihoods. Yet, most are tax collection by closing tax gaps and enhancing the informal, low-productivity firms with little prospect efficiency and equity of the tax system. of scaling up. Philippines SMEs export less than their counterparts in peer economies. That matters Unlocking Potential: The Structural Reform as exporting is more than a channel for sales; it is a Agenda. platform for productivity growth and quality job creation through gains from scale, increased competition, and Mitigating global policy uncertainty over the learning. Equally, too few Philippine SMEs participate in medium-term will require a three-part approach to global value chains. That is costly, because those that do private sector development and job creation (World gain productivity through tougher competitive pressure Bank, 2025b). To support growth and job creation, and the diffusion of know-how. PHILIPPINES ECONOMIC UPDATE JUNE 2025 9 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Firm-level analyses and interviews with the benefiting both SMEs and larger firms. Reducing management of companies have identified information gaps includes making export market constraints in developing SME exports and global information readily available and creating mechanisms supply chain linkages. Key constraints include: for matching SMEs with larger firms and multinationals. (i) restricted access to testing facilities and In addition, the government can create a digital certification services; marketplace linking SMEs with pre-qualified vendors (ii) limited access to finance for equipment and and consultants. This would enable SMEs to find quality upgrades; and partners who offer technological solutions and quality (iii) limited market information to match buyers and assurance services that can improve their productivity sellers. and expand their market access. Improving access to testing facilities and certification A focus on resolving these three key constraints for services would require investments on multiple a small subset of dynamic and innovative SMEs has fronts. First, making testing and certification services the potential to drive productivity and job creation. more affordable and reliable is key, and would benefit A comprehensive Government of the Philippines (GOP) from government’s supporting role to the private strategy can maximize impact by focusing on high- sector in remote locations or emerging sectors. Second, potential firms, which requires screening and results- enhancing the quality of testing can be achieved through based assistance. Effectively targeting these firms is a simplifying regulations for laboratories and import challenging task. To improve outcomes, the GOP can testing equipment and investing in public conformity develop tailored methods that ensures that limited assessments. Third, the government can prioritize resources are allocated efficiently. reforms and investments that can help accelerate securing international recognition and compatibility of Focusing on high-growth SMEs will require assigning certifications and standards. Finally, robust systems are agency responsibilities based on comparative needed to prevent and control disease outbreaks. Here, advantage. Livelihood grants or startup livelihood kits effective risk management is essential to safeguard the that support low-growth micro enterprises might be integrity of the Philippine quality brand and achieve the better viewed as a form of social protection. On the goal of being globally acknowledged as a disease-free other hand, the Department of Trade and Industry (DTI), area. which has traditionally offered investment incentives both to attract large investments and provide livelihood Expanding access to investment finance can be grants to microentrepreneurs, could play a more central pursued through credit de-risking mechanisms. role in supporting the growth and competitiveness of Investments in credit information and collateral exporters and suppliers. It is well-positioned through registries can reduce the financial information its vast network of Negosyo Centers nationwide and a asymmetries that financial institutions face. This will network of overseas commercial attachés in strategic facilitate higher firm investments in equipment and cities worldwide. High-growth firms can benefit from quality upgrades. DTI’s information about key global market opportunities and leverage DTI’s relationships with industry By facilitating information sharing, the government associations to mediate between large buyers and can help improve how the market functions, smaller suppliers. PHILIPPINES ECONOMIC UPDATE JUNE 2025 10 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains PART 1 Recent Economic and Policy Developments Photo: Shutterstock /r.nagy PHILIPPINES ECONOMIC UPDATE JUNE 2025 11 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains 1.1 RECENT GLOBAL DEVELOPMENTS: UNEVEN ECONOMIC RECOVERY The global economy is facing high policy uncertainty, with high frequency activity indicators pointing to a deterioration in business and consumer confidence. As a result, expectations for global growth this year have fallen markedly. Global inflation remains elevated despite tighter global financial conditions. Given the shifting macroeconomic context and supply chain changes, global commodity prices have experienced a drop in the first five months of 2025 although uncertainty remains elevated. The global economy is facing significant challenges partly due to the pickup in core inflation, which due to heightened trade policy uncertainty, which reflected rising services prices and wage pressures. weigh heavily on growth. In the first quarter, global activity continued to grow (Figure 1). Developing East Commodity prices experienced a significant Asia and Pacific (EAP) grew faster than the rest of the decline in early April in the backdrop of worsening world, but still slower than before the pandemic.1 growth prospects and a global oil supply glut. Following wide-ranging global trade policy shifts, Commodity prices declined since March, led by lower economic policy uncertainty reached historic highs in energy and agriculture prices (Figure 4). Oil prices Q2, as measured by the Global Economic Policy declined sharply in early April, dropping from US$ 72 Uncertainty (GEPU) Index (Figure 2).2 In this context, per barrel to US$ 60 per barrel in just 4 trading days, consensus forecasts for global growth this year have while they have returned to the low $70s mid-June. fallen markedly. High-frequency global activity The price decline took place in the context of rapidly indicators, such as the Global Purchasing Managers shifting trade and macroeconomic conditions, a Index3 (PMI), demonstrate a deteriorating confidence commitment to increase oil production from countries in economic conditions, with a drop in both belonging to the Organization of the Petroleum manufacturing and services surveys in April (Figure 3). Exporting Countries Plus (OPEC+), and higher U.S. crude inventories.4 Agriculture prices have fallen since Global inflation remains elevated relative to March (5.2 percent), driven by declines in beverages central bank targets and pre-pandemic averages, (10 percent) and food (3 percent). Metal and minerals with a notable increase in high-income countries prices fell by 7 percent in April as the industrial (HICs) since late last year. The gradual decline in demand outlook deteriorated along with the global headline inflation that had started last year worsening global growth outlook. stalled in early 2025. In many HICs, headline inflation picked up around the turn of the year, while core Financial conditions have tightened in the first half inflation remained persistently elevated, reflecting of 2025 amid elevated trade policy uncertainty and continued tightness in labor markets and high trade concerns of a global growth slowdown. Monetary policy uncertainty. In Emerging Markets and Policy in the United States remains restrictive and Developing Economies (EMDEs), monthly headline policy rates are anticipated to decline only gradually inflation continued to be volatile earlier this year, 1 Developing East Asia and Pacific (EAP) region includes Cambodia, China, Indonesia, Lao PDR, Malaysia, Mongolia, Myanmar, Pacific Island Countries, Philippines, and Thailand. 2 Developed by Davis (2016), The GEPU Index is a GDP-weighted average of national EPU indices for 16 countries that account for two-thirds of global output. Each national EPU index reflects the relative frequency of own-country newspaper articles that contain a trio of terms pertaining to the economy, uncertainty, and policy-related matters. 3 Global composite PMI indices are compiled by S&P Global from responses to monthly questionnaires sent to companies in manufacturing and services survey panels in over 40 countries, totaling around 27,000 companies. These countries account for 89% of global gross domestic product (GDP). 4 On April 3, 2025, eight OPEC+ members—including Saudi Arabia, Russia, Iraq, the UAE, Kuwait, Kazakhstan, Algeria, and Oman—agreed to raise oil production by 411,000 barrels per day (bpd) starting in May, which was notably higher than the initially planned 135,000 bpd. PHILIPPINES ECONOMIC UPDATE JUNE 2025 12 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains in 2025. Risk premia in U.S. equity and corporate subsequently only partially reversed. Sovereign credit markets have widened markedly since 2025, spreads in EMDEs have risen, increasing financial albeit from very low levels.51EMDEs’ financial pressure on those with weak credit ratings and high conditions also tightened abruptly, with equity market debt refinancing burdens. declines and currency depreciations that Figure 1. Global activity continued to grow in Q1… 8 6 4 Percent, (%) 2 0 -2 -4 Dec-22 Mar-23 Dec-23 Mar-24 Dec-24 Mar-25 Jun-22 Sep-22 Jun-23 Sep-23 Jun-24 Sep-24 Global goods trade volume Global Industrial Production Source: Netherlands Bureau for Economic Policy Analysis; Haver Analytics. Figure 2. …but global policy uncertainty heightened. 600 500 400 300 200 100 Global Economic Policy Uncertainty Index, PPP-Adjusted GDP 0 20 21 3 2 19 19 20 24 24 25 2 3 1 9 1 4 -2 -2 -2 -2 -1 -2 -2 -2 p- b- n- n- r- n- n- r- ar ay ov ov ec g ct l Ju Ap Ap Fe Ju Ju Ja Ja Au Se M O M N D N Source: Davis (2016). 5 As gauged by cyclically adjusted equity earnings relative to the risk-free rate and high-yield corporate bond spreads. PHILIPPINES ECONOMIC UPDATE JUNE 2025 13 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Figure 3. PMI continues to slow down… 57 55 53 51 49 47 45 Se 2 Se 3 Se 4 M 2 22 M 3 23 M 4 24 M 5 2 3 4 5 M 2 M 3 M 4 M 5 Ja 2 Ja 3 Ja 4 2 2 2 -2 -2 -2 -2 2 2 2 2 -2 -2 -2 -2 -2 -2 -2 l- l- l- p- p- p- n- n- n- n- ar ar ar ar ay ay ay ay ov ov ov Ju Ju Ju Ja N N N Global PMI: Services (50+=Expansion) Global PMI: Manufacturin g (50+=Expansion) Global PMI: Composite (50+=Expansion) Source: S&P Global; Haver Analytics. Figure 4. …and commodity prices have also fallen in tandem. 250 200 (January 2018 = 100) 150 Index 100 50 0 Jan-18 May-18 Jan-19 May-19 Jan-20 May-20 Jan-21 May-21 Jan-22 May-22 Jan-23 May-23 Jan-24 May-24 Jan-25 May-25 Sep-18 Sep-19 Sep-20 Sep-21 Sep-22 Sep-23 Sep-24 Energy Agriculture Metals and Minerals Source: World Bank; Haver Analytics. PHILIPPINES ECONOMIC UPDATE JUNE 2025 14 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains 1.2 OUTPUT AND DEMAND IN THE PHILIPPINES: SLOWER GROWTH AMID INCREASED UNCERTAINTY AND HEADWINDS The pace of economic expansion slowed in Q1 2025. Growth in services and industry moderated due to both external and domestic challenges. Despite higher private and public consumption spending relative to the previous year, a weaker expansion in exports weighed on overall demand. Economic growth slowed to 5.4 percent in Q1 to overall growth decreased by 0.2 ppt partly 2025, but the Philippines remains a fast grower in because weaker external demand for electronics and the region. Growth year-on-year (yoy) was lower chemical products dampened manufacturing growth. than the 5.9-percent rate observed in Q1 2024 and The growth contribution of utilities also fell, coming the pre-pandemic average of 6.2 percent.6 On a from a high base in Q1 2024 when demand for seasonally adjusted basis, gross domestic product electricity and water spiked during an intense El (GDP) growth slowed from 1.5 percent in Q4 2024 Niño. In contrast, agriculture benefited from more to 1.2 percent in Q1 2025.71 The deceleration favorable base effects as it recovered from the coincided with heightened global macroeconomic impact of adverse weather conditions in the same uncertainty (see Section 1.1 above). Partly in period last year. response to the increased uncertainty, the Bangko Sentral ng Pilipinas (BSP) held interest rates steady Domestic demand conditions remained resilient, in Q1 2025 after a cumulative reduction of 50 basis driven by improved consumption spending. Easing points in Q4 2024. As a result, monetary conditions inflation helped boost household spending with its remained tight during the period relative to levels Q1 growth contribution rising by 0.4 ppt yoy (Figure the BSP maintained previously.82Nevertheless, 6). This was driven by strong growth in food and Philippine GDP growth remained among the fastest beverages and a modest uptick in transportation. in the EAP region, outpacing Indonesia (4.9 percent), The growth contribution of government spending Malaysia (4.4 percent), and Thailand (3.1 percent), increased by 2.3 ppt. This was due to higher but trailing Viet Nam (6.9 percent). spending on social assistance and transfers to local governments, with disbursements frontloaded ahead Growth in services and industrial output of the May elections (see Section 1.5 below).104 decelerated, weighed by external and domestic Investment also increased its contribution to GDP headwinds. The contribution of services to GDP growth by 0.7 ppt compared to Q1 2024, driven by growth declined by 0.4 percentage point (ppt) in Q1 sustained construction activity and a recovery in 2025 (Figure 5). This deceleration was broad-based durable equipment. However, the pace of but driven by lower growth in accommodation and construction growth has slowed, and businesses food service activities, alongside a slight decline in have seen a sharp reduction in inventories.115 international arrivals.93The contribution of industry 6 Q1 growth average from 2015 to 2019; annual growth averaged 6.6 percent during the same period. 7 Non-annualized. 8 The policy rate of 5.75 percent in Q1 2025 remained higher than the 3.7-percent average in 2015-2019. 9 Tourism earnings grew sharply in January on the back of higher arrivals, but February and March have seen monthly declines since. Other tourism-ad- jacent services such as trade and other services had flat growth contributions. The lagged effects of previous monetary policy tightening weighed on financial services and real estate activities. There is also oversupply in some segments of the real estate market (commercial offices and mid- to low-end residential condominiums in parts of Metro Manila) following the winding down of Philippine offshore gaming operations. 10 Public spending and investment (with specific exemptions) was suspended for 45 days before the May 12 elections. 11 Changes in stocks declined by 98.0 percent. PHILIPPINES ECONOMIC UPDATE JUNE 2025 15 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Lower export demand dampened overall growth. industry, which is driven by demand and investments The growth contribution of exports declined by 0.5 technology and business process outsourcing mostly ppt largely because of weaker performance in from North America.12,13 Meanwhile, the uptick in electronics, machinery and transport equipment, and domestic demand was reflected in a strong rebound chemicals. A slowdown in business services and in imports such as electronic components and tourism inflows also led to a deceleration in service machinery and equipment. Demand for outbound exports. Trade policy shifts have raised uncertainty tourism also drove services imports growth through on the growth prospects of the local information transport and travel services. technology and business process outsourcing Figure 5. The growth contribution of services declined substantially. Agri, Fishery, & Forestry 14 Manufacturing 12 Mining, Constructions, and Utilities Services 10 Real GDP growth 8 Percentage point 6 4 2 0 -2 -4 -6 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2021 2022 2023 2024 2025 Source: Philippine Statistics Authority (PSA). Photo: Shutterstock /Tony Magdaraog 12 Industry officials acknowledge the uncertainty associated with trade policy shifts, as well as the impact of previous reshoring efforts on the industry’s growth in 2017-2018. However, they remain optimistic on continued growth this year driven by sustained global demand and investor interest. 13 Based on revenue transactions from outside the country in the 2022 Annual Survey of Philippine Business and Industry and foreign investment data from the 2013 Survey of Information Technology Business Process Outsourcing Services. PHILIPPINES ECONOMIC UPDATE JUNE 2025 16 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Figure 6. Slower export growth dragged down its contribution to domestic demand. Private Consumption Government Consumption 30 Capital Formation Exports Imports Statistical discrepancy 25 Real GDP growth 20 15 10 Percent 5 0 -5 -10 -15 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2021 2022 2023 2024 2025 Source: PSA. Photo: Shutterstock /Ungureanu Catalina Oana PHILIPPINES ECONOMIC UPDATE JUNE 2025 17 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains 1.3 INFLATION AND MONETARY POLICY: MONETARY EASING AMID SLOWER INFLATION Inflation continued to ease due to lower rice and fuel prices, bringing it below the lower bound of the BSP’s target range. Amid the improving inflation outlook, the BSP reduced its key policy rate in April. In February, the Philippines was removed from the Financial Action Task Force (FATF) grey list. This is expected to reduce cross-border transaction costs, ease compliance burdens for financial institutions, and boost international investor confidence. Headline inflation fell during the first five months an improved inflation outlook, effects of lower tariffs of 2025 due to lower rice and fuel prices. It on rice imports and downside risks to growth due to averaged 1.9 percent from January to May 2025, global trade policy uncertainty as key factors behind down from 3.5 percent during the same period in its decision. Despite the recent rate cuts, the real 2024, and below the BSP’s 2–4 percent target range interest rate is estimated to have inched up slightly (Figure 7). Compared to regional peers, domestic amid the rapid decline in inflation. To reinforce its inflation was lower than in Viet Nam (3.2 percent), more accommodative stance, the BSP supported but remained higher than in Indonesia (1.0 percent), accelerated financial intermediation by lowering Malaysia (1.5 percent), and Thailand (0.5 percent). banks’ reserve requirement ratio (RRR) by 200 bps During this period, food inflation moderated as rice to 5 percent in February.163These monetary easing prices declined due to easing global prices, increased policies will benefit domestic firms, with a previous domestic harvests, and more supportive pricing analysis by the World Bank (2024) finding that a rate policies14 Meanwhile, declining global energy prices cut results in increased investments, particularly resulted in lower transport fuel prices and stable among highly leveraged firms.174 electricity rates, respectively.152Lower rice and fuel prices especially benefited low-income Filipinos, The Philippines’ banking sector continued to be with inflation for the poorest 30 percent of resilient with adequate capital and liquidity, and households declining by 3.4 ppts to 1.0 percent. systemic risk remains contained. The system-wide Core inflation, which excludes volatile food and non-performing loan (NPL) ratio stood at 3.4 energy items, also decelerated in the first five percent in April 2025 (Figure 9). The banking sector months of 2025, declining by 1.1 ppts to an average continued to have adequate buffers to withstand of 2.3 percent. potential adverse shocks, as the capital adequacy ratio is above 15 percent as of March 2025 and the The BSP resumed monetary easing in April amid provisions to NPLs ratio is more than 95 percent as the continued decline in inflation: The BSP of Q1 2025. Funding liquidity in the banking sector, resumed monetary easing in April amid the ability to repay deposits and other short-term the continued decline in inflation (Figure 10). On liabilities, remains ample, as the loan-to-deposit April 10, the BSP cut its key policy rate by 25 bps to ratio was around 77 percent and liquid assets 5.5 percent, building on the cumulative 75 bps constituted 48 percent of deposits and short-term reduction implemented in late 2024. The BSP cited funding in April 2025 (around their normal levels). 14 The average price of rice (Vietnamese 5% variety) fell to USD396.9/mt in the first five months of 2025, 33 percent lower compared to the same period in the previous year. In addition to easing global prices, the Department of Agriculture lowered the maximum suggested retail price of imported rice from PHP55/kg to PHP49/kg in February. The price of rice sold by the government through its Rice-for-All program will also be lowered by up to PHP3/kg. 15 See Section 1.1 for details. The price of Brent crude oil averaged USD71.8/bbl. in the first five months of 2025, 15 percent lower compared to the same period in the previous year. Meanwhile, the average price of Australian coal dropped by 19 percent to USD106.5/mt. 16 This follows a 250-bps reduction in September 2024. The measure aims to ease financial intermediation by reducing the share of deposits that banks must hold in reserve, thereby enhancing their capacity to extend productive loans and investments. 17 A 100-bps rate cut results in a 0.6 ppts increase in asset growth. This increases by 0.06 ppts for highly leveraged firms. PHILIPPINES ECONOMIC UPDATE JUNE 2025 18 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains The Philippines exited the grey list earlier this However, a World Bank (2023) analysis notes year, contributing positively to financial sector that there are risks if the government’s fiscal stability and development. In February 2025, the consolidation program is not implemented. Excess Philippines was removed from the list of jurisdictions liquidity may decline and bank lending to the private under increased monitoring by the Financial Action sector may revert to pre-pandemic levels, potentially Task Force (FATF), an intergovernmental body in the increasing crowding-out risks. field of anti-money-laundering and combating the financing of terrorism (AML/CFT).18 The decision Elevated global policy uncertainties could reflected substantial reform progress over the past adversely impact the financial sector. These three years.192As a result, the country is expected to developments can affect financing conditions benefit from lower cross-border transaction costs through bank credit exposure to export-oriented (including remittances), increased international firms, weaker bank profitability and buffer due to investor confidence, and lower compliance burden slowing domestic demand and reduced investment, for financial institutions. as well as currency volatility and capital outflows due to elevated risk aversion and weak global Overall financing conditions have stayed investor sentiments. For the Philippines, a tightening accommodative, although widening fiscal deficit of external funding conditions is possible due to and trade-related external developments could slightly higher external debt than peers, declining result in tightening of financing conditions. reserves, and a large current account deficit. Capital Growth of credit to the private sector picked up to outflows related to trade uncertainties have not 12.1 percent in the first four months of 2025, the been observed so far, as the peso strengthens fastest pace since 2022, though still below pre- against the dollar. Sovereign-bank nexus risks may pandemic averages.20 Despite the persistent fiscal materialize in the case of external distress, as banks’ deficits in recent years, the share of credit to the public debt exposure is 21.3 percent of total asset private sector remained stable at 64 percent of total and sovereign debt is 58 percent of GDP in 2024, bank lending since 2021, suggesting no significant higher than most regional peers (Figure 10). additional crowding out of private investments. Photo by: Shutterstock/Wara1982 18 A country under FATF’s grey list is placed under increased monitoring until it has rectified identified flaws in its financial system. 19 The 2022 WB-IMF Financial Sector Assessment Program (FSAP) recommended that significant legal, regulatory and supervisory gaps in the effective- ness of the AML/CFT framework be addressed, following the Philippines’ grey listing by FATF in June 2021. These include improving financial stability policy, enhancing macro scenario stress testing exercises, and closing data gaps. 20 The pre-pandemic average growth rate was 14.5 percent over 2010-2019. PHILIPPINES ECONOMIC UPDATE JUNE 2025 19 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Figure 7. Lower rice and transport fuel prices led to a decline in headline inflation in the first five months of 2025. Contribution to inflation Rice 9 Other non-food Transport Utilities 7 Alcoholic beverages and tobacco Percentage point Food and non-alcoholic beverages excl. rice Headline inflation 5 Core inflation 3 1 -1 Aug Aug May May May Dec Dec Feb Feb Oct Oct Jun Jan Jun Jan Mar Apr Mar Apr Nov Nov Sep Sep Jul 2023 2024 Jul 2025 Source: PSA. Figure 8. The BSP reduced the key policy rate in April amid continued decline in inflation. Policy rate and real interest rate 8 6 4 Percent 2 0 -2 -4 21 21 21 21 22 22 22 22 23 23 23 23 24 24 24 24 25 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Inflation expectations (next 12 months) Average policy rate (target RRP rate) Real interest rate (based on overnight RRP) Note: Inflation expectations were drawn from the Business Expectations Survey (BES). The real interest rate was calculated using the Overnight Reverse Repurchase (RRP) Rate and inflation expectations. Source: Bangko Sentral ng Pilipinas (BSP); PSA. PHILIPPINES ECONOMIC UPDATE JUNE 2025 20 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Figure 9. System-wide NPLs remain manageable and the banking sector has adequate buffers. NPL, and CAR, and Provisioning (In percent) 18 120 16 100 14 12 80 10 60 8 6 40 4 20 2 0 0 Feb-20 Apr-20 Apr-22 Apr-23 Apr-24 Apr-25 Oct-20 Feb-21 Apr-21 Oct-21 Feb-22 Oct-22 Feb-23 Oct-23 Feb-24 Oct-24 Feb-25 Dec-19 Jun-20 Aug-20 Dec-20 Jun-21 Aug-21 Dec-21 Jun-22 Aug-22 Dec-22 Jun-23 Aug-23 Dec-23 Jun-24 Aug-24 Dec-24 NPL (LHS) CAR (LHS) Provision to NPL (RHS) Source: BSP IMF Financial Soundness Indicators. Note: NPL: Non-Performing Loans; CAR: Capital Adequacy Ratio. Note: NPL Ratio: Non-Performing Loans Ratio (percent); CAR: Capital Adequacy Ratio (percent). Source: BSP; IMF Financial Soundness Indicators. Figure 10. Sovereign-bank nexus risks are higher in the Philippines than in many peers. Sovereign Debt to GDP and Government Debt to Total Banking Sector Asset, percent, 2024 90 CHN 80 FJI Sovereign debt to GDP (%) 70 MYS THA 60 PHL 50 KOR PNG VUT 40 MNG IDN TON KHM 30 WSM 20 SLB TLS 10 0 BRN 0 5 10 15 20 25 30 35 40 Banks's public debt exporsure to total assets (%) Sources: IMF World Economic Outlook, and IMF International Financial Statistics. Source: IMF World Economic Outlook; IMF International Financial Statistics. PHILIPPINES ECONOMIC UPDATE JUNE 2025 21 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains 1.4 EXTERNAL SECTOR: HIGHER IMPORTS, STRONGER PESO The current account (CA) deficit widened due to higher merchandise imports. Meanwhile, net financial inflows rose as Filipinos’ direct investments abroad declined. The Philippine peso strengthened amid a broad weakness of the US dollar. The CA deficit widened from 1.9 percent of GDP in continued to be strong, both contributing to the rise Q1 2024 to 3.7 percent of GDP in Q1 2025, driven in net inflows. Despite the increase in net by higher payments for merchandise imports borrowings, net foreign direct investments (FDI) (Figure 11). The merchandise trade deficit rose by declined from 2.7 percent of GDP in Q1 2024 to 1.5 1.4 ppts to 14.8 percent of GDP in Q1 2025. Imports percent of GDP in Q1 2025. Amid heightened global of telecommunication equipment and electrical economic uncertainty (see section 1.1), Q1 2025 machinery rose amid continued investments in marked the lowest first quarter FDI reading since the digital infrastructure, while robust consumer demand pandemic. FDI inflows were primarily directed buoyed imports of cars, and animal and vegetable towards manufacturing, real estate, and financial and oils. In contrast, merchandise exports posted a more insurance industries. The expansion of the CA deficit modest expansion, fueled by external demand to outpaced the increase in FA net inflows, resulting in camera lenses and higher coconut prices. Meanwhile, the reversal of balance of payments (BOP) from a the services trade surplus declined by 0.4 ppt to 2.9 surplus of 0.2 percent of GDP in Q1 2024 to a deficit percent of GDP in Q1 2025, due to lower export of 2.6 percent of GDP in Q1 2025 (Figure 12). receipts from transport services and higher spending of Filipino tourists abroad. The decline in The Philippine peso strengthened between May merchandise and services trade balance was 2024 and May 2025. The peso appreciated by 3.8 partially offset by higher net receipts in the primary percent against the US dollar, mirroring the and secondary income accounts. Dividends and performance of regional currencies such as the interest income from residents’ investments abroad Malaysian ringgit and the Thai baht (Figure 13). This surged, while remittances continued to post robust was largely driven by a broad weakness of the US growth in Q1 2025. dollar since the start of 2025, as global policy uncertainty and its potential drag on global output The financial account posted higher net inflows pushed the dollar to a three-year low against a amid a decline in Filipinos’ direct investments basket of currencies. In real effective terms, however, abroad. Net inflows, which represents net the peso depreciated by 1 percent against a basket borrowings from the rest of the world, rose from 4.2 of currencies from its major trading partners, percent of GDP in Q1 2024 to 5.9 percent of GDP in reflecting the strength of the euro and yen.211 Q1 2025. This was driven by a sharp decline in Meanwhile, gross international reserves (GIR) rose Filipinos net equity capital investments abroad (-93 by 0.4 percent to USD105.5 billion between May percent, yoy). In addition, net foreign loan availments 2024 and May 2025. The GIR remained adequate, by domestic banks soared, while foreign demand of equivalent to 7.3 months’ worth of imports of goods long-term bonds issued by the national government and payments of services and primary income. 21 The basket includes the currencies of the following trading partners: Australia, the European Union (euro area), US, Japan, Hong Kong, Taiwan, Thailand, Indonesia, Malaysia, Singapore, South Korea, China, Saudi Arabia, and the United Arab Emirates. PHILIPPINES ECONOMIC UPDATE JUNE 2025 22 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Figure 11. Higher merchandise imports fueled the rise in CA deficit in Q1 2025. Merchandise and Services Trade 2 Percent of GDP (3) (8) (13) (18) Q1 2019 Q1 2020 Q1 2021 Q1 2022 Q1 2023 Q1 2024 Q1 2025 Services Trade Balance Merchandise Trade Balance Current Account Balance Source: BSP. Figure 12. The larger CA deficit led to a BOP surplus in Q1 2025 Balance of Payments Components 10 8 6 4 Percent of GDP 2 0 -2 -4 -6 -8 -10 Q1 2019 Q1 2020 Q1 2021 Q1 2022 Q1 2023 Q1 2024 Q1 2025 Net Unclassified Items Capital Account Financial Account Current Account Overall BOP Position Source: BSP. PHILIPPINES ECONOMIC UPDATE JUNE 2025 23 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Figure 13. The peso and currencies of regional peers strengthened amid a broad weakness of the US dollar due to global policy uncertainty. May 2024 = 100, end of period 116 111 106 101 96 25 25 24 24 24 24 5 4 5 4 24 4 25 -2 -2 -2 -2 l-2 n- r- g- p- v- c- n- b- ct ay ay ar Ju Ap Ja Au Se No De Ju Fe O M M M Indonesia Malaysia Philippines Thailand Viet Nam Source: Haver Analytics, various central banks. Photo by: Shutterstock/richardernestyap PHILIPPINES ECONOMIC UPDATE JUNE 2025 24 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains 1.5 FISCAL SECTOR: WIDENING DEFICIT Revenues remained stable while public spending increased amid higher operating expenditure, interest payments and fiscal transfers to local government units (LGUs). As a result, the fiscal deficit widened in the first quarter of 2025, consistent with historical trends. Meanwhile, the national government debt increased to 62 percent of GDP by end- March 2025. The fiscal deficit widened in the first quarter of same period in 2024 (Figure 16). Impacting this 2025, driven by an uptick in public spending. total, non-tax revenues (NTR) recorded a 0.8 ppt Revenues remained broadly flat yoy in Q1 2025, decline in Q1 2025 as fewer Government Owned and while expenditure increased by 2.7 ppt, reaching Controlled Corporations (GOCCs) remitted their almost a quarter of the full-year disbursement dividends early in 2025 compared to the same program. As a result, the fiscal deficit widened from period last year.22 Supporting total revenue, tax 4.5 percent of GDP in Q1 2024 to 7.3 percent of revenues rose by 0.7 ppt of GDP led by higher GDP in Q1 2025. This represents the highest first- collections of domestic taxes. Value-added taxes quarter deficit in recent years, excluding the (VAT) increased by 0.3 ppt of GDP reflecting stronger pandemic period (Figure 14). Nevertheless, the growth in private demand. In addition, excise tax increase reflected a trend in pre-pandemic election collections expanded, with those from international years, where certain expenditures rise in the quarter trade buoyed by stronger imports and the preceding the election (Q1). Historically, this has implementation of higher excise tax rates on been followed by lower disbursements in the imported alcohol and tobacco.231 election quarter (Q2) due to a 1.5-month spending ban mostly on capital outlays and operating Public spending surged mostly due to higher expenditures before election day (May 12, 2025). operating expenditures, allocations to local government units (LGUs), interest payments, and Debt ticked up but remains sustainable. The capital outlays. Disbursements increased from 19.7 national government debt increased to 62 percent of percent of GDP in Q1 2024 to 22.4 percent in the GDP by end-March 2025 due to net issuance of same period in 2025. Current expenditures rose by domestic securities and slowing growth for Q1 2025 2.4 percent of GDP. Operating expenditures surged (Figure 15). Debt metrics remain sustainable, with largely due to increased funding for social protection most public debt long-term (81.3 percent), peso- programs. This was further driven by election denominated (67.6 percent), and from domestic preparations by the Commission on Elections. sources (68.2 percent). Declining interest rates Furthermore, fiscal transfers to LGUs expanded should also lower the cost of debt financing (see driven by higher National Tax Allotment for 2025, Section 2.1 below). and a higher Annual Block Grant to the Bangsamoro Autonomous Region in Muslim Mindanao.24 In Despite low collections of non-tax revenues, addition, interest payments increased, mostly driven public revenues remained stable on the back of by new and additional issuances of retail treasury robust tax collections. Total public revenues bonds.25 Meanwhile, capital outlays increased by 0.3 decreased by 0.1 ppt to reach 15.2 percent of GDP ppt of GDP, mainly due to higher disbursements for Total public revenues decreased by 0.1 ppt to reach road infrastructure and carryover projects. 15.2 percent of GDP in Q1 2025 compared to the 22 In early 2024, the Department of Finance increased the mandatory dividend rate of remittances of GOCCs to the national government from 50 percent of their annual net earnings in 2023 (as stipulated in Republic Act No. 7656) to 75 percent. The new rate is to be applied in subsequent years. As a result, non-tax revenue collections increased by 0.5 ppt of GDP in 2024. However, a recovery in NTR from GOCCs is expected in May. See: Bureau of Treasury (2025). https://www.treasury.gov.ph/?p=70090. 23 Excise tax rates on alcohol and tobacco products have been adjusted starting March 22, 2025, in compliance with Republic Act (RA) No. 11346 and RA No. 11467. 24 The National Tax Allotment for 2025 is based on the revenue collection in 2022, which saw an expansion amid economic recovery from the pandemic. 25 The 30th tranche of Retail Treasury Bonds was issued on February 28, 2024, to raise funding for priority projects of the government. PHILIPPINES ECONOMIC UPDATE JUNE 2025 25 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Figure 14. The Q1 fiscal deficit was the highest in recent years. Q1 Fiscal Deficit (in percent of GDP) COVID 8 years 7 6 5 4 3 2 1 0 b/ 14 15 17 18 20 21 23 24 a/ a/ a/ b/ 13 19 20 20 20 20 20 20 20 20 16 22 25 20 20 20 20 20 Note: a/ Midyear election year; b/ Presidential election year Source: Bureau of Treasury (BTr). Figure 15. Public debt recorded an uptick as the fiscal deficit widened. 70 60 50 40 Percent 30 20 10 0 15 16 17 18 19 20 21 22 23 24 Q1 20 20 20 20 20 20 20 20 20 20 25 20 Domestic External Source: BTr. PHILIPPINES ECONOMIC UPDATE JUNE 2025 26 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Figure 16. The fiscal deficit widened as public spending surged. 25 20 15 Percent of GDP 10 5 0 -5 -10 2021 2022 2023 2024 Q1 2024 Q1 2025 Source: BTr. Revenues Expenditures Fiscal Balance Table 1. Fiscal indicators, Q1 2024 vs Q1 2025. Q1 FISCAL INDICATORS 2024 2025 Difference Y-o-Y growth In percent of GDP, unless stated otherwise REVENUES 15.3 15.2 -0.1 -0.7 Tax Revenues 13.4 14.1 0.7 5.5 Bureau of Internal Revenue 9.7 10.5 0.8 8.4 Bureau of Customs 3.6 3.5 -0.1 -1.8 Non-Tax Revenues 1.9 1.0 -0.8 -45.4 EXPENDITURES 19.7 22.4 2.7 13.7 Current Operating Expenditures 15.0 17.5 2.4 16.3 Personnel Services 5.1 5.0 -0.2 -3.1 Maintenance and Other Operating Exp. 3.2 4.9 1.7 51.5 Subsidy 0.3 0.3 0.0 7.1 Allotment to LGUs 3.1 3.4 0.3 10.4 Interest Payments 3.2 3.7 0.5 16.0 Tax Expenditures 0.1 0.2 0.1 63.9 Capital Outlays 4.7 5.0 0.3 5.4 Infrastructure and Other Capital Outlays 3.5 4.0 0.4 12.2 Capital Transfers to LGUs 0.0 0.0 0.0 -100.0 Equity 1.2 1.0 -0.2 -16.4 SURPLUS/(DEFICIT) -4.5 -7.3 -2.8 63.2 Source: BTr. PHILIPPINES ECONOMIC UPDATE JUNE 2025 27 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains 1.6 EMPLOYMENT AND POVERTY: LABOR MARKET RESILIENCE AND POVERTY ALLEVIATION The labor market continued to perform strongly amid structural transformation and ro- bust economic growth over the past decade. Building on these gains, the Philippines has achieved notable progress in alleviating poverty. Employment continued to perform strongly, with 6.4 million employed Filipinos sought longer working the country registering a robust employment rate hours. There have moreover been small reversals in of 96.1 percent in March 2025. The employment labor market outcomes across demographic groups. rate stayed unchanged from March 2024 to 2025, Youth unemployment climbed 2.2 percent from 8.7 although in level terms, one million fewer Filipinos percent in March 2024 to 11.0 percent in March were employed in the same period in 2025, bringing 2025. Meanwhile, the female labor force participation total employment to 48 million Filipinos. And while rate (LFPR) declined from 55.1 percent in March the unemployment rate stayed the same year-on- 2024 to 52.5 percent in March 2025 (Figure 18). year at 3.9 percent, there was an uptick in Despite this dip, FLPR remains within the target underemployment to 13.4 percent in March 2025 range of 51.5–53.5 percent target range laid out in (from 11 percent in March 2024) (see Figure 17) as the Philippine Development Plan (PDP) 2023–2028. Figure 17. While unemployment continues to decline, underemployment has been more volatile and has seen a recent uptick. 25 20 15 Percent 10 5 0 Sep Sep Sep Sep Jun Jun Jun Jun Mar Mar Oct Mar Mar Mar Jan Dec Dec Dec Dec 2020 2021 2022 2023 2024 2025 Unemployment Rate Underemployment Rate Expon. (Unemployment Rate) Expon. (Underemployment Rate) PHILIPPINES ECONOMIC UPDATE JUNE 2025 28 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Figure 18. Female labor force participation continues to trend slightly upward despite small dips. 1.20 Percent 1.10 1.00 0.90 0.80 Aug Aug Aug Aug Jan Feb Feb Feb Oct Nov Nov Nov Nov July May May May May Feb Feb 20192020 2021 2022 2023 2024 2025 Male Female Source: PSA, Labor Force Survey (LFS) (various rounds). Note: The LFS has been conducted monthly since February 2021 to produce more timely data. Data show a normalized LFPR (January 2020=1). Strong labor market performance has been self-employed or working without pay in family- grounded in continued structural transformation operated farms or businessesbeing close to one third and robust economic growth over the past decade. (34.5 percent in March 2025). Meanwhile, labor force In March 2025, employment in services accounted for participation among vulnerable groups has shown 62.0 percent of overall employment, translating to uneven progress, as the youth LFPR fell 3.8 percent 29.8 million jobs, while employment in agriculture was to 29.4 percent in March 2025 (from 33.3 percent in at one-fifth (20.1 percent or 9.6 million jobs).261 The the previous year). Although performance in these services sector has moreover been a strong engine of areas has improved over the long-term, job creation over the last 5 years, generating 4.96 vulnerabilities persist. Addressing these issues is million jobs from January 2020 to the same period in critical for sustained long-term poverty reduction. 2025. Job creation has further become more inclusive, with the share of wage to total employment elevating Building on improvements in the labor market, the from 62.0 percent in March 202127 to 63.4 percent by Philippines has achieved notable progress in March 2025 and with much of this shift occurring in alleviating poverty. As of 2023, official data low and middle-income regions. indicates that approximately 17.5 million Filipinos (15.5 percent of the population) were living in Despite continued improvements in the Philippine poverty (Figure 19). Of these, about 4.8 million labor market, significant challenges persist. High individuals (4.3 percent of the population) could not underemployment, the prevalence of low-quality afford the basic food basket. This marks a substantial informal employment, and a relatively stagnant youth improvement from conditions during the COVID-19 LFPR threaten sustained advancements in the labor pandemic and a return to pre-pandemic poverty market. Vulnerable forms of employment are levels.28 Similarly, internationally comparable poverty prevalent, with the proportion of workers who are estimates indicate that 16.9 percent of Filipinos were 26 The Philippines is among the middle-income countries which have the highest contribution of services to growth. 27 World Bank Philippines Growth and Jobs Report: Bridging the Gap – Jobs, Growth, and the Road to Convergence (2025, forthcoming). 28 During the pandemic, over 2.2 million people fell into poverty resulting in the poverty rate rising to 18.1 percent in 2021 PHILIPPINES ECONOMIC UPDATE JUNE 2025 29 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains living on less than $4.20 per day (in 2021 PPP terms), Recent progress in poverty reduction in the the international poverty line for lower middle- Philippines has been accompanied by a decrease income countries.Recent progress in poverty in inequality; however, additional efforts are reduction in the Philippines has been accompanied required to align with regional peers. In 2023, the by a decrease in inequality; however, additional Gini index dropped below 40 for the first time on efforts are required to align with regional peers. In record (Figure 20), marking a significant milestone in 2023, the Gini index dropped below 40 for the first addressing high inequality. However, the Philippines time on record (Figure 20), marking a significant remains one of the most unequal countries in the milestone in addressing high inequality. However, the region, with notable disparities in well-being and Philippines remains one of the most unequal opportunities across provinces, although narrowing countries in the region, with notable disparities in over time. well-being and opportunities across provinces, although narrowing over time. provinces, although narrowing over time. Photo by: Shutterstock / Yasni PHILIPPINES ECONOMIC UPDATE JUNE 2025 30 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Figure 19. Poverty rate has declined in 2023 25 25 No. of Individuals (in millions) 20 20 Poverty Rate (%) 15 15 10 10 5 5 0 0 2015 2018 2021 2023 Poor Population Poverty Inciden ce Source: Family Income and Expenditure Survey (FIES), 2015-2023 Figure 20. … and inequality is at an all-time low. 50 45 Gini Index 40 35 2015 2018 2021 2023 Source: FIES, 2015-2023 PHILIPPINES ECONOMIC UPDATE JUNE 2025 31 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains PART 2 Outlook and Risks Photo: Shutterstock / Phuong D. Nguyen PHILIPPINES ECONOMIC UPDATE JUNE 2025 32 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains 2.1 GROWTH OUTLOOK Global Outlook291 Global growth is projected to decelerate sharply The pace of global disinflation is set to slow in this year to 2.3 percent, with the downgrade 2025 and inflation expectations for the year have driven by major economies. The growth outlook is recently risen in HICs. The outlook for global 0.5 ppts lower than the 2024 average and 0.4 ppts inflation has become more uncertain since late last lower than previously projected due to the impact of year, and the performance of countries has become elevated uncertainty, rising trade barriers, increased more heterogeneous. Overall, global headline financial volatility, and deteriorating business and inflation is set to remain elevated relative to central consumer confidence. The slowdown is largely driven bank targets and pre-pandemic averages. Most by advanced economies (AEs) – where the growth recently, inflation expectations have picked up in forecast has been downgraded to 1.2 percent..30 2025, especially in major economies. Coupled with Global trade and investment growth are expected to the impact of rising trade policy uncertainty, be the main two drivers of growth deceleration, persistent underlying core inflationary pressures are owing to a sharp deterioration in business and expected to delay the decline in global headline consumer confidence. The US and China, which inflation. However, in some EMDEs, inflation represent two of the Philippines’ top five export projections have been revised slightly lower in 2025 destinations over the last two decades, are expected due to the impact of weaker demand for traded to see growth deteriorations in 2025 by 2.0 ppts and goods. 1.0 ppts, respectively, compared to 2024. Country Outlook In conjunction, most EMDEs will see lower near- term growth. A majority of EMDEs are expected to Economic growth in the Philippines is projected see slower growth in 2025, as weakening investment to decelerate to 5.3 percent in 2025, and average and global supply chains disruptions are likely to 5.4 percent per year over the medium term, more than offset any possible short-term benefits weighed by the slowdown in global activity (Table from trade diversion. As a result, growth in EMDEs is 2). This projection represents a significant downward expected to average around 3.8 percent, 0.4 ppts revision of 0.8 ppts from The Philippine Economic slower than in 2024. This is well below the pace that Update December 2024 edition’s forecast of 6.1 is needed from EMDEs to meet their development percent. Growth deceleration is driven largely by the objectives and increased demand for jobs from their impact of increasing global policy uncertainty and growing populations. trade policy shifts. As a result, the Philippines is set to see a trade deterioration, with exports set to grow A tepid recovery is expected over 2026-2027. by just 0.7 percent (compared to a previous forecast Global growth is expected around 2.4-2.6 percent of 6.1 percent, and to 2024’s growth rate of 3.3 over 2026-2027, substantially lower than the pre- percent). In parallel, investment growth is set to pandemic decadal average of 3.2 percent. With an broadly match 2024’s figure at 6.4 percent average growth rate around 3.8-3.9 percent in (compared to a previous projection of higher growth 2026-2027, progress by EMDEs in closing wide per at 7.8 percent). capita income gaps with AEs, spurring job creation, or reducing extreme poverty rates is anticipated to Despite external headwinds, consumption growth remain sluggish. is set to recover in 2025, underpinned by a dynamic labor market, low inflation, and supportive monetary and fiscal policy. On the 29 This section draws from the June 2025 editions of the World Bank’s Global Economic Prospects (World Bank, 2025). 30 Beyond meeting the WBG’s classification of high-income, advanced economies are those that exhibit characteristics of developed economies including a diverse export base, a well-developed financial sector, a high-level of industrialization, and generally a high-level of healthcare, education, and infra- structure. PHILIPPINES ECONOMIC UPDATE JUNE 2025 33 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Table 2. Economic indicators for the baseline projections 2021 2022 2023 2024F 2025F 2026F GDP growth, at constant market prices 7.6 5.5 5.7 5.3 5.4 5.5 Private consumption 6.0 4.1 3.5 3.8 3.9 4.1 Government consumption 0.8 0.1 1.0 1.1 0.8 1.1 Capital formation 3.0 1.5 1.8 1.5 1.3 1.7 Exports, goods and services 3.0 0.4 0.9 0.2 1.3 0.2 Imports, goods and services -5.2 -0.4 -1.6 -1.3 -2.0 -1.7 GDP growth, at constant market prices 7.6 5.5 5.7 5.3 5.4 5.5 Agriculture 0.0 0.1 -0.1 0.1 0.1 0.1 Industry 2.0 1.1 1.6 1.1 1.2 1.2 Services 5.6 4.4 4.2 4.2 4.1 4.2 Headline inflation 5.8 6.0 3.2 2.4 2.8 2.9 National government balance (% of GDP) -7.3 -6.2 -5.7 -5.4 -4.9 -4.4 National government debt (% of GDP) 60.9 60.1 60.7 60.2 59.7 59.6 Current account balance (% of GDP) -4.5 -2.8 -3.8 -4.2 -3.7 -3.4 Sources: PSA, BTr, and World Bank staff projections Note: Components of growth are expressed in terms of their contribution to growth. expenditure side, private consumption is expected The government’s commitment to public to grow faster than in 2024, albeit slower than investment will continue to support investment previously forecast. This resilience is thanks in part activity, helping it accelerate over the medium- to high levels of employment, low and stable term. Investment growth is set to remain steady in inflation, and steady remittance growth. Fiscal 2025, benefiting from the government’s continued and monetary policy are also playing their part. commitment to public investment and push for Considering the global and domestic context, the greater public-private partnerships (PPPs). For BSP has signaled a willingness to continue to loosen example, as of February 2025, the PPP Center monetary policy.31 Reducing the cost of credit will has a pipeline of 174 projects, worth PHP 2.4 help support domestic demand through encouraging trillion (around 9.2 percent of GDP). Most of investment and private consumption, in turn leading these PPP projects (by value) are in the transport to faster growth and job creation. Meanwhile, on sector, but other sectors include information and the fiscal side, a wider-than-targeted fiscal deficit communication technology (ICT), health, and in 2025 may imply higher demand for businesses water and sanitation. In-line with implementation and net transfers for households.32 In the long- of these projects, normalizing monetary policy, term, however, wider fiscal deficits will either lead a partial recovery in global trade, and sustained to increased public borrowing, thus putting upward implementation of pro-investment reforms, total pressure on borrowing costs, or to higher taxes. (private and public) investment is projected to In either case, this is likely to crowd out private accelerate to a range of 6.6-6.9 percent over 2026- spending. 2027.33 31 As discussed in Part II, the BSP has implemented rate cuts of 100 basis points since August last year, but the current rate is still higher than historical averages pre-pandemic. In its latest monetary policy meeting in April, the BSP signaled a willingness to continue with its more accommodative policy stance. The Monetary Board is scheduled to meet an additional four times in 2025, on 19 June, 28 August, 9 October, and 11 December. 32 See Section 2.3 for a discussion on the government’s progress on fiscal consolidation. Compared to targets in the medium-term fiscal framework (MTFF), 2025 expenditure figures are projected to be 0.6 ppts higher, and revenue to be 0.4 ppts lower. 33 The government has been prioritizing lowering the cost of doing business through a series of business process and institutional reforms that enable it to effectively implement recent landmark legislative reforms including the amendments to the Public Services Act, implementation rules and regulations of the Renewable Energy Act, the Retail Trade Liberalization Act, and the Foreign Investment Act. PHILIPPINES ECONOMIC UPDATE JUNE 2025 34 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains On the supply side, moderating services growth headline inflation is set to be supported by lower will be insufficient to compensate for decelerating global commodity prices, which are projected to industry, as trade policy uncertainty is expected decline by 12 percent in 2025 and by a further 5 to hinder manufacturing. Headline inflation is percent in 2026. Energy prices are expected to fall projected to remain within target, as commodity substantially amid a projected excess global supply prices are expected to decline over the forecast of 0.7 million barrels per day, benefitting net energy horizon, around the median of the BSP’s target range importers such as the Philippines (Box 1). Other of 2-4 percent. In contrast, the services sector – the downside risks to inflation include the effects of Philippines’ historical growth driver – is expected reduced domestic rice tariffs on food prices and the to see moderating growth over the medium-term. projected weakening of global demand. Lower aggregate growth in 2025 is expected due to a deterioration in industry, with projected growth Amid favorable inflation outlook and downside of 3.8 percent compared to 5.6 percent in 2024. A risks to growth, the BSP is expected to continue its sharp fall in business and consumer confidence in the monetary policy easing through additional rate cuts context of global policy uncertainty helps to explain this year. To support consumption and investment this shift.34 Recovery over 2026-2027 is expected to activities, the BSP has signaled the possibility of a remain partial, limiting manufacturing and broader more accommodative stance if the projected decline industry’s contribution to GDP growth. in inflation materializes.35 The BSP has additional room for rate cuts to support price stability and domestic Headline inflation is projected to remain within demand in the face of a potential growth slowdown target, as commodity prices are expected to decline due to heightened global trade policy uncertainty. The over the forecast horizon, around the median of the monetary policy easing is expected to lower the cost of BSP’s target range of 2-4 percent. Low and stable financing for SMEs and boost firms’ investment.36 Photo by: Shutterstock / Erwin Dimal 34 For example, due to a sharp fall in confidence, growth in the manufacturing sector is expected to decline. The S&P Global Philippine Manufacturing Purchasing Managers’ Index recorded the second-lowest confidence reading in its series history (which dates to January 2016), only surpassing that observed amid the pandemic in March 2020. 35 In a recent conference, the BSP’s Deputy Governor announced that “policy easing (is) on the table,” following rate cuts of 100 basis points since August last year. See, BSP Press Release, May 23, 2025, accessed online at: https://www.bsp.gov.ph/SitePages/MediaAndResearch/MediaDisp.aspx- ?ItemId=7533 36 See Box 1 in Philippines Economic Update, December 2024 Edition. PHILIPPINES ECONOMIC UPDATE JUNE 2025 35 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains BOX 1. UNDERSTANDING THE IMPACT OF COMMODITY PRICES ON PHILIPPINE INFLATION. Since the start of 2025, global commodity prices The evidence suggests that when global commodity have been on a downward trend due to weaker prices fall, the benefits are quickly transmitted to the international demand and improved supply Philippine economy. However, the extent of pass- conditions. For the Philippines, a country heavily through depends on whether commodity price reliant on imports for oil and key food products, this changes are driven by supply factors, like increased decline offers significant relief to both consumers oil production, or demand factors, such as slowing and businesses. Lower energy and food prices ease global demand. For policymakers, periods of falling household budget pressures, especially for lower- commodity prices offer an opportunity to reinforce income families who spend a larger portion of their price stability, alleviate the burden on vulnerable income on these necessities. Additionally, price households, and support recovery in domestic reductions can help curb overall inflation and bolster demand. Nonetheless, it is essential to remain domestic economic activity. Understanding how vigilant to other inflation risks, communicate clearly these global price decreases affect local inflation is about the drivers of lower inflation, and ensure that crucial for policymakers, as it informs decisions on the benefits of price declines are widely shared monetary policy, social support, and strategies to across the population. maintain economic stability. The findings show that declines in global To evaluate the impact of global commodity price commodity prices are associated with a noticeable reductions on inflation in the Philippines, a local reduction in Philippine headline inflation. projection approach is used (Jorda, 2005). This Specifically, a 10 percent drop in global commodity method estimates the effects of a commodity price prices is estimated to lower headline inflation by decrease over time, considering other factors like around 0.3 to 0.5 percentage points within a year. 38 past inflation, exchange rate movements, and global Moreover, both demand shocks and supply shocks economic activities. Additionally, a Structural Vector are found to imply a reduction in domestic inflation Autoregression (SVAR) model is employed to following a decrease in commodity prices. However, separate demand shocks from supply shocks (Figure the pass-through from demand shocks are slightly 21), applying both to the local projection framework lower and more delayed, around 0.3 percentage (Kilian, 2009 and Shapiro, 2024). 37 This analysis can points per 10 percent drop in commodity prices help to clarify whether commodity price changes (Figure 22). driven by supply and demand shocks have different implications on inflation. Photo: Shutterstock / Yasni 37 The SVAR ordering is as follows: Global Demand Index constructed by Kilian and Zhou (2018), Oil Price Index, PHP/US$ bilateral exchange rate, Philippines Headline Inflation. The variables are ordered from the most exogenous variable to the most endogenous one. For example, global demand is assumed to be contemporaneously exogenous to commodity price and Philippines domestic condition and thus listed first. 38 This result is consistent with estimates from BSP and IMF working papers, which similarly find a strong pass-through from global commodity pric- es—both upwards and downwards—to Philippine domestic inflation, particularly in the prices of food and energy. PHILIPPINES ECONOMIC UPDATE JUNE 2025 36 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Figure 21. Commodity prices are driven by both supply and demand shocks 3 2 1 0 -1 -2 -3 -4 19 20 21 22 23 24 25 19 20 21 22 23 24 n- n- n- n- n- n- n- c- c- c- c- c- c- Ju Ju Ju Ju Ju Ju Ju De De De De De De Demand Shock Supply Shock Source: World Bank staff calculations. Figure 22. Philippine headline inflation declines as commodity prices increase, while the pass-through is stronger with supply shocks 1.4 1.2 1 0.8 Percentage Points 0.6 0.4 0.2 0 -0.2 -0.4 0 4 8 12 16 20 24 28 32 36 Months Impulse Response: Supply Shock 90% Confidence Interval Impulse Response: Demand Shock 90% Confidence Interval Source: World Bank staff calculations. PHILIPPINES ECONOMIC UPDATE JUNE 2025 37 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains The current account (CA) deficit is expected personnel costs and operations costs. In 2025, to remain elevated and is projected to narrow public spending is expected to taper in the last three gradually over the forecast horizon. The CA deficit quarters due to back-loaded adjustments, declining is projected to widen in 2025, as external demand to 21.6 percent of GDP. The Q1 spike in operating for merchandise exports is expected to weaken amid expenditures, driven by frontloaded and temporary slower global growth and trade activity due to rising outlays, is expected to normalize and drive the global trade policy uncertainty. Import growth is decline in public spending for the remainder of the expected to remain robust due to strong domestic year. Public expenditures are expected to decline demand. The CA deficit is expected to narrow over over the forecast horizon, tracking the government’s the forecast horizon, led by steady growth in services medium-term program at a pace consistent with the exports due to the continued recovery in tourism normalization in spending since 2021. The reduction demand and the resilience of the information in recurrent spending is expected to be supported by technology business process outsourcing (IT- a pipeline of reforms which includes the government BPO) industry. Steady remittance inflows are also optimization program, planned reforms to the expected to support a narrow CA deficit over the Military and Uniformed Personnel (MUP) pension medium-term. The deficit is expected to be financed system, and increased devolution. In addition, primarily by net FDI inflows as well as net portfolio reforms to procurement and the public financial inflows. management system will help improve the efficiency of public spending. Fiscal consolidation is projected to lead to a decline in the fiscal deficit, albeit at a slower pace Public debt is projected to be reduced over than planned under the government’s medium- the medium term due to fiscal consolidation term fiscal framework (MTFF). The fiscal deficit and recovering growth. The national debt ratio is expected to decline from 5.7 percent of GDP in is projected to shrink over the forecast horizon to 2024 to 4.1 percent in 2028, 0.4 ppts higher than around 59.1 percent of GDP by 2028. The primary the MTFF’s 2028 deficit target (Table 3). Fiscal deficit is expected to return to pre-pandemic levels consolidation will mostly be driven by a reduction in by 2027, lowering the burden on financing needs. expenditure of 1.8 ppts of GDP from 2024 to 2028. The projected decline in interest rates should also In addition, domestic revenue mobilization efforts lower the cost of debt financing. In addition, debt from the government’s comprehensive tax reform sustainability will continue to be bolstered by a program (CTRP) are set to increase the tax-to-GDP favorable composition of debt. The country’s debt ratio by around 0.5 ppt over the same period. composition is expected to continue to rely on secured financing (domestically sourced and mostly Recurrent spending is expected to drive the medium-to-long term), reducing the vulnerability to decline over the forecast horizon, led by lower external shocks and rollover risks. Photo: WorldBank PHILIPPINES ECONOMIC UPDATE JUNE 2025 38 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains 2.2 POVERTY OUTLOOK Poverty is expected to continue its downward to disasters worldwide. Over 60 percent of Filipinos trend. The incidence of poverty is expected to are considered highly susceptible to climatic shocks. decline from 15.7 percent in 2024 to 14.5 percent in This vulnerability is due to high exposure to climatic 2025 and further decrease to 12.3 percent by 2027, events, particularly typhoons, coupled with limited as measured by the World Bank (Figure 23). The shift social protection systems and financial access, of workers from low-productivity agriculture to wage which leave most households vulnerable in the employment has facilitated faster income growth event of a shock. Additionally, food price inflation for poorer households, thereby contributing to more poses another risk for poorer households. Rice is rapid reductions in poverty and inequality since particularly important for those at the lower end of 2015. the income spectrum, accounting for nearly a fifth of all expenditures by the poorest 30 percent. Rice Nevertheless, extreme climatic events and inflation surged in 2024.391As discussed in Section food inflation present significant risks. Building 1.3, rice prices declined in early 2025, helping to resilience remains a critical challenge for the country bring down average inflation for the poorest 30 to maintain its progress in poverty reduction. The percent of households by 2.8 ppts to 1.3 percent. Philippines is among the countries most vulnerable Figure 23. Actual and projected poverty rates using the LMIC poverty line ($4.20/day) Lower middle-income poverty rate (%) 35 30 25 20 15 10 5 0 2015 2018 2021 2023 2024 2025 2026 2027 Notes: The World Bank’s poverty line for lower-middle-income countries has been recently revised based on 2021 Purchasing Power Parity (PPP) terms, set at $4.20 per day. Source: World Bank staff estimates. 39 For more on drivers of rice price increases in 2024, see The Philippines Economic Update: December 2024, World Bank, Section 1.3. PHILIPPINES ECONOMIC UPDATE JUNE 2025 39 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains 2.3 RISK AND POLICY CHALLENGES Risks and Policy Challenges The risks to the global growth outlook remain lower than the full-year outturn (Figure 24). Total tilted to the downside. The global economic expenditure in Q1 2025 reached approximately 23 outlook faces significant downside risks. Higher or percent of the full-year program, higher than the more persistent policy uncertainty, especially around 21.4 percent share from 2016 – 2024. Spending over trade, could lead to greater-than-expected Q2 - Q4 2025 would need to decline by 2.0 percent weakening in investment, trade, and confidence. of GDP year-on-year to reach the government’s Additional trade restrictions could increase inflation programmed expenditure target.41 To preserve fiscal in key economies, limiting central banks’ ability to policy’s supporting role for growth, it is important lower rates and support growth. This backdrop that the government maintains its commitment of suggests potential triggers for declining financial risk infrastructure spending at around 5.6 percent of appetite, which could worsen global growth GDP on average for 2025 – 2028. In this context, the surprises, especially in major economies. government is expected to narrow the deficit by Geopolitical tensions and regional conflicts persist, reducing Personnel Services (PS) and Maintenance with rapidly escalating conflict in the Middle East and Other Operating Expenditures (MOOE). In posing a significant risk to commodity prices and addition, the government could partly meet its MTFF may result in widespread disruptions to global deficit target by increasing revenue collection by shipping.40 Meanwhile, natural disasters pose higher than planned (Table 3). ongoing threats particularly for EMDEs. On the upside, resolving trade tensions through tariff Effective implementation of the government’s reprieves or new deals could boost confidence. medium-term fiscal consolidation program Synchronized fiscal policy loosening in Germany and requires accelerating expenditure reforms. other large economies might counteract demand Between 2025 and 2028, the Government aims to pressures, though it could raise inflation and debt. reduce public spending by about 0.8 ppt of GDP Advances in technology, notably artificial intelligence (Table 3 and Figure 25). The Government could enact (AI), could enhance global investment growth and planned reforms to the Military and Uniformed productivity. Personnel (MUP) pension system, which will reduce PS, and remains critical to ensuring long-term fiscal Managing fiscal consolidation without sustainability. It could also reduce maintenance costs jeopardizing growth is emerging as the main by improving spending efficiency through the domestic challenge. The surge in the Q1 fiscal passage of procurement, budgeting, and investment deficit poses a risk to the pace of planned fiscal management reforms. These reforms include the consolidation. This risk is heightened by a post- New Government Procurement Reform Act and the pandemic pattern, where Q1 deficits have been passage of the Budget Modernization Bill. 421 40 According to the US Energy Information Administration, about 20 percent of global oil consumption flows through the strait, which the agency de- scribes as the “world’s most important oil transit chokepoint”. For reports on impact on global shipping, see for example, Wright, R. “Oil tanker owners reluctant to brave Strait of Hormuz, Frontline chief says,” The Financial Times (June 14, 2025) and “Shipping disruption surges around Hormuz amid Israeli attacks on Iran, say naval agencies” Reuters (June 16, 2025). 41 To generate this estimate, the target expenditure level was based on the government program amounting to PHP 6,182.1 billion. Then, the average growth in expenditures from Q2 to Q4 during 2016–2024 was applied to project the expected spending for Q2–Q4 2025, assuming it follows historical trends. The difference between this projection and the government’s target represents the required reduction in savings for the remainder of the year, using the World Bank’s forecast for nominal GDP as the base to express in percent of GDP. 42 The New Government Procurement Reform Act, or Republic Act No. 12009, was signed and published on July 20, 2024, and become effective on August 13, 2024. The Act’s implementing rules and regulations (IRRs) were signed on February 4, 2025. PHILIPPINES ECONOMIC UPDATE JUNE 2025 40 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Public revenues are anticipated to increase on hand, faster adoption of these technologies in the back of policy and administrative reforms. the country implies higher investment and has Total revenues are projected to decline in 2025 due the potential to improve within-firm productivity. to the normalization of non-tax revenue collection, On the other hand, global adoption could reduce before gradually rising again from 2025 to 2028.432 demand for Overseas Filipino Workers (OFWs), Value-added tax (VAT), personal income tax (PIT), which typically contribute around 10 percent corporate income tax (CIT), and excise taxes are of GDP in remittances, and of the BPO sector, expected to bolster tax revenues. For example, VAT which similarly contributes around 10 percent is expected to be boosted by recent reforms that of GDP (including through investment, jobs, and have expanded its coverage on non-resident digital exports). For example, a recent report found that service providers (DSPs).44 Additionally, tax reforms around 14 percent of the Filipino labor force is that aim to modernize the tax system and broaden both highly exposed to AI and holds jobs with the tax base are anticipated to further support tax low complementarity, making them susceptible revenues.45 to displacement by AI.46 • Faster/slower implementation of the Other domestic risks to the economy are more government’s economic reform program is balanced. The domestic outlook is subject to high also a source of upside/downside risk and uncertainty given the presence of well-balanced currently faces uncertainty. Mid-term elections risks. and subsequent changes in the legislative and • While the baseline forecast assumes inflation executive arms of the government could result in will remain low and stable between 2025 and a few months of ‘reform pause.’ Conversely, with 2027, risks are skewed to the upside. In the short mid-term elections concluded, the government term, adverse weather conditions in the second may be able to accelerate implementation of half of the year could result in supply disruptions, its legislative reform agenda.47 Government a loss in agriculture output, and higher-than- interventions are needed both to support expected food inflation. Proactive policy medium-term stabilization and to unlock higher preparation by national and local governments growth potential, which are elaborated below. is crucial to mitigate the impact of such extreme weather events, enhance community resilience, Strengthened Medium-term Stabilization and ensure adequate supplies of food, water, and electricity, while supporting the poor and The government has monetary policy space to vulnerable. address negative economic growth risks but fiscal • As a net commodity importer, the Philippines space is limited. As discussed in earlier sections, the would benefit from lower commodity prices BSP’s policy rate remains higher than pre-pandemic that could arise from a deeper-than-anticipated averages. Thus, loosening monetary policy is likely global growth slowdown and/or a glut in energy to be a viable and conducive policy response to a commodities (Box 1). However, escalating negative GDP growth shock. In contrast, given the conflict in the Middle East is resulting in a sharp pressing need to implement fiscal consolidation, the increase in energy prices; if sustained, this will fiscal space to act will likely be highly constrained. result in increased inflationary pressures in the By accelerating the rebuilding of fiscal buffers during Philippines. good times, the government can provide added • Automation and AI bring both opportunities assurance that it can credibly stabilize the economy and risks over the medium-term. On the one in a downturn. 43 Non-tax revenues experienced a significant increase in 2024 due to the Department of Finance’s decision to raise the required dividend remittances from Government-Owned and Controlled Corporations (GOCCs) from 50 percent to 75 percent in April 2024. Higher non-tax revenue from the mining sector is planned under the government’s reform of the fiscal regime for the sector, which is expected to enter into law in 2025. 44 VAT on resident DSPs were already implemented on February 1, 2025, while that on non-resident DSPs will be implemented from June 1, 2025. 45 Priority tax policy reforms include the VAT on Digital Service Providers, the proposed excise tax on single-use plastics, excise tax on pick-up trucks, and the adjustment to the motor vehicles road user’s tax. 46 M. Cucio and T. Hennig, “Artificial intelligence and the Philippine Labor Market: Mapping Occupational Exposure and Complementarity.” IMF Working Paper No. WP/25/43, February 2025. 47 Following the mid-term elections, the Philippines President announced a cabinet reshuffle would be implemented. PHILIPPINES ECONOMIC UPDATE JUNE 2025 41 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Deeper tax system reforms are one way the higher growth (World Bank, 2025a); government can accelerate rebuilding fiscal (2) strengthen governance and support business- buffers. Deeper tax system reforms include faster enabling policies and a predictable regulatory modernization of the revenue administration to environment; and ease the burden of paying taxes and strengthen the (3) mobilize private capital, because public funds government’s ability to manage tax compliance risks. are insufficient to meet the Philippines’ vast On the policy side, the government is considering development needs. raising selected tax rates or introducing new taxes.48 To raise substantially more tax revenue, Pillars two and three of this structural reform the government can undertake a renewed push to agenda are a focus of this report, with the aim identify and phase out ineffective, inefficient, and/or of encouraging more dynamic firms to grow inequitable tax expenditures. For example, a tax gap and thrive in the Philippines. Previous editions analysis conducted by the World Bank on VAT reveals of The Philippines Economic Update highlighted the that there is significant opportunities to increase importance of pillar one of this reform agenda.51 In VAT revenues by improving compliance and reducing this issue, the report focuses on reforms relevant to exemptions and special rates.49 In addition, the pillars two and three. This is because despite recent income tax system face compliance risks, including liberalization reforms in key sectors, investors, from tax avoidance.50 Combined, reforms to reduce especially foreign, continue to face business entry the large tax gaps that currently exist can enable hurdles including in the corporate registration even higher tax collection. process. For example, on average, it takes 106 days to register a foreign firm and 75 days for a domestic firm. In comparison, registration for foreign firms Unlocking Potential: The Structural Reform takes 65 days in Indonesia, 66 days in Viet Nam, Agenda and 15 days in Singapore. While for domestic firms, it takes 43 days in Indonesia, 28 days in Viet Nam, Mitigating global policy uncertainty over the and 15 days in Singapore. According to B-READY medium-term will require a three-part approach 2024, the Philippines has well-designed regulations to boosting private sector development and job but has a significant gap in the delivery of public creation (World Bank, 2025b). To support growth services that implement regulations to support and job creation, the Philippines would benefit firms. This gap manifests in several ways, such as significantly from the following three-pillar approach bureaucratic delays, inefficient government services, to its structural reform agenda: and inadequate infrastructure to support business (1) establish the infrastructure foundation operations. Addressing this implementation gap is necessary for jobs, with connectivity infrastructure crucial for creating a business-ready environment and skills gaps two critical binding constraints for that can attract investment. 48 For example, taxes on single-use plastics are part of the government’s MTFF. A higher excise rate on automobiles that generate higher emissions may be considered. 49 For example, analysis by the World Bank of the VAT reveals that VAT collection is substantially below potential due to large policy and administration gaps. Part of the administration gap is due to willful non-compliance (that needs to be tackled through stronger compliance management), while the other part is ‘accidental’, linked to complex VAT policies and administration. Thus, by easing the administrative burden of paying the VAT (through the usual of digital technologies as part of a broader modernization reform of the revenue administration), the Government will be able to reduce accidental non-compliance. 50 The PIT system contains several notable exemptions on personal income that limit revenue collection through an otherwise progressive system, in- cluding exemptions on benefits and allowances, and on social security. Significant tax avoidance risks remain and are being addressed including through reforms that strengthen anti-base erosion and profit shifting me asures. 51 For example, the June 2023’s special issue focused on the energy system, the December 2023 issue on the water and sanitation system, and the De- cember 2024 issue on the importance of investing in human capital in the early years. PHILIPPINES ECONOMIC UPDATE JUNE 2025 42 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Table 3. Key fiscal indicators for the baseline projections. 2021 2022 2023 2024 2025 2026 2027 2028 Actual Projected In percent of GDP, unless otherwise stated. Overall Balance -8.6 -7.3 -6.2 -5.7 -5.4 -4.9 -4.4 -4.1 June 2024 MTFF -5.6 -5.3 -4.7 -4.1 -3.7 Total Revenues (and grants) 15.5 16.1 15.7 16.7 16.2 16.3 16.3 16.5 June 2024 MTFF 16.1 16.2 16.2 16.6 17.0 Tax Revenues 14.1 14.6 14.1 14.4 14.4 14.6 14.7 14.9 Total Expenditures 24.1 23.4 21.9 22.4 21.6 21.2 20.8 20.6 June 2024 MTFF 21.7 21.5 20.9 20.7 20.7 Current operating expenditures 18.0 17.4 16.0 16.4 16.1 15.7 15.4 15.2 Capital Outlays 6.0 5.9 5.8 6.0 5.5 5.5 5.4 5.4 National Government Debt 60.4 60.9 60.1 60.7 60.2 59.7 59.4 59.1 Note: Figures under the rows entitled ‘June 2024 MTFF’ refer to the Government’s fiscal targets as outlined by the June 2024 revisions to The Medium-Term Fiscal Framework Source: Department of Budget and Management (DBM), World Bank staff calculations. Figure 24. Q1 deficits have been lower than the full-year outturn since 2019. Fiscal Deficit (in percent of GDP) 10 9 8 7 6 5 4 3 2 1 0 b/ 14 15 17 18 20 21 23 24 a/ a/ b/ a/ 13 19 20 20 20 20 20 20 20 20 16 22 25 20 20 20 20 20 Ann ual Fiscal Deficit Q1 Fiscal Deficit Notes: a/ Midyear election year; b/ Presidential election year. Source: BTr, World Bank staff calculations. PHILIPPINES ECONOMIC UPDATE JUNE 2025 43 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Figure 25. The fiscal deficit is set to decline over the medium term, driven by lower spending. 30 7 25 6 20 5 15 Percent of GDP Percent of GDP 10 4 5 3 0 2 -5 1 -10 -15 0 2021 2022 2023 2024 2025F 2026F 2027F 2028F Fiscal balance Public expenditure Public revenue Infrastructure program (RHS) Source: BTr, DBM, World Bank staff calculations. Photo: Shutterstock / ThaiHoang PHILIPPINES ECONOMIC UPDATE JUNE 2025 44 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains EXECUTIVE SUMMARY PART 3 Philippine SMEs and global value chains: the case for strategic support. Small and medium-sized enterprises (SMEs) are essential to the Philippine economy, sustaining many livelihoods. Most are informal, low-productivity firms with little prospect of scaling up. Yet among them is a smaller, more promising subset—dynamic, innovative businesses that, if better integrated into global value chains, have the potential to drive productivity and job creation. A comprehensive Government of the Philippines (GOP) strategy should focus on three key constraints these firms face: restricted access to testing facilities and certification services, low access to finance, and tackling limited market information. Photo: World Bank PHILIPPINES ECONOMICUPDATE PHILIPPINESECONOMIC UPDATEJUNE 2025 JUNE2025 4545 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains 3.1 SMES: MISSING OUT ON THE BENEFITS OF EXPORT SUPPLY CHAINS SMEs are essential to the Philippine economy, their domestic suppliers to ensure quality sustaining many livelihoods (Figure 27).521 upgrades, which can lead to increased productivity. SMEs generate 63 percent of the country’s total Additionally, domestic firms benefit when they employment and contribute 36 percent of gross hire workers transitioning from foreign firms, or value-added. when domestic employees at foreign firms leave to establish businesses that often maintain connections However, Philippine SMEs export less than their to the foreign firms, disseminating knowledge and counterparts in peer economies (Figure 28). expertise to other firms within the same sector. That matters as exporting is more than a channel Furthermore, domestic firms can benefit when they for sales; it is a platform for quality job creation adopt new management practices and operational through gains from scale, increased competition, processes from foreign firms through demonstration and learning. Firms that engage with international effects. The absence of Philippine SMEs is most markets are typically more productive, not simply notable in the supply chain of anchor multinationals, because the best firms export, but because despite notable steps to attract foreign direct exporting makes firms better (Box 2). investment and steady inflows (Figure 29a).53 Furthermore, Philippine SMEs lag peers in But for the few domestic firms that link to anchor participating in global value chains. That is multinationals, productivity has not increased. costly: firms tethered to global supply chains gain Productivity data from firms associated with MNCs productivity through tougher competitive pressure do not indicate that such spillovers have occurred and the diffusion of know-how. Multinationals over time. The productivity of suppliers to MNCs often decide on location based on the presence of has declined over time (Figure 29b, green bar). reliable local suppliers that meet their benchmarks In addition, while customers of MNCs have seen on quality, cost, and delivery. Consequently, foreign an increase in productivity, this change is not buyers provide training and technological support to statistically significant (Figure 29, red bar). Photo: WorldBank 52 In the Philippines, SME classification is based on asset size and number of employees. Micro is defined as having assets up to ₱3,000,000 and 1 to 9 employees; small as assets from ₱3,000,001 to ₱15,000,000 and 10 and 99 employees; and, medium as assets from ₱15,000,001 to ₱100,000,000 and 100 to 199 employees. (The government is exploring the redefinition of SME classification.) 53 The government has eased entry through reforms such as the amendment to the Public Service Act and the Konektadong Pinoy bill. Recent policy moves—including tax cuts, enhanced fiscal incentives, greater flexibility in work arrangements, and clearer VAT rules—signal a more investor-friendly environment. PHILIPPINES ECONOMIC UPDATE JUNE 2025 46 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains BOX 2. EXPORTERS AND FOREIGN FIRMS TEND TO BE MORE PRODUCTIVE DUE TO SELECTION AND LEARNING PROCESSES. The fact that firms’ productivity increases due to large productivity premium shown by exporters is exporting has been documented extensively across due to two reasons: selection and learning. countries. Atkin et al. (2017) provide causal evidence for the case of exporting SMEs in Egypt on the link Selection implies that firms that are more productive between exporting activities, product quality and in the first place are the ones that become exporters. efficiency. In the study, a randomly drawn group of This shows in the difference in productivity between small rug manufacturers in Egypt was provided with two groups of firms: those that are not exporting the opportunity to export by matching them with today and will not export in the next period, and foreign buyers. The opportunity to export raised the those that are not exporting today but will export in overall performance of these firms. De Loecker the next period (‘exporters to be’). Firms in the latter (2013) identifies learning by exporting in for group are on average 2.07 times more productive Slovenian firms. Lovo and Varela (2021) show similar than those in the former group. effects on Pakistani firms. More recently, Liang etal. (2024) provide evidence on learning by exporting in Learning implies that by becoming systematic China, combining data on firms’ operations, trade exporters, firms become even more productive and patents, and finding that access to export through being exposed to different and often markets improves the quantity and quality of superior technologies or management practices. This innovation. latter mechanism tends to motivate public support to exporting. This shows in the difference in This link between exports and productivity also productivity between exporters to be and systematic holds in Philippines. Exporting firms in the exporters (‘always exporters’ are 22 percent more Philippines are substantially more productive than productive than ‘exporters to be’ (year before)), as non-exporting ones. Firms that systematically export well as in premium shown with export experience (‘always exporters’) are 2.52 times more productive (exporters to be, compared to first time exporters, than firms that never export (‘never exporters’). This and with second year exporters). Figure 26. Selection and learning explaining productivity premium of internationally linked firms. 9.5 Average TFP (in logs) 9 8.5 8 7.5 Always Never Year before Year entered Year a er exporters exporters Source: World Bank Staff calculation based on the Annual Survey of Philippine Business and Industry (ASPBI) and exporters transactions dataset. Note: average TFP is reported in logs. To calculate percentage difference in TFP levels, we compute differences in logs and convert to percentage difference. Comparisons between categories are for a given size class and sector. Source: Authors’ elaboration. PHILIPPINES ECONOMIC UPDATE JUNE 2025 47 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Firm-level analyses and interviews with the from export destination markets; (ii) Limited access management of companies have identified to finance for equipment and quality upgrades, due constraints in developing SME exports and global to inadequate credit information and collateral, and supply chain linkages. Key constraints include: (i) (iii) Limited market information to match buyers Restricted access to testing facilities and certification and sellers. Box 3 presents an example from the services, which leads to higher costs or rejection rates electronics sector. Figure 27. SMEs are widespread and contribute significantly to services, employment, and value-added, but less so in manufacturing and exports. Micro (0-4) Small (5-19) Medium (20-99) Large (100+) 1 0.8 0.6 0.4 0.2 0 d s t s t s d s en en rm rt rt de de rm po po m m ad Fi ad Fi oy oy Ex Ex g es e e rin pl pl lu lu ic es g Em Em Va tu Va rin rv ic ac Se g tu rv es es g rin uf rin Se ac ic ic an tu rv uf tu rv ac M Se an Se ac uf M uf an an M M Sources: PSA, based on the list of Establishments 2023. Figure 28. Filipino SMEs are less likely to export than their peers in other economies. Percent of small firms exporting directly at least 10% of sales in 2023 16 14 12 10 8 6 4 2 0 a a ar es e co a ru nd sh a a or si si di in di nm Pe in de la ay oc ne Ch In bo ap pp ai al la or do ya ng m Th il i ng M M M In Ca Si Ph Ba Source: Authors’ calculations based on PSA CPBI 2018 and Hsieh and Klenow (2014). PHILIPPINES ECONOMIC UPDATE JUNE 2025 48 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Figure 29. FDI inflows have been rising, but have yet to benefit local firms and the broader economy. a. Net inward FDI (Percent of GDP) 2.50 Foreign direct investment, net inflow 2.00 1.50 (% of GDP) 1.00 0.50 0.00 2000-2010 2010-2023 b. Estimated effect on domestic firms (Productivity) 1 Change in productivity associated with FDI 0.8 0.6 among linked firms 0.4 0.2 0 -0.2 -0.4 -0.6 All Backward Foward Note: Local firm linkages with FDI enhance productivity through spillovers. Backward linkages involve sectors supplied by foreign capital, while forward linkages pertain to upstream sectors. Bars show estimated productivity increase, and whiskers indicate confi- dence intervals. A 0.25 coefficient means a 10 percent rise in FDI boosts domestic firm productivity by 2.5 percent. Values have been deflated to consider changes in prices. Data collection for 2019 (conducted in 2020) and later years was affected by COVID. Total factor productivity is weighted by employment. Source: Analysis based on ASPBI. PHILIPPINES ECONOMIC UPDATE JUNE 2025 49 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains BOX 3. FINDING COMPETENT SUPPLIERS IN THE ELECTRONICS SECTOR CAN LEAD TO COLLABORATION OPPORTUNITIES TO IMPROVE THE CAPACITY OF DOMESTIC FIRMS. Some electronic manufacturers in the Philippines Several possible solutions could address these issues face challenges in finding suitable suppliers. While as part of a supplier development program (SDP). there are efforts to promote domestic sourcing, the Qualified management consulting could help identify sector lacks a functional marketplace and an up-to- gaps and develop quality management improvement date centralized listing database for suppliers. This is plans. Advisers could assist with achieving quality particularly important as compliance with standards compliance and obtaining quality certifications. and regulatory requirements is critical. The absence Long-term loans could finance investments in of access to testing and certification facilities equipment and software, while a database and exacerbates the problem. Additionally, the information system for suppliers could streamline the dependence on imported materials limits the ability process. of domestic firms to integrate into global value chains. Finally, several exporters and suppliers face Examples from other countries demonstrate the difficulties in accessing long-term investment potential success of these solutions. The SDP in the financing, which impacts their capacity to modernize Czech Republic resulted in more than half of operations and systems to meet buyer standards. domestic SMEs becoming suppliers to multinational Banks are hesitant to offer long-term financing to corporations, securing US$250 million in new SMEs in the Philippines due to the lack of collateral contracts between 2001 and 2006. Similarly, the SDP for these investments and insufficient credit data in Costa Rica saw participating SMEs increase their about the firms. revenue from US$2 million to US$52 million during 2002-2005, reaching US$105 million by 2009. Photo: Shutterstock/MDVEdwards Source: Authors’ elaboration. PHILIPPINES ECONOMIC UPDATE JUNE 2025 50 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains 3.2 RESTRICTED ACCESS TO TESTING FACILITIES AND CERTIFICATION SERVICES Restricted access to testing facilities and are stringent, and the pace of innovation is relentless. certification services leads to missed export and For digital services, there is limited access to local global value chain participation opportunities. internationally recognized certification services Accessible, affordable, and specialized testing in cybersecurity and data protection. Limited infrastructure and certification services are critical international recognition of the certification and to access export markets and global supply chains. standards by the National Meat Inspection Service Philippine firms, particularly SMEs, lag regional in poultry and livestock and the lack of testing peers in achieving internationally recognized and certification facilities results in several food certifications, a shortfall that limits their ability to processors having to send their products to Singapore access high-value markets and secure long-term or the United Arab Emirates to meet the quality and supplier relationships (Figure 30). The high cost of labeling requirements of export destinations, adding certification poses a significant hurdle, particularly in additional costs and prolonging lead times. Box 4 sectors like electronics, semiconductors, aerospace, explores further examples. and automotive parts, where technical requirements Photo: Shutterstock/MDVEdwards PHILIPPINES ECONOMIC UPDATE JUNE 2025 51 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains BOX 4. HOW TROUBLED COMPLIANCE WITH BUYER REQUIREMENTS HOLDS PHILIPPINE AGRIBUSINESSES BACK. SMEs in the Philippines face a substantial rate of like with the EU and Korea. For small-scale food import rejection due to noncompliance with Sanitary processors, this challenge is particularly acute. and Phytosanitary (SPS) regulations. There are a few examples of countries that introduced reforms with relative success. Pakistan Between 2010 and 2022, the primary reasons for reengineered its quality infrastructure (QI) to secure rejecting food products in key markets for Philippine export markets, particularly after fish exports to the goods were diverse. In Japan, for example, rejections European Union (EU) were curtailed in 2004 due due to pesticide residues were at 70 percent, to quality and safety issues. By modernizing and while Australia’s rejections due to mycotoxins and achieving international recognition for metrology, bacterial contamination reached approximately 80 accreditation bodies, laboratories, and certification percent. In the European Union, about 50 percent of bodies, Pakistan gained international recognition by rejections were due to the presence of additives. 2014. As a result, fish exports to the EU resumed, and new export markets for other products were A key problem lies in SMEs’ lack of market and realized. regulatory intelligence about these dynamic requirements and the limited domestic testing and Similarly, a World Bank-financed project in certification capabilities, compelling SMEs to send Peru helped laboratories achieve international their products abroad to meet stringent quality accreditation for testing and certifying agricultural and labelling requirements. Moreover, the lack of products. This led to a four-fold increase in exports, availability of local quality assurance also hinders a doubling of non-traditional exports, and a 50 the learning of internal quality upgrading for SMEs. percent rise in exporting SMEs. Achieving foreign Product design and marketing are also critical for acceptability for testing and certification results leveraging new market opportunities, particularly directly helped avoid rejection and gain market those presented by Free Trade Agreements (FTAs), access. Photo: World Bank Source: Authors’ elaboration. PHILIPPINES ECONOMIC UPDATE JUNE 2025 52 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Gaps in quality and risk management systems chicken, duck, and pork. Notably, the lack of linkages expose the Philippines’ exporting sectors to between SMEs and large firms or multinationals reputational risk. Weak systems to prevent and results in the slow adoption of quality management control disease outbreaks (such as avian influenza systems. and African swine fever) can impact the export of Figure 30. Philippine firms obtain fewer international quality certifications than their peers. International Certification (Share of firms, 2023) 60 Share of Establishments (%) 40 20 Malaysia Thailand Viet Nam Philippines Indonesia 0 6 7 8 9 10 11 12 Log GDP per capita (constant 2015 US$) International Certification by firm size (2023) Small (3-19) Medium (20-99) Large (100+) 0 5 10 15 20 25 30 35 40 45 50 Source: Authors’ calculations based on WBES 2023 and WDI. PHILIPPINES ECONOMIC UPDATE JUNE 2025 53 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains 3.3 LIMITED ACCESS TO FINANCE Overall, the proportion of firms that use banks, non- Due to inadequate credit information and financial institutions (NFIs), and supply chain finance collateral, limited access to finance limits for investments is among the lowest in the region. investments in equipment and quality upgrades. Loan rejection and perceived prospects of rejection For example, Cebu furniture manufacturers struggle deter lending for investment.542In the Philippines, to increase local content because plywood and rates of both are high, compared to Indonesia and rattan suppliers lack the necessary resources to Viet Nam (Figure 31). Factors contributing to this invest in technology to produce at scale and constraint include the absence of a comprehensive according to necessary standards.1In the Philippines, credit registry, limited use of alternative credit firms frequently rely on retained earnings to finance scoring models, and firms’ inability to produce capital investment more than in peer countries. collateral. Figure 31. Filipino firms are more likely to be rejected for credit than their peers in other countries. Firms with rejected loans (those who applied) or fear of rejection (those who did not apply), 2023. 20 18 16 Share of Establishments (%) 14 12 10 8 slope= -1.3*** 6 4 PHL 2 IDN VNM 0 4 5 6 7 8 9 10 11 12 Log GDP per capita (constant 2015 USD) 54 The rejection outlook on loans comprises the rate of rejection and prospects of rejection. PHILIPPINES ECONOMIC UPDATE JUNE 2025 54 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains Firms with rejected loans or fear rejection in the Philippines, 2023. Share of Firms (%) Small (5-19) 4.8 Medium (20-99) 2.4 Large (100+) 0.1 Source: Staff calculation based on the WBES 2023-2024. Note on the left chart: The base only includes the number of firms with a loan or line of credit granted last year. Photo: Shutterstock/Kim David PHILIPPINES ECONOMIC UPDATE JUNE 2025 55 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains 3.4 LIMITED MARKET INFORMATION limited visibility into the capabilities of domestic A critical but often overlooked barrier to SMEs, defaulting instead to established foreign SME integration into larger value and supply suppliers or vertically integrated networks. Bridging chains is the pervasive information gap—on this information gap is essential: better market both sides. Many SMEs lack awareness of the intelligence and coordination platforms can help standards, procurement processes, and specific realize the full potential of SME participation demands of export markets, large corporations, and in export supply chains. Figure 32 outlines how multinational firms. This leaves them ill-prepared knowing the market access requirements is the first to position themselves as viable suppliers and step in meeting them. exporters. At the same time, large firms often have Figure 32. The case for meeting market requirements Knowing market Meeting requirements Showing conformity access requirements (achieving conformity) (attestation) • Information provision (what to • Improve functioning of value chains (e.g., • Understand gaps in the national quality confirm with). e.g. via public access to suppliers, etc). including infrastructure databases necessary regulatory reforms • Improve access to conformity assessment • Harmonizing national with • Improve access to industrial bodies (CABs) international standards insfrastructure (e.g. wastewater treatment • Strengthen internationally recognized plants) accreditation of conformity assessment • Enable the adoption of technology • Improve metrology to archieve • Improve access to finance (e.g., for trustworthy measurements technology upgrading) • Invest in availability of data to show • Information provision and trainings for • compliance (e.g., water use, etc.) firms (how to achieve conformity) • Linking firms with international buyers Key question: Is there a business case for meeting the market access requirements? A firm or country may lack a comparative advantage in a strategis market segment where conformity requirements apply (e.g., certified organic cotton cannot be produces competitively). Hence, the public and private investments for knowing, meeting and showing conformity need to weighed against the likehood of potential gains. Source: Grinsted and Wolfers. Supporting Firms in Complying with Market Access Requirements: Overview of International Experiences. Forthcoming. PHILIPPINES ECONOMIC UPDATE JUNE 2025 56 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains 3.5 A STRATEGIC APPROACH TO SUPPORTING SMES’ POTENTIAL IN EXPORTS AND GLOBAL VALUE CHAINS Addressing the constraints in developing SME • standards. The GOP can contribute to exports and global supply chain linkages requires harmonizing domestic and global standards a comprehensive strategy. Efforts should focus on to streamline conformity assessments, three key constraints: access to testing facilities and compliance, and certification procedures. The certification services, access to finance, and market GOP may also advance efforts to achieve information. Interventions tend to be more effective Mutual Recognition Agreements (MRAs), when directed at high-potential firms that are likely advocating with international accreditation to grow by establishing connections with larger firms, bodies.561Furthermore, public-private MNCs or accessing international markets. When collaboration can target investments in executed properly, export support and supplier cold storage and traceability technologies, development programs can significantly enhance incentivizing exporters and suppliers’ access additionality, serving as some of the most effective to regional cold chain facilities. methods for fostering economic growth.55 • Strengthening systems to prevent and Improving access to testing facilities and control disease outbreaks. Effective risk certification services would require investments management is essential to safeguard the on multiple fronts: integrity of the Philippine quality brand and achieve the goal of being globally • Making testing and certification services acknowledged as a disease-free area. This more affordable and reliable. Private entails improving animal health surveillance laboratories are optimally positioned to and biosecurity measures, establishing provide testing, inspection, and certification. internationally recognized disease-free zones, However, the GOP must incentivize private and implementing compartmentalization sector laboratories to offer support in zones to create protective buffers. specific areas where SMEs encounter higher compliance costs, including remote locations Expanding access to investment finance for or emerging sectors. firm equipment and quality upgrades can be pursued through credit de-risking mechanisms. • Enhancing quality testing. The GOP can Investments in credit information and collateral simplify regulations for laboratories and registries can reduce the financial information import testing equipment, lowering testing asymmetries that financial institutions face. The costs through third-party certifiers meeting collateral registry has been recently operationalized.57 market standards. Additionally, the GOP could PhilGuarantee, a GOP-owned corporation, can tailor invest in public conformity assessments. specific loan guarantees for equipment, certifications, and consulting to stimulate SME investment. • Securing international recognition and Furthermore, SBC, the Small Business Corporation compatibility of certifications and under the Department of Trade and Industry (DTI), 55 A Chilean supplier development program (2003-2008) gave SMEs matching grants to improve management skills, boosting revenue, employment, wages, and SME survival (Portugal 2018). Costa Rica’s PROVEE program (2001-2014) created 126 new product and service links annually. Olarreaga (2015) indicates $1 spent on export promotion yields $15 in exports. Atkins et al (2017) found reducing matching frictions between foreign buyers and local suppliers increases profits and productivity. 56 This is crucial for service exports such as IT-Business Process Management (BPM) outsourcing and game localization, where the GOP can also enhance regional capacity for export-ready Software-as-a-Service (SaaS) and digital services. 57 This centralized system enables the registration and searching of notices on security interests, ensuring transparency and efficiency in secured trans- actions, aiming to streamline secured transactions and facilitate credit access for SMEs. It broadens access to financing by allowing a wider range of personal property as collateral, supporting financial inclusion and MSMEs. PHILIPPINES ECONOMIC UPDATE JUNE 2025 57 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains can customize SME-focused on-lending schemes global value chains, such as through initiatives of the through private financial intermediaries where the DTI’s Export Marketing Bureau (EMB), Board risk-return incentives require it. Finally, targeted of Investments (BOI), Philippine Economic technical assistance can help SMEs design viable Development Authority (PEZA), Halal Development investment proposals to reduce risks for financiers and Trade Office, and Center for International Trade and lower underwriting costs. Expositions and Missions (CITEM). EMB and the Halal Development Office provide assistance to Reducing information gaps would include existing and would-be exporters on all export- making export market information readily related matters, including information on export available, creating mechanisms for matching procedures and documentation, marketing support, SMEs with larger firms and multinationals, or matching and market access, quality and food establishing accredited vendors that can direct safety, and trade facilitation. BOI and PEZA assist SMEs to improve their capabilities. Identifying in content localization by encouraging collaboration SME suppliers can come with costs and risks to among multinational exporters and domestic SME larger firms and multinationals. SMEs are aware suppliers. CITEM, a division of DTI, promotes SMEs, of supply opportunities, but they may not always exporters, designers, and manufacturers via trade understand how thee fall short in meeting buyer’s and marketing events. Moreover, DTI’s Regional requirements. The GOP can support collaboration Operations Group (ROG), through industry focal by creating a marketplace that connects exporters points, also support the development of priority and SME suppliers and incentivizing partnerships national industry cluster roadmaps. Despite these through trade fairs, networking activities, and efforts, improved coordination, an improved M&E project design funding. In addition, product system to track the development of assisted firms, certification or labeling compliance information regular program evaluation and increased funding is crucial for investing, meeting standards, and are needed to sufficiently address the gap identified accessing international markets.582The GOP can in the previous sections. raise awareness and promote uptake of labels and certification through successful examples from early Importantly, to maximize impact of interventions, adopters. Finally, informational gaps also exist for focus should be placed on high-potential firms, firms that need reliable vendors and consultants who which requires screening and results-based offer technological solutions and quality assurance assistance. Effectively targeting these firms is a services. The GOP can create a digital marketplace challenging task. To improve outcomes, the GOP linking firms with pre-qualified vendors and can develop tailored methods, as outlined in Box consultants. 5, that ensures that limited resources are allocated efficiently. This is especially important as the As a guiding principle, market-based policy Philippines face tighter fiscal space. Focusing on solutions that mobilize private capital should be high-growth SMEs will also require assigning agency prioritized, freeing limited public resources responsibilities based on comparative advantage. to address other critical areas. Promoting private DTI (which has traditionally offered investment sector engagement by removing constraints to incentives to attract large investments and provide private investment can leverage limited financial livelihood grants to microentrepreneurs) could play resources. Catalytic public interventions tend to be a more central role in supporting the growth and more efficient and effective when they are time- competitiveness of exporters and suppliers. It is bound, mobilize private investment, and include a well-positioned through its vast network of Negosyo clearly defined exit strategy. Centers nationwide and a network of overseas commercial attachés in strategic cities worldwide. Support should be enhanced by leveraging High-growth firms can benefit from DTI’s information existing programs and incorporating lessons about key global market opportunities and leverage learned from their implementation. The DTI’s relationships with industry associations to Philippines supports SME exports and linkages to mediate between large buyers and smaller suppliers. 58 For example, in food processing, suppliers must adhere to production standards, border tests, certification, shipment rules, foreign safety laws, and labeling regulations. PHILIPPINES ECONOMIC UPDATE JUNE 2025 58 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains BOX 5. HOW CAN POLICY PROGRAMS ENGAGE THE TYPE OF FIRMS THAT HAVE THE POTENTIAL TO COMPETE? Identifying high-growth firms (HGFs) for Effective SME support programs for high-growth government support programs is challenging. firms (HGFs) need a tailored and evidence-based HGFs are typically characterized by sustained and approach. Programs should distinguish between fast employment growth.591 They span various sizes potential and existing HGFs, providing timely and sectors, not just small, high-tech companies. strategic guidance, leadership development, and mentoring. Private sector intermediaries can deliver Predicting future growth is difficult. Governments personalized, hands-on support and access to have used quantitative criteria, like past growth networks not readily available to public agencies. performance and turnover thresholds, and Public sector targeting efforts often struggle in qualitative assessments, including business dynamic markets due to unpredictable firm growth. plans and management capabilities. Government Static eligibility criteria focused on young, high-tech programs often combine these criteria, emphasizing startups can miss diverse growth-oriented SMEs, entrepreneurial ambition and strategic planning. The many of which are older, in traditional sectors, and process typically relies on targeting, screening, and growing through acquisitions. Adopting a more results-based support. adaptive, intelligence-driven approach—such as high-growth identification units—could better align support with SME growth trajectories. Step by step framework Example: supplier development program Selection of anchor firms and products and • Made steps towards professional services that can be locally supplied Target 1 management SMEs • Favor investment outcomplete peers Call for proposals • Connnect with reign (high-value domestic) markets Selection • Present a growth outlook (intent) Proposal develpment assistance Screen • Assessability 2 SMEs • Evaluate willingness to improve Gap analysis & project design • Screen for integrity Award & project implementationPlan (PIP) • Present willingness to coinvest in 3 Sequential • improving the business engagement • Meet specifis milestones as Implementation milestones • part of the improvement plan. Closure Source: Authors’ elaboration, based on Nesta Working Paper No. 14/01 (2014), Increasing ‘The Vital 6 Percent’: Designing Effective Public Policy to Support High Growth Firms. 59 The Organisation for Economic Co-operation and Development (OECD) defines high growth firms as firms that can generate employment growth exceeding 20 percent annually over three years. PHILIPPINES ECONOMIC UPDATE JUNE 2025 59 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains REFERENCES Davis, Steven J., 2016. “An Index of Global Economic Policy Uncertainty,” Macroeconomic Review, October. Jordà, Òscar (2005). “Estimation and Inference of Impulse Responses by Local Projections.” American Eco- nomic Review, 95(1), 161-182. Kilian, Lutz (2009). “Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market.” American Economic Review, 99(3), 1053-1069. Kilian, Lutz and Zhou, Xiaoqing (2018). “Modeling Fluctuations in the Global Demand for Commodities.” Journal of International Money and Finance, Journal of International Money and Finance 88 (2018): 54-78. Shapiro, Adam Hale (2024). “Decomposing Supply and Demand Driven Inflation.” Federal Reserve Bank of San Francisco Working Paper 2022-18. World Bank, 2025. Commodity Market Outlook. PHILIPPINES ECONOMIC UPDATE JUNE 2025 60 Executive Recent Economic Outlook & Risk 2.1 2.2 2.3 Philippine SMEs and & Policy Dev 1.1 1.2 1.3 1.4 1.5 1.6 3.1 3.2 3.3 3.4 3.5 Summary global value chains The World Bank PHILIPPINES 26th Floor, One Global Place 5th Ave. corner 25th St. Bonifacio Global City, Taguig City Philippines 1634 T: +63 2-465-2500 F: +63 2-465-2505 W: www.worldbank.org/en/country/philippines Photo: World Bank