The Marcos government is in danger of being warned by global debt watcher Moody’s ratings over its fiscal policy. The government’s move to restrict subsidies to consumers helps protect the state budget from world price fluctuations, but could also lead to a reduction of consumers’ spending and a decline in domestic demand.
Moody’s Asia-Pacific report says free fuel prices would ensure that public funds were not lost, but it would cost citizens more. Such high pass-through to domestic prices reduces real income and slows the overall economic activity in a nation, potentially adding to social tensions.
Balancing Fiscal Stability Against Economic Slowdown and AI Challenges
There are obvious trade-offs in domestic policy in this fiscal approach. The state’s budget is still shielded, and the national debt profile is not deteriorating as compared to other neighboring countries, such as Indonesia, which still has a heavy debt profile. But it is a price that the middle class pays in terms of consumption power.
The new policy comes at a time when the economy is slowing considerably. But investor confidence got kind of dampened by that ongoing probe into oddities in the flood control projects, which then caused economic growth to slow down to 4.4 percent in 2025. The Philippine Statistics Authority (PSA) also said that domestic growth contracted some more in 2026’s first quarter, ending up at its weakest level in five years, at 2.8 percent.
Meanwhile, adding to the pressure is a rather constrained financial environment. The Bangko Sentral ng Pilipinas (BSP) decided to increase the interest rate for the second time this year in response to the threat of inflation and to support the peso. The Bangko Sentral ng Pilipinas (BSP) raised the benchmark interest rate from 4.5 percent to 4.75 percent to curb inflation and to stabilize the peso. In its report, Moody’s pointed out that the higher borrowing rates will “improve the debt affordability of these borrowers over a period of time.
However, the Department of Finance has a certain elasticity to external shocks, considering these challenges. The Philippines has foreign exchange reserves sufficient to pay for about five months’ worth of imports; however, the current account buffer might be reduced in the face of a continuous rise in energy prices.
The nation’s “critical” business process outsourcing (BPO) industry is subject to structural changes on the long run. Moody’s believes the shift to AI will be slow because the low salaries of local workers slow the replacement of workers.
In addition, massive investments in infrastructure are needed to transition to an AI-based economy. The requirements will be hard for the government to meet in a time of limited fiscal space. But the stable, well-capitalized banking system and demographic picture in the state have kinda kept the country’s ‘stable’ credit score intact for the Department of Energy and other state spheres.
