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The Philippines’ gross domestic product (GDP) is likely to expand slower than the government’s target until 2025, Citigroup, Inc. (Citi) said.

Citi cut its GDP growth forecast for the Philippines to 5.8% this year but kept its 6% growth forecast for 2025.

This is below the government’s 6-7% target this year and 6.5-7.5% goal next year.

“We lowered 2024 GDP growth slightly from 6% to 5.8%, mainly due to a weak third-quarter outturn that had been a result of several temporary, weather-related factors,” Citi economist for Thailand and the Philippines Nalin Chutchotitham said in a report.

The Philippine economy slowed to 5.2% in the July-to-September period from 6.4% in the second quarter and 6% a year ago.

This was also the weakest growth since the 4.3% expansion in the second quarter of last year.

“Nonetheless, we think it would be misleading to view the weaker third-quarter expansion as the start of a slowdown as several negative factors in the third quarter are one-off events,” Ms. Chutchotitham said.

She said the weakness in third-quarter economic growth mainly stemmed from the drop in agriculture production, construction activity and net exports.

Despite the weak third quarter, Citi expects growth to accelerate in the fourth quarter as domestic demand is seen to pick up due to easing inflation and lower rates.

“We expect fourth-quarter 2024 GDP growth to accelerate to 6% year on year. Household consumption is expected to continue improving, supported by lower interest rates and improved consumer sentiment as inflation continues to stabilize.”

In the first nine months, GDP grew by 5.8%. The economy would need to grow by at least 6.5% in the fourth quarter to meet the lower end of the government’s 6-7% target.

“With the storm season passing soon, we also expect infrastructure projects’ progress to proceed at a faster clip in the fourth quarter and first quarter of 2025,” Ms. Chutchotitham said.

Domestic demand will also likely be sustained by improving employment conditions, remittance growth and bank lending.

“The RRR (reserve requirement ratio) cut of 250 basis points (bps), effective on Oct. 25, would also release more liquidity into the banking system and likely continue to support strong credit expansion,” Ms. Chutchotitham added.

The central bank last month reduced the RRR for universal and commercial banks and nonbank financial institutions with quasi-banking functions by 250 bps to 7%.

“We also maintain our expectation of 6% growth in 2025 but see some upside risks due to tailwinds from more rate cuts,” Citi said.

The Bangko Sentral ng Pilipinas (BSP) will likely cut by 25 bps in December and by a total of 75 bps next year, according to Citi.

This year so far, the central bank has reduced interest rates by 50 bps since August. The Monetary Board is set to hold its last rate-setting meeting of the year on Dec. 19.

BSP Governor Eli M. Remolona, Jr. has said it is possible to deliver a 25-bp rate cut by then. This could bring the benchmark rate to 5.75% by end-2024.

“Looking ahead, the recent enactment of CREATE MORE (Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy) bill should help to lower costs for businesses through lower corporate income tax, larger deductions of electricity expenses, and simpler local tax and VAT regulations,” Ms. Chutchotitham said.

Last week, President Ferdinand R. Marcos, Jr. signed into law the CREATE MORE bill.

The law expands fiscal incentives and lowers corporate income tax on certain foreign enterprises.

“In response to the post-pandemic world, the CREATE MORE law allows firms in special economic zones to implement flexible/hybrid work arrangements while continuing to enjoy their other incentives,” she added. — Luisa Maria Jacinta C. Jocson

The Philippines’ external debt service burden fell at the end of August as principal payments declined, preliminary data from the central bank showed.

Data from the Bangko Sentral ng Pilipinas (BSP) showed debt servicing on external borrowings dropped by 3.8% to USD 8.68 billion in the January-to-August period from USD 9.023 billion a year ago.

Broken down, principal payments fell by 23.3% year on year to USD 3.461 billion from USD 4.511 billion.

On the other hand, interest payments rose by 15.6% to USD 5.218 billion in the first eight months from USD 4.512 billion.

“The decline in external debt may fundamentally reflect the net payment of maturing foreign debt and less availment of new US dollar and other foreign currency borrowings,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

He noted this was likely a “matter of prudence” by the government to prioritize domestic borrowings in order to mitigate foreign currency risk.

The peso strengthened to PHP 56.111 per dollar at end-August from its finish of P58.365 at end-July.

“However, it is also a delicate balance in ensuring diversified borrowings, not just solely concentrated on domestic borrowings, that could still include some foreign borrowings,” Mr. Ricafort added.

“Foreign borrowings could also be managed properly with the right foreign exchange view based on market and economic cycles, such as whenever the US dollar corrects lower versus major global currencies amid Fed rate-cutting cycles.”

Finance Secretary Ralph G. Recto earlier said the National Government is aiming to lower the share of external borrowings in its borrowing program.

The government’s borrowing mix is at 75:25 this year, in favor of domestic sources. Next year, the mix will be adjusted to 80:20, in favor of domestic borrowings.

John Paolo R. Rivera, a senior research fellow at the Philippine Institute for Development Studies, likewise said the decline in debt payments was due to a “more manageable burden of principal and interest payments relative to the country’s export earnings and income from services.”

“This suggests that the Philippines has been strategically managing its external debt portfolio to optimize repayment schedules and reduce near-term pressures,” he said in a Viber message.

Latest data from the BSP showed that the debt service burden as a share of gross domestic product (GDP) stood at 3.2% in the second quarter. This was lower than 3.6% a year earlier.

Earlier data from the central bank showed outstanding external debt hit a record $130.182 billion at the end of June. Broken down, this was composed of $79.825 billion in public debt and $50.357 billion in private debt.

This brought the external debt-to-GDP ratio to 28.9% at end-June.

The BSP’s external debt data cover borrowings of Philippine residents from nonresident creditors, regardless of sector, maturity, creditor type, debt instruments or currency denomination. – Luisa Maria Jacinta C. Jocson, Reporter

Camille Delos Santos, a 29-year-old government worker from Palawan province, spent P35,000 to watch the concert of K-pop boy band Seventeen in Bulacan north of the Philippine capital on Jan. 13.

“I had to save up not only for the concert ticket but also for the plane fare, transportation to the concert venue, accommodation and food,” she said in a Facebook Messenger chat.

The thought of going over budget caused her a lot of stress, she added.

The local travel industry is experiencing a transformation with the rise of music tourism, which is reshaping how Filipino travelers plan their trips, with concerts and music festivals becoming central to their travel decisions.

Korean acts like Seventeen, Blackpink, Enhypen and IU, and global sensations like Olivia Rodrigo and Ed Sheeran are driving the transformation of Philippine and global tourism.

The Philippine music event market is projected to hit USD 83.6 million this year and grow by 3.9% annually to USD 97.5 million by 2028, according to German online data platform Statista.

Much of the global revenue from music tourism this year will come from the United States at USD 17 billion.

Locally, the target market is about 2.9 million Filipinos, or a user penetration rate of 2.5%, compared with Denmark’s 25.8%, the highest in the world, Statista said.

Filipinos who travel overseas to watch concerts spend more than those who aren’t concertgoers, according to Visa. “In the Philippines, concertgoers, known for their higher disposable income, have a history of outspending non-concertgoers,” it said.

Most of them come from Metro Manila and spend much on international brand apparel and accessories, luxury retail and quick-service restaurants, Visa said. “Often, they spend double the amount compared with those who do not attend concerts.”

“Concertgoers, being more digitally connected and having more disposable income, are also more likely to shop online. This includes booking flights, shopping via platforms, department store purchases, food delivery and insurance in the Philippines,” it added.

Singapore-based online travel service provider Trip.com Group said there’s a growing demand for bundled travel packages, which include flights, accommodations and concert tickets.

Trip.com Managing Director and Vice-President for International Markets Boon Sian Chai said Taylor Swift’s six-day concert in Singapore led to an almost fourfold increase in hotel bookings.

He said the popularity of concerts among tourists, especially millennials, is a global trend. “It is a worldwide trend. It will be an initiative that we want to expand internationally, not just in the Philippines but in all the international points of sale because it is quite common across multiple races or nationalities,” he added.

Hotel demand

Peggy E. Angeles, executive vice-president at SM Hotels and Conventions Corp., said events have had a positive effect on hotels near SM Mall of Asia (MOA) in Pasay City.

“When there are concerts held in the arena or even in the open fields that we have in MOA, obviously, it creates demand for the hotels,” she told BusinessWorld. “It adds to the occupancy of the hotels especially at the weekends because that is when concerts are usually held.”

“Concerts actually end up very late,” she said. “So rather than go home, they spend the night at the hotels and party or have drinks, then go home the next morning.”

Benito C. Bengzon, Jr., executive director at Philippine Hotel Owners Association, said their members report full occupancy rates when there are concerts nearby. “And that’s why they have also identified concertgoers as a specific segment,” he told BusinessWorld.

“It is a good ecosystem because when you get more concerts, there are more concertgoers, and more concertgoers mean greater chances of them staying in nearby hotels,” he added.

Venue is important for hotels to benefit from concert events, Mr. Bengzon said.

Joanne De Leon, a 25-year-old accountant from Sto. Tomas, Batangas province, spent P15,000 for the Seventeen concert, which Ms. Delos Santos, mentioned at the outset, also attended.

She said she had a hard time getting to the Philippine Arena in Bulacan province, which is 86 kilometers away. “Since it was a carpool, we had to leave Batangas early to get to the venue,” she said in a Facebook Messenger chat. “It should have been easier for me if it was held at the MOA.”

Regina Rose Raz, a 26-year-old human resources director and part-time teacher from Calbayog City, Samar in central Philippines, had a similar experience.

Out of the five concerts she attended over several years, the ones held at the Philippine Arena were the hardest to get to.

“First, it is hard to secure transportation,” she said via Messenger chat. “Second, it is hard to secure accommodation because most of them are far from the venue. And third, it is not really friendly for concertgoers.”

Travel bundles

“I don’t know if the problem is with the event organizers or the venue itself, but in the two times I attended a concert at the Philippine Arena, I don’t recall a good experience before and after the event,” she added.

Florent Humeau, chief executive officer at Red Planet Hotels, said the company’s branch along Timog Avenue in Quezon City get bookings from concertgoers at the Philippine Arena.

“For hotels, more events and bigger concerts are better for us,” he said. “When there is an event, our hotel is usually full two weeks to three weeks in advance.”

SM’s Ms. Angeles said travel packages that include concert tickets would help patrons like Ms. Delos Santos, Ms. De Leon and Ms. Raz.

“If you are living in the province and the concerts are at the Philippine Arena, then you could have a bundle of the hotel and ticket, and maybe transportation, from a travel agency,” she said.

“It will definitely have a market here, and I think it’s more for millennials, because that is the same market that went to Japan or Singapore for the Taylor Swift concert,” she added.

Besides concerts, she said events like Disney on Ice, Marvel Universe and meet-and-greets of international artists are also among the drivers of hotel bookings.

“Events have come back,” Ms. Angeles said. “A lot of concerts that have been held. We’ve had international concerts and local concerts. We also have had not just concerts but even shows.”

“I think events have come back, and we could probably have more. And I’m sure more will come in a short while,” she added.

Fiona Pan, senior market director at Trip.com Philippines, said the company sees opportunities in targeting Filipino concertgoers with bundled packages.

“We have already formed partnerships with local entertainment companies and successfully sold tickets for events such as the popular Disney concerts last year,” she said.

“Our flight ticket business in the Philippines is experiencing strong momentum… and we have also expanded our local team to strengthen relationships with airlines and to explore more collaboration possibilities,” she told BusinessWorld via WhatsApp.

“As Trip.com expands its presence in the Philippines and covers more businesses and scenarios, there is definitely an opportunity to leverage our synergies and marketing capabilities to target Filipino concertgoers,” she added.

Ms. De Leon, the state worker from Palawan, said she would be on the lookout for travel concert packages in the future. “It would surely make life easier for me.” – Justine Irish D. Tabile, Reporter

Private sector analysts surveyed by the Bangko Sentral ng Pilipinas (BSP) still expect headline inflation to remain within the 2-4% target band until 2026.

In its Monetary Policy Report from its October meeting, the central bank said that economists’ inflation expectations “remain well-anchored.”

The BSP’s survey of external forecasters for October showed that the mean inflation forecasts for 2024 and 2026 were unchanged at 3.4% and 3.2%, respectively, compared with September forecasts.

Meanwhile, the mean inflation forecast for 2025 was trimmed to 3% from 3.1% previously.

“Analysts consider the inflation risks to be broadly balanced, with headline inflation expected to remain low and within-target over the policy horizon,” the BSP said.

The BSP’s baseline forecasts see inflation settling at 3.1% this year, 3.2% in 2025 and 3.4% in 2026.

Headline inflation picked up to 2.3% in October, bringing the 10-month average to 3.3%.

The central bank said that the balance of risks to the inflation outlook for 2025 and 2026 shifted to the upside but will likely continue to remain within target.

“Inflation is expected to settle near the low end of the target band due to the impact of reduced tariffs on rice imports,” it said.

An executive order that slashed tariffs on rice imports to 15% from 35% until 2028 took effect in July.

“However, by the second half of 2025, inflation could rise toward the upper end of the target range, largely due to positive base effects,” it added.

It also noted that the upside risks are mainly due to “potential adjustments in electricity rates and higher minimum wages in regions outside Metro Manila.”

“Meanwhile, downside risks continue to be linked to the impact of lower import tariffs on rice,” the central bank said.

“Nevertheless, after incorporating the impact of these risks at their assigned probabilities, the risk-adjusted inflation forecasts remain within the 2-4% target range over the policy horizon.”

The BSP said the inflation outlook and inflation expectations allow it to adopt a “less restrictive monetary policy” stance.

“Nonetheless, the monetary authority will continue to closely monitor the emerging upside risks to inflation, including geopolitical factors.”

The Monetary Board is set to have its last policy review for the year on Dec. 19. BSP Governor Eli M. Remolona, Jr. has said it is possible to deliver a 25-basis-point (bp) rate cut at the meeting.

The central bank has reduced interest rates by a total of 50 bps since August or when the BSP kicked off its cutting cycle.

Growth

Meanwhile, the BSP expects gross domestic product (GDP) growth to remain resilient.

“The Monetary Board also expects domestic economic growth to continue to be strong,” it said.

“This reflects improved prospects for household income and consumption, investments, and government spending, which are supported by the start of the monetary easing cycle in August and the announced reduction in reserve requirements in October.”

In the nine-month period, GDP averaged 5.8%. To meet the lower end of the government’s 6-7% goal, the economy must grow by at least 6.5% in the fourth quarter.

“This outlook is supported by the policy interest rate reduction in August and the reduction in reserve requirements in October,” the BSP said.

“The forecast is consistent with the small negative output gap in 2024 and 2025, which is expected to turn positive in 2026. The steady upturn in the output gap reflects improved prospects for household consumption, investments, and government spending.” — Luisa Maria Jacinta C. Jocson

The Philippines slumped to its worst showing in the World Digital Competitiveness Ranking by the International Institute for Management Development (IMD), mainly due to a decline in talent and scientific concentration. 

The country slid two spots to 61^st place out of 67 economies, scoring 45.18 in the 2024 World Digital Competitiveness Ranking, conducted by the World Competitiveness Center.

This was the Philippines’ lowest ranking since the report started in 2017.

Among 14 Asia-Pacific economies, the Philippines ranked 13^th, ahead only of Mongolia (64^th).

Singapore ranked first in the global digital competitiveness index with 100 points, followed by Switzerland and Denmark.

The ranking measures a country’s capacity to adopt and explore digital technologies to transform government practices, business models and society in general.

It measures a country’s capacity in three key factors: knowledge or the quality of human capital, excellence of technological infrastructure and future readiness.

The Philippines ranked 64^th in the knowledge factor, 58^th in future readiness and 56^th in technology.

“The decline is mainly driven by a drop in talent and scientific concentration. There is also a downturn in the technology and regulatory frameworks,” said José Caballero, senior economist at the IMD World Competitiveness Center, in an e-mail.

The country saw the steepest drop in the technology pillar, falling five places from 51^st last year.

According to IMD, the country showed weakness in the ease of starting a business (65^th), enforcing contracts (64^th), communications technology (66^th), and secure internet servers (64^th).

However, the Philippines showed promising performance in investments in high-tech exports (2^nd) and telecommunications (9^th).

The country also slid one spot in knowledge and future readiness, amid low ranking in talent (60^th), training & education (62^nd) and scientific concentration (61^st).

According to IMD, the Philippines’ strength in the knowledge factor lies in its graduates in sciences (22^nd) and its female researchers (2^nd).

For future readiness, IMD said the country showed strength in flexibility and adaptability (19^th spot).

“In terms of future readiness, while there has been an improvement in adaptive attitudes, that is societal attitudes toward new technologies, business agility and information technology integration remain stagnant,” he added.

According to Mr. Caballero, prioritizing the development of relevant talent and the country’s R&D (research and development) capabilities are keys to improvement.

“In addition, there is room for improvement in the regulatory framework’s support for the development of new technologies, [while] strengthening the adoption and integration of new technologies across the societal, private, and public sectors is also fundamental,” he added.

Asian Institute of Management’s (AIM) Rizalino S. Navarro Policy Center for Competitiveness, IMD’s local partner institute in the report, said that the Philippines was the weakest in the knowledge component.

“[This] reflects the level of our human capital and our investments in it. We are trailing behind regional peers in terms of improvements in basic education and training,” said Jamil Paolo S. Francisco, executive director of the AIM Rizalino S. Navarro Policy Center for Competitiveness, in an e-mail.

However, he said that the decline in the ranking does not mean that no progress has been made, but simply that other economies are improving at a faster pace.

“Basic education remains the foundation for any upskilling needed to adapt to rapidly changing technologies and economic demands. We need to get that right before we can expect to reap the benefits of technological advancement,” he added.

For the country to improve its ranking, Mr. Francisco said that the country should start with getting the basics right.

“We need more sustainable investments in education and infrastructure — begin with solid foundations in basic education and skills development to leverage technological advancements,” he said.

“Additionally, creating an enabling environment in terms of regulation, access to resources, and access to markets is crucial. Modernizing rules and frameworks to match the new needs and realities of companies, consumers, and workers is essential for progress,” he added.

Sought for comment, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said that the country’s declining performance in digital competitiveness can be attributed to the emergence of new technologies.

“The fast pace of digitalization globally with the emergence of new technologies such as artificial intelligence is widening the digital divide among countries, consistent with the wealth gap,” said Mr. Ricafort in a Viber message.

“As [well-off] countries digitize further, [the more they] would be far ahead than those that are worse off and far behind,” he added.

Because of this, he said that there is an urgent need for the Philippine economy to boost digitalization.

“There is an urgent need for the Philippines to digitize further… to have more competitive infrastructure and to create a favorable environment that is more conducive to more technological advances that will boost the country’s productivity,” he added.

Global tensions

The IMD report also explored the key challenges that hinder the advancement of digital competitiveness in the countries, such as geopolitical tensions.

Mr. Caballero said the geopolitical rivalry between the US and China are among the conflicts that could compromise how other countries compete at the global level.

“Geopolitical rivalries… are fragmenting the digital landscape, influencing not only how other countries develop and use digital technologies but also their ability to compete globally,” Mr. Caballero said in a statement on Thursday.

“It is therefore likely that any new tariffs will encompass national security-related elements. That is, tensions over technology and security concerns could also intensify, leading the US to further curtail China’s access to advanced technology,” he added.

US President-elect Donald J. Trump is seeking to impose 60% or higher tariffs on all Chinese goods and a 10% universal tariff once he assumes office in January 2025.

Mr. Caballero said that the geopolitical tensions have led to increased competition for digital dominance, which resulted in the fragmentation of global digital governance.

“In turn, such fragmentation can hinder collaboration on issues like cybersecurity and data privacy, which are essential for a balanced and secure digital ecosystem,” he said.

“In addition, fragmentation, by hampering collaboration, can increase the level of digital disparities among countries,” he added. – Justine Irish D. Tabile, Reporter

Foreign investment pledges received by Philippine investment promotion agencies (IPA) surged in the third quarter, driven by investments from South Korea and Switzerland, the statistics agency reported.

Preliminary data from the Philippine Statistics Authority (PSA) showed the value of foreign commitments approved by IPAs soared by 434.4% year on year to PHP 146.75 billion in the July-to-September period from PHP 27.46 billion in the third quarter of 2023.

Despite the strong annual growth, the amount was the lowest in investment commitments since the third quarter of 2023.

Quarter on quarter, it also slid by 22.56% from PHP 189.5 billion in the second quarter.

South Korea was the top source of foreign investment pledges in the third quarter with PHP 53.72 billion (36.6%), followed by Switzerland with PHP 51.84 billion (35.3%). Investment commitments from Japan stood at PHP 15.96 billion (10.9%).

The PSA compiles investment pledges approved by the government’s six IPAs: Board of Investments (BoI), BoI-Bangsamoro Autonomous Region in Muslim Mindanao (BoI-BARMM), Clark Development Corp. (CDC), Cagayan Economic Zone Authority (CEZA), Philippine Economic Zone Authority (PEZA), and Subic Bay Metropolitan Authority (SBMA).

The BoI approved PHP 70.34 billion in foreign investment pledges, accounting for 47.93% of this quarter’s total.

PEZA approved PHP 58.38 billion worth of foreign investment pledges, which accounted for 39.78% of the total. This was followed by CDC with PHP 14.66 billion, BoI-BARMM with PHP 86.7 million, SBMA with PHP 53 million, and CEZA with PHP 3.24 million.

The Calabarzon Region accounted for 40.1% of the pledged foreign investments with PHP 58.86 billion. This was followed by the Bicol Region with PHP 51.84 billion and Central Luzon with PHP 15.2 billion.

The manufacturing industry received nearly half of approved pledges with PHP 70.57 billion, followed by electricity, gas, steam, and air-conditioning supply industry with PHP 51.92 billion and real estate activities with PHP 13.13 billion.

Foundation for Economic Freedom President Calixto V. Chikiamco said in a Viber message that the growth in foreign investment pledges could be attributed to the liberalization of investment laws, such as the amendments to the Public Service Act.

“Aside from reducing the cost of doing business with better infrastructure and less red tape, the government can further spur foreign investments by further liberalizing our restrictive anti-FDI laws, primarily the Constitution,” he said.

First Metro Investment Corp. Head of Research Cristina S. Ulang said the higher investment pledges reflect President Ferdinand R. Marcos, Jr.’s “untiring global investment promotion” for the country.

The Department of Trade and Industry reported in June that a total of USD 19 billion worth of investments pledged during Mr. Marcos’ foreign trips have been actualized or implemented.

She also noted the newly signed Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE) law could help attract foreign investments.

CREATE MORE expands incentives and lowers corporate income tax on businesses registered with IPAs.

“Very sustainable given the more competitive fiscal incentives and greater emphasis for ease of doing business in the country,” Ms. Ulang said in a Viber Message to BusinessWorld.

Mr. Chikiamco said he expects more investments from South Korea once the free trade agreement (FTA) takes effect.

The Senate in September ratified the FTA between the Philippines and South Korea, which will remove Philippine tariffs on 96.5% of goods from South Korea, while Seoul will lift tariffs on around 94.8% of Philippine products.

However, the FTA is still undergoing the ratification process at the Korean National Assembly.

Mr. Chikiamco said the government needs to forge more free trade deals with the European Union, Canada, and the United Arab Emirates.

“Short of any negative geopolitical event, this momentum of increased foreign investments will probably be sustained,” he added.

PSA data also showed investment pledges of foreign and Filipino nationals surged by 542% to PHPb 541.29 billion in the third quarter. Of this, Filipino nationals pledged PHP 394.54 billion in investments.

PSA data on foreign investment commitments, which may materialize in the near future, differ from actual foreign direct investments tracked by the Bangko Sentral ng Pilipinas for the balance of payments. The central bank’s monitoring goes beyond the projects and includes other items such as reinvested earnings and lending to Philippine units via their debt instruments. — Aubrey Rose A. Inosante

Lower interest rates and easing inflation will fuel double-digit credit growth in the Philippines through 2025, S&P Global Ratings said.

“Credit growth could improve. Higher economic growth, along with lower inflation and interest rates, will support credit demand,” S&P Global Primary Credit Analyst Nikita Anand said in a report.

“We forecast credit growth of 10%-12% in 2024 and 2025, compared with 8% in 2023,” she added.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed that bank lending grew by 11% in September, its fastest pace in nearly two years.

S&P said this outlook is driven by expectations that interest rates will normalize over the next year.

“We forecast policy rates could decrease to 5.5% in 2024 and 4.25% in 2025 as inflation stays moderate. This should also help contain asset quality risks emanating from a higher share of consumer lending.”

Since August, the central bank has reduced borrowing costs by 50 basis points (bps), bringing the key rate to 6%.

The Monetary Board’s final policy review for the year is set for Dec. 19.

BSP Governor Eli M. Remolona, Jr. earlier signaled the possibility of a 25-bp rate cut next month, which would bring the benchmark to 5.75% by yearend if realized.

Mr. Remolona also earlier said the BSP can deliver up to 100 bps worth of rate cuts for next year, though not necessarily every quarter or every meeting.

Philippine headline inflation averaged 3.3% in the first 10 months, within the BSP’s 2-4% target.

The BSP expects inflation to average 3.1% this year and 3.2% in 2025, both well within the target band.

Meanwhile, S&P Global said that economic growth will also support lending demand.

The credit rater sees Philippine gross domestic product (GDP) expanding by 5.7% this year and 6.2% in 2025.

The economy grew by a weaker-than-expected 5.2% in the third quarter, the weakest growth in five quarters. In the first nine months, GDP growth averaged 5.8%.

Banking sector outlook

Meanwhile, S&P Global said that the country’s banking system remains resilient.

“Banks maintain good buffers. Philippine banks are well positioned for growth with a sound capital position (15.7% Tier-1 ratio)… They have also maintained adequate provisioning, although we believe some write-back of pandemic-related provisions is likely amid a buoyant economic backdrop,” it said.

Under S&P’s Banking Industry Country Risk Assessment (BICRA), the Philippines is categorized under group 5.

The BICRA aims to “evaluate and compare the relative strength of global banking systems.”

BICRA scores are on a scale from one to 10, with group 1 representing the lowest-risk banking systems and group 10 being the highest risk.

Credit losses are also seen to “stay flattish,” S&P Global said.

“We expect the sector’s credit costs to stay at 0.5%-0.6% of gross loans over the next two years. The rising share of higher-risk (and higher-yielding) consumer loans is likely to lead to a manageable deterioration in the nonperforming loan ratio.”

“Large corporates, which form the bulk of the sector’s loan portfolio, should remain resilient. Banks with higher exposure to unsecured loans could see elevated credit costs as the portfolio matures,” it added.

On the other hand, it expects banks’ profitability to decline as margin expansion weakens.

“Earnings could moderate over the next two years. The sector’s return on average assets could normalize to the long-term average of 1.2%-1.4% over the next two years, after peaking at about 1.5% in 2023.”

“This is because net interest margins will decline in line with policy rates. A moderating cost-to-income ratio and increasing share of retail loans could push profitability above our forecast.”

S&P Global also flagged risks such as disruptions in the property market.

“A sharp correction in asset prices would hurt asset quality given banks’ sizable exposure to the residential and commercial real estate markets. Real estate loans form about 21% of sector loans; two-thirds are commercial real estate loans,” it said.

The exposure of Philippine banks and trust entities to the property sector declined to 19.92% at end-June, the latest central bank data showed.

This was its lowest ratio in four and a half years or since the 19.84% seen as of December 2019.

“Notably, office vacancy rates have stayed sustainably elevated in Metro Manila. While a fallout in the property sector is not our base case, it is a key downside risk amid higher interest rates and challenging global credit conditions,” S&P added. – Luisa Maria Jacinta C. Jocson, Reporter