When the Philippines took over from Malaysia as chair of the Association of Southeast Asian Nations (ASEAN), expectations ran high that the country could use its one-year term to attract investment and catch up with the more successful neighbors driving the region’s growth story.
With two months left in 2026, those hopes have been dashed. The country has been Southeast Asia’s worst-hit by high energy prices since the U.S.-Iran war began in February.
“For decades, the Philippines has been described as a country of enormous promise. It has a young population, a large domestic market, a strategic location, and a highly capable workforce,” Ruben Carlo Asuncion, chief economist of the Union Bank of the Philippines, says. “Yet it has often struggled to convert these advantages into sustained gains in investment, productivity, and competitiveness.”
He notes that the start of 2026 brought expectations for strong growth supported by easing inflation, lower interest rates, resilient household spending, and infrastructure investment. “Instead, the economy faced a series of shocks that slowed momentum and reignited inflation pressures,” he says.
What was meant to be a breakout year, highlighted by the Philippines’ turn as ASEAN chair, has instead become a case study in how the country keeps falling short: its structural advantages are outweighed by corruption, institutional dysfunction, and energy insecurity.
Some of the Philippines’ woes—particularly energy prices—are out of the country’s control, and may ease in 2027. In fact, the World Bank expects a rebound to 5.2% in 2027, on higher public spending and easing inflation.
Even so, Asuncion sees larger challenges ahead. “The more important question is whether the country can finally break free from its recurring cycle of underachievement.”
Middle-income status a ‘milestone, not a destination’
Peter L. U, dean of economics at the University of Asia and the Pacific in Manila, says the university’s early forecasts put GDP growth above 5% this year, similar to the World Bank’s estimates.
However, high oil prices and cuts in public spending—enacted in the wake of a billion-dollar flood control infrastructure scandal last year—have since dragged this forecast down to a meager 3.7%.
The one bright spot is the World Bank’s reclassification of the Philippines as an upper-middle-income economy this year. Yet Asuncion calls it a “milestone, not a destination.”
“Many countries reach middle-income status. Far fewer successfully make the transition to becoming high-income economies…the challenge for the Philippines is no longer how to achieve growth, but how to sustain and improve the quality of that growth,” Asuncion says.
The Philippines’ sluggishness is a contrast to Vietnam, the other Southeast Asian country to get upper-middle-income status this year. Vietnam is expected to grow 7.8% in 2026, according to forecasts from the Asian Development Bank. Exports are also booming, reaching about $375 billion in the first eight months of the year. The Philippines, by comparison, just exported $64 billion.
U puts the milestone in more domestic terms.
“It’s like a child who turned 13, yet is still the same person with the same maturity they had yesterday. That child will need to continue working hard to continue learning more, acquiring more skills and virtues to become an adult,” he says.
One of the biggest obstacles to climbing the income ladder is that investors still struggle to find projects worth backing. Steep electricity costs—some of the highest in Southeast Asia—as well as bureaucracy and corruption, also raise the cost of doing business.
Exposing decades-old problems
The biggest drag on the Philippine economy, however, may be entirely out of its control. Continued tensions in the Middle East will keep energy prices elevated for the foreseeable future, driving inflation in the Philippines.
“Oil prices had already begun to come down but spiked again on renewed clashes around a month ago,” U says. Inflation is back at its April peak of 7.2%.
The Philippines is still absorbing sharply higher prices of fuel and fertilizer, along with a peso trading at record lows against the dollar. Those pressures feed into prices across the board, says Michael Ricafort, chief economist at the Rizal Commercial Banking Corporation.
Ricafort cautions that inflation could pick up further through second-round and pass-through effects, including higher transport costs, businesses pushing for higher prices, rising inflation expectations, and wages. The increase in Metro Manila’s daily minimum wage from 695 to 755 Philippine pesos ($10.91 to $11.85) in September could also lead to pay hikes in other parts of the country, he adds.
Bangko Sentral ng Pilipinas, the country’s central bank, has also been hiking interest rates to rein in inflation—moves that will dampen the consumption spending that has traditionally driven the economy. On Oct. 22, the BSP raised its benchmark rate by 50 basis points to 5.5%. And more hikes could be coming: Nomura now expects the Philippine central bank to raise rates by another 75 basis points to 6.25% by February.
Yet Asuncion argues that these external events exposed the Philippines’ existing weaknesses. “Economies inevitably face external shocks. What differentiates successful economies from struggling ones is the strength of their institutions and their ability to respond effectively,” he says. “The energy shock highlighted the country’s dependence on imported fuel, while the flood control controversy reinforced concerns about governance, accountability, and the efficient use of public resources.”
U makes a similar point: the Gulf conflict and last year’s flood-control scandal mirror challenges long familiar to the Philippines.
“The Middle East conflict and the resultant oil price spikes have been recurrent going back to the 1970s. Similarly, corruption scandals in the Philippines seem to also be recurrent,” U says.
Turning the tides
With just a few months left in the year, attention is back on the Philippines to see whether it can turn things around, starting with the ASEAN Summit in November and into 2027.
“The ASEAN Chairship has opened important economic opportunities, although many of the benefits will take time to materialise and build on initiatives already underway,” Victor Andres Manhit, president of the Manila-based consultancy group Stratbase, says. He adds that key developments include the signing of the ASEAN Digital Economy Framework Agreement expected during the summit.
While the ASEAN Chairship may have provided a platform and opened doors to raise the Philippines’ profile on the investment stage and position it as a key player in the region, “whether the Philippines walks through them depends largely on governance and execution at home,” Asuncion says.
The Philippines does have some structural advantages, despite the grim short-term outlook. “The country’s geostrategic location, abundant natural resources, large and young population, and investment opportunities remain important strengths,” Manhit says.
Ricafort also sees opportunities in what has been touted as one of the Philippines’ greatest strengths: a young population of more than 115 million, with an average age below 25. “The Philippines has been in a demographic sweet spot since 2015, with the majority of the population already of working age,” he says.
Yet this window is also narrowing fast. U warns that declining birth rates and slipping educational quality, as well as the rise of AI, could affect sectors that rely on young workers, like the business process outsourcing industry.
And if there’s one insight from the past year, it’s that institutions are still the the foundation of a well-functioning economy. “The lesson from 2026 is straightforward: there is no shortcut around good governance,” Asuncion says.
“That is ultimately the difference between an economy that is perpetually promising and one that finally fulfills its promise.”
