Philippines corruption scandal darkens outlook for one of Asia’s growth stars
The scandal is now bleeding into financial markets, with economists revising their growth projections
[MANILA] A widening corruption scandal in the Philippines, involving billions of US dollars in fraudulent flood-control allocations, has triggered mass protests, rattled investor confidence and cast a shadow over the country’s once-promising economic outlook.
The unfolding revelations, which expose how public funds were funnelled into ghost projects and padded contracts, are not only shaking political stability but also feeding into a broader regional fury over inequality and government excess.
Congressional hearings have revealed allegations of collusion among lawmakers, public works officials and contractors to divert billions from flood-control projects. Audits found some projects were substandard or non-existent while witnesses claimed cash-filled suitcases were delivered to politicians’ homes – accusations those implicated have denied but now central to a growing public backlash.
The scandal is now bleeding into financial markets. Economists are revising their growth projections down and credit rating agencies have signalled that continued erosion of institutional trust could affect the Philippines’ investment-grade status. For a nation repeatedly ravaged by typhoons and flooding, the betrayal over infrastructure that could have saved lives cuts deep.
Last month, tens of thousands poured into the streets across major cities in some of the largest demonstrations since President Ferdinand Marcos Jr said in July that flood-control budgets were being looted.
The unrest in the Philippines echoes violent protests in Indonesia, where youth-led movements railed against elite corruption, and in Nepal, where rising inequality has fuelled anti-government marches – marking a growing regional backlash against deepening wealth divides.
A NEWSLETTER FOR YOU
Friday, 8.30 am
Asean Business
Business insights centering on South-east Asia's fast-growing economies.
The economic fallout from the investigations in the Philippines could show up mainly in slower government spending, which accounts for about a fifth of output.
Infrastructure rollout will likely be delayed as agencies increase scrutiny of projects, which could dent economic growth for the rest of the year, according to economists.
Angelo Taningco, chief economist at Security Bank, said he trimmed his estimate for second-half economic growth to 5.5 per cent from 5.8 per cent partly due to “increased political risk” from the corruption probe that “would dampen both government spending and capital formation.” He projects full-year growth at 5.5 per cent, which would be at the low end of the government’s target.
Patrick Ella, portfolio manager at Sun Life Investment Management and Trust Corporation, also sees gross domestic product expanding by mid-5 per cent for the full year, lower than his earlier forecast of 6 per cent.
Economic growth could however slow to as low as 4.3 per cent in a scenario where government spending completely grinds to a halt, he said.
The corruption scandal adds to headwinds from higher US tariffs imposed in August that have already slowed factory activity. The central bank this week warned of weaker investment inflows and softer growth in key service exports.
Philippine assets have already been hit by the worsening scandal. The peso was Asia’s worst performer against the US dollar in September, as weak sentiment added to pressure from the greenback’s rebound.
The nation’s benchmark stock index earlier this week suffered its longest losing streak this year as offshore investors retreated.
Credit score
Economic growth is one of the key quantitative factors that credit watchers use to assess a country’s credit score or ability to repay debt. A faltering economic recovery along with a deterioration in government’s fiscal and debt positions, weakening of the country’s external balance sheet, and reversal of reforms are typically reasons for a downgrade, according to ratings firms.
“If we see prolonged and intensified social unrest – against a backdrop of heightened political tensions – growth could soften, and fiscal consolidation could slow as legislative attention shifts from reforms to domestic politics,” said Young Kim, an analyst at the sovereign risk group at Moody’s Ratings.
Still, current developments may not materially change Moody’s assessment of the country’s political risk and institutional strength in the near term, “which remain broadly in line with or above peers and are well positioned at present,” Kim said.
Some analysts see the Philippines being able to withstand challenges and grow faster in the coming years. Thanks to recent and ongoing economic and fiscal reforms, the Philippines has been enjoying investment-grade ratings, which allow the government and businesses to borrow at lower interest rates. The consumption-driven economy has also fared better than regional peers in recent years.
Philippine GDP may grow by an average of 6.3 per cent over the next three years, said YeeFarn Phua, a director at S&P Global Ratings, who’s projected a 5.6 per cent expansion for 2025. Foreign direct investment will be supported by a law that cuts corporate income taxes and boosts incentives for businesses along with other recent reforms, he said.
Marcos’ move to reallocate spending meant for flood infrastructure into social services could also cushion the economic impact of the scandal, according to Bank of the Philippine Islands’ lead economist Emilio Neri.
The corruption crackdown could bring gains in the long run if it addresses governance issues, Pantheon Macroeconomics economists Miguel Chanco and Meekita Gupta said in a note last month.
The Philippines has ranked below peers in last year’s Transparency International Corruption Perceptions Index.
“The bigger the cleanup in the short run, however painful for current activity, the better it will be for the economy’s long-term prospects,” they said. BLOOMBERG
Share with us your feedback on BT's products and services
