Growth concerns, governance issues drag markets in fourth quarter

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By Heather Caitlin P. Mañago, Researcher

PHILIPPINE financial markets ended 2025 on a subdued note, as lingering concerns over domestic growth momentum and governance-related uncertainties offset the tailwinds from a sustained monetary easing cycle.

However, analysts warned that escalating Middle East tensions, which drove up global oil prices in early March, could trigger downturns in the local financial markets this year.

In the fourth quarter, the bellwether Philippine Stock Exchange index (PSEi) closed at 6,052.92. This was lower by 7.3% from 6,528.79 at the end of 2024.

Meanwhile, data from the Bankers Association of the Philippines showed the peso closed at P58.79 to the dollar in the October-to-December period, weakening by 1.6% from a year earlier.

Yields on government securities slipped by 44.04 basis points (bps) on an annual basis based on the PHP Bloomberg Valuation Service Reference Rates (BVAL) published on the Philippine Dealing System’s website.

During the period, domestic markets were influenced by a tension between aggressive monetary easing and a sharp deceleration in economic activity, said analysts.

“Overall, the quarter was defined by the tension between supportive monetary settings on one hand and deteriorating growth momentum and weak sentiment on the other,” said Union Bank of the Philippines (UnionBank) Chief Economist Ruben Carlo O. Asuncion.

Metropolitan Bank & Trust Co. (Metrobank) Chief Economist Nicholas Antonio T. Mapa attributed the subdued market performance to “declining consumer and business sentiment” as concerns shifted from global factors to domestic economic activity.

“Macro drivers include sluggish GDP (gross domestic product) growth, benign inflation, and policy rate cuts,” said Security Bank Corp. Chief Economist Angelo B. Taningco.

The Philippine Statistics Authority (PSA) reported on that the fourth-quarter gross domestic product expanded by 3%, slowing down from 5.3% in the fourth quarter of 2024 and the revised 3.9% print in the third quarter of 2025.

In 2025, the economy expanded by 4.4%, much weaker than the 5.7% growth in 2024.

This was the weakest pace in five years, or since the 9.5% contraction in 2020 at the height of the pandemic. Excluding the pandemic, it was the slowest growth since the 3.9% expansion in 2011.

PSA data also showed that headline inflation quickened to 1.8% in December from 1.5% in November but slowed from 2.9% in December 2024.

December’s figure was the fastest since February 2025, although it matched the 1.8% print in March 2025.

December marked the tenth consecutive month that inflation undershot the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target.

Latest PSA data showed inflation rising to 2.4% in February 2026 from 2% in January and 2.1% a year earlier — the highest since January 2025.

“With inflation below target and even lower than the tolerance band, BSP opted to lower policy rates to bolster sagging growth momentum,” said Metrobank’s Mr. Mapa.

By end‑2025, the BSP had lowered its benchmark policy rate by 25 bps to 4.5%, its lowest level since September 2022.

In February 2026, the Monetary Board cut the rate by another 25 bps to 4.25%, the lowest since August 2022.

This brought the BSP’s total reductions to 225 bps since it began its series of monetary policy easing in August 2024.

“The BSP’s two policy rate cuts in Q4 2025 helped support confidence in the domestic economy. Improved investor sentiment likely contributed to gains in select financial markets,” the BSP said in an e-mail.

Sun Life Investment Management and Trust Corp. economist Patrick M. Ella said the rate cuts and easing inflation helped push yields lower. However, he noted that further declines in the yield curve did not materialize due to uncertainty over potential US rate cuts.

From October to December, the US Federal Reserve implemented two interest rate cuts — one in late October, which lowered the federal funds rate to 3.75%-4%, and another in December, which further reduced it to 3.5%-3.75%, completing the Fed’s three rate cuts for 2025.

GOVERNANCE AND SENTIMENT
Sentiment was particularly bruised by the flood control corruption scandal and investigations into infrastructure spending.

The local stock barometer was characterized by “thin trading volumes, persistent foreign outflows, and lingering concerns over economic growth,” according to Mr. Asuncion.

Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp. (RCBC), pointed to tightened infrastructure spending amid the fiasco, alongside political uncertainties that dampened investor confidence.

Philippine government spending on infrastructure fell for a fifth straight month in November.

State disbursements for infrastructure and other capital outlays plunged 45.2% to P48 billion from a year earlier, according to data released by the Department of Budget and Management (DBM) on Jan. 31.

Metrobank’s Mr. Mapa said that 2025 market issues were distinct from the global factors of the previous year, appearing instead to be driven by “concerns on slowing economic activity and fading confidence.”

ROAD AHEAD FOR 2026
Analysts expect remittances, tourism recovery, and resilient business process outsourcing firms (BPOs) to provide support, but they stressed that the broader economic outlook will depend on how quickly confidence rebounds from the governance shocks of late 2025.

“In 2026, market sentiment and financial conditions will depend on the interaction between domestic fundamentals and global developments. A key domestic driver will be how quickly confidence rebounds from recent governance shocks, hinging on the pace and credibility of governance reforms,” said the central bank.

RCBC’s Mr. Ricafort forecasts GDP growth to pick up to 5.3%-5.8% this year, driven by a P1.44-trillion “catch-up” government spending plan in the first quarter.

Finance Secretary Frederick D. Go said the government plans to spend P1.44 trillion in the first quarter as part of catch-up efforts to support the economy after last year’s growth slowdown.

The planned first-quarter outlay under the P6.793‑trillion national budget will help drive economic activity to meet the government’s GDP growth target, Mr. Go said at a Foreign Correspondents Association of the Philippines event on Feb. 2.

The government is targeting 5%-6% GDP growth this year.

“The trajectory of economic recovery will depend heavily on how quickly public spending normalizes and whether confidence can be rebuilt following governance-related disruptions,” Mr. Asuncion said.

Security Bank’s Mr. Taningco warned that “excessive rate cuts may carry risks as inflation could rise again in 2026,” suggesting a gradual easing path that could bring the policy rate down to 4%.

OIL PRICE SHOCK
Meanwhile, escalating geopolitical tensions in the Middle East, alongside soaring global oil prices, have introduced additional risks to the market.

“Overall, oil prices will remain an important swing factor shaping policy expectations, currency performance, and sector leadership through 2026,” said UnionBank’s Mr. Asuncion.

In the first quarter, higher fuel costs may push inflation upward, limiting expectations of deeper BSP rate cuts and nudging bond yields higher. These same dynamics could also pressure the peso by widening the trade deficit, particularly if energy imports continue to outpace export receipts, he said.

Beyond the first quarter, Mr. Asuncion added that market conditions will depend heavily on second‑round effects.

“If oil-driven inflation proves contained and demand conditions soften, the BSP should still have room to recalibrate policy later in the year, which would be supportive for bonds and rate-sensitive equities. However, a prolonged oil shock would favor defensives and energy-linked names, while keeping [foreign exchange] and equities more volatile,” he said.

Security Bank’s Mr. Taningco emphasized that the Philippines is particularly vulnerable to high global oil prices, given its status as a net oil importer and its heavy reliance on Middle Eastern crude.

According to Department of Energy data, about 98% of the country’s oil imports come from the region.

FIXED-INCOME MARKET
BSP: The BSP expects that improving growth prospects and manageable inflation will support market confidence.

Mr. Asuncion: The outlook for fixed income remains favorable, with easing inflation, supportive monetary policy, and steady demand for longer‑dated securities expected to keep yields contained. The curve is positioned for further flattening as investors continue to price in accommodative policy settings. Healthy liquidity conditions and strong demand in auctions should persist, barring any major supply surprises. Overall, fixed income is likely to outperform other asset classes in early 2026 as markets continue to digest the full effects of the easing cycle.

Mr. Mapa: The mix of policy easing from the BSP (although limited) and an eventual pickup in inflation should result in a steepening of the yield curve.

Mr. Ella: Taking its cue from the direction of Fed policy.

Mr. Taningco: Expecting downward pressure this first quarter largely due to risk-off sentiment triggered by the Middle East war, which sparked an oil price shock.

Mr. Ricafort: Fixed-income market remains positive, characterized by high demand for government securities and a trend toward lower yields. Future BSP rate cut/s possible amid relatively slower local economic growth/recovery and could match future Fed rate cut/s expected in the latter part of 2026 to better manage interest rate differentials.

EQUITIES
BSP: Equity market activity will be influenced by the interaction between domestic fundamentals and global developments, including how quickly confidence rebounds from recent governance shocks.

Mr. Asuncion: The equities market enters the first quarter of 2026 on a cautiously constructive footing. While lower interest rates and benign inflation create a supportive valuation environment, investors are likely to remain selective until clearer evidence of an economic turnaround emerges. The market may see intermittent rallies driven by rate‑sensitive sectors and improving sentiment, but sustained upward momentum will depend on better macro data — particularly on government spending, corporate earnings guidance, and consumer demand conditions.

Mr. Ella: Taking its cue from domestic GDP and the direction of Fed policy. We have just begun with corporate earnings season so that will influence the first quarter.

Mr. Taningco: Expecting downward pressure this first quarter largely due to risk-off sentiment triggered by the Middle East war, which sparked an oil price shock.

Mr. Ricafort: PSEi has shown signs of a firm recovery, completely erasing losses from late 2025 as it trades above the 6,000 mark amid continued market optimism about possible inclusion of Philippine government bonds into the JPMorgan Emerging Market Bond Index that would entail additional foreign buying of Philippine government bonds worth about US$3 billion and mostly better local corporate earnings results by local listed companies recently that could fundamentally support valuations.

FOREIGN EXCHANGE (FX) MARKET
BSP: Expects the economy to be buffered from external headwinds by robust remittance inflows, a recovery in tourism, and resilient service export revenues (especially from BPOs).

Mr. Asuncion: The peso is expected to trade within a relatively stable range during the first quarter, influenced by a combination of supportive domestic inflation dynamics, a more patient Federal Reserve, and improving risk sentiment. However, without a clear rebound in domestic growth, significant appreciation is unlikely. The currency is likely to move within the upper‑P57 to P59 band, with modest strengthening possible if global dollar conditions soften and if early economic indicators point to recovering domestic activity.

Mr. Mapa: We could see the FX market impacted by overall direction of the US dollar as well as on BSP policy direction.

Mr. Ella: Taking its cue from the direction of Fed policy.

Mr. Taningco: Expecting downward pressure this first quarter largely due to risk-off sentiment triggered by Middle East war, which sparked an oil price shock.

Mr. Ricafort: Provided that inflation remains stable and within the BSP’s inflation target range of 2%-4%, the peso exchange rate vs. the US dollar remains relatively stable or stronger; also, within the acceptable monetary and fiscal policy space.