World Bank flags weaker outlook and calls for deeper local reforms

Lending agency flags weaker investment and exports; calls for stronger LGU capacity, fiscal management, and bolder reforms to revive the tradables sector

The Philippines needs to strengthen the overall framework for local service delivery and the capacity of Local Government Units (LGUs) to create a virtuous cycle of investment, productivity, and local revenue growth, accelerating growth and job creation nationwide, the World Bank said.

The World Bank stressed this need as it downgraded its growth outlook for the Philippines this year to 5.1 percent from 5.3 percent in June in its Philippine Economic Update released on Tuesday. It also projected growth to remain at 5.3 percent next year before picking up momentum and reaching 5.4 percent in 2027. This trajectory falls short of the government’s target of 6 to 7 percent for 2026 to 2028.

2025 slowdown driven by domestic factors

Jafar Al-Rikabi, World Bank senior economist, said the slowdown this year is due to weaker investment and stalled services exports in the first part of 2025, which dragged growth to an average of 5 percent in the first three quarters, compared to 5.9 percent last year and 6.3 percent in the pre-COVID-19 years.

“Our projection for 2025 to 2027 is for economic growth that, on average, is slower than that of 2024, and this is really because of 2025, driven primarily by domestic factors. And from 2026 to 2027, we think the main drag to growth will come from weaker export demand linked to a decelerating global economy,” he said.

Global downside risks

Al-Rikabi said “external risks are tilted to the downside,” with continuing policy uncertainty, potential financial market corrections, and weaker growth in key economies affecting export demand.

The first key risk is continuing policy uncertainty that could weaken investment and trade. The second is the disruptive financial market corrections, he said.

“Think of this extraordinary investment we’ve had in AI and automation. If some of the returns of that investment disappoint, we could see a disrupted correction in the US and other major economies, and this could result in capital outflows, pressuring capital flows in the Philippines and other emerging markets,” he said.

The last risk to take note of is the possibility of weaker growth in major economies, which could lead to a slowdown in Philippine exports.

Bolder reforms for inclusive growth

Zafer Mustafaoğlu, World Bank Division Director for the Philippines, Malaysia, and Brunei, said the Philippines can leverage its strong economic foundations to implement “bolder reforms that can unlock faster, more inclusive growth.”

“Removing barriers that limit investment and productivity and strengthening competitiveness can create more and better-paying jobs, expand opportunities, and reinforce economic resilience,” he said.

The World Bank noted that the Philippines’ recent growth has favored “non-tradables” (construction, domestic services, and retail). Burdensome regulations have kept manufacturing job creation flat, causing exports to trail regional peers.

Revitalizing the tradables sector

The World Bank noted that the Philippines’ recent growth has tilted toward “non-tradables” such as construction, domestic services, and retail. Burdensome regulations have kept manufacturing job creation flat, reduced the number of exporting firms, and left exports trailing regional peers.

“Strengthening competition in logistics and energy, simplifying and digitizing permits, streamlining customs, and improving investment facilitation would reduce costs, attract private investment, and revive dynamism in the tradables sector, thereby strengthening the Philippines’ growth outlook,” the World Bank said.

Strengthening LGU capacity and fiscal management

Al-Rikabi said reforms to boost the Philippines include strengthening local government unit (LGU) capacity, improving the ease of doing business, and ensuring effective implementation of the medium-term fiscal consolidation plan to raise the tax-to-GDP ratio and improve expenditure efficiency.

On fiscal consolidation, Al-Rikabi noted in particular the need for the implementation of excise taxes on single-use plastics, motor vehicles, and tobacco, as well as improving the effectiveness of tax expenditures.

On the expenditure side, Al-Rikabi said the government should effectively implement the Procurement Reform Act, particularly its beneficial ownership registry provisions, to substantially improve transparency in public procurement.

At the same time, Al-Rikabi said that the government should introduce “an explicit fiscal rule around debt and around deficits.”

Engines of job creation

“For long-term, sustained growth, the Philippines needs to ensure that low-income and middle-income regions continue to grow faster than the National Capital Region as they have done over the past decade,” Al-Rikabi also said.

To achieve this, high-potential urban areas and emerging urban corridors need to be developed as engines of job creation and productivity, generating spillover benefits across the country.”

With growth facing pressure at home and abroad, the World Bank said the challenge for the Philippines is to turn its reform agenda into measurable gains on the ground. Strengthening local capacity, easing business hurdles, and tightening fiscal management, it said, will be crucial in shaping whether the country can regain momentum and deliver broader opportunities in the years ahead.

 

 

The World Bank trimmed its growth forecast for the Philippines and urged the government to strengthen local service delivery, boost competitiveness, and push fiscal and regulatory reforms to support long-term, broad-based expansion.

 

 

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