Inflation Falls, Risks Remain: World Bank Pushes SME Reforms for Philippine Growth

The June 2025 Philippines Economic Update, titled "Small Business, Big Impact: Catalyzing Philippine Growth," delivers an insightful and comprehensive look at the country’s economic performance. Compiled by the World Bank’s Economic Policy Global Practice in partnership with the Finance, Competitiveness and Innovation (FCI); Poverty; and Social Protection Global Practices, this report is the work of economists and policy specialists including Lars Christian Moller, Gonzalo Varela, Jaime Frias, Jaffar Al-Rikabi, and their multidisciplinary teams. The update arrives at a crucial time for the Philippines, as it navigates global volatility while laying a resilient foundation for long-term growth, with a special focus on empowering small and medium-sized enterprises (SMEs) to participate more actively in global trade.

Global Headwinds Cast a Shadow Over Local Momentum

The global economic backdrop in early 2025 has been increasingly turbulent. Intensifying trade tensions, high policy uncertainty, and geopolitical instability, particularly in energy markets, have undermined growth worldwide. Inflation, though easing, remains high in advanced economies. The Philippines has not been immune to these dynamics. GDP growth slipped to 5.4 percent in the first quarter of 2025 from 5.9 percent a year earlier, driven by sluggish services and industrial activity. Yet the country still outperformed regional peers like Malaysia and Thailand, though it lagged behind Vietnam. The slowdown was largely attributed to weaker export demand for electronics, chemicals, and machinery, and a deceleration in services such as food and accommodation, tourism, and IT-related business processes. However, private consumption remained robust, supported by a strong labor market, easing inflation, and increased government spending in advance of mid-year elections.

The report emphasizes that agriculture showed a rebound after earlier weather-related declines, and investment in infrastructure and equipment helped partially offset export weakness. Imports surged, fueled by domestic demand for telecommunications and consumer goods. The Philippine peso strengthened in line with regional trends, as the US dollar weakened, while financial markets remained relatively stable.

Inflation Eases and Financial Conditions Improve

One of the more encouraging economic indicators has been the significant drop in inflation. Headline inflation averaged just 1.9 percent in the first five months of 2025, falling well below the Bangko Sentral ng Pilipinas (BSP)’s target range. For the country’s poorest households, inflation dropped even more steeply, to just 1.0 percent, thanks to lower rice and fuel prices. In response, the BSP resumed monetary easing in April, cutting its key policy rate to 5.5 percent and lowering banks’ reserve requirement ratio. These moves are expected to support investment and lending activity.

The country also marked an institutional achievement with its removal from the Financial Action Task Force’s grey list, following substantial reforms in anti-money laundering and counterterrorism financing. This step is projected to lower compliance costs for financial institutions, facilitate cross-border financial transactions, and boost international investor confidence.

The financial sector remains resilient. Non-performing loans held steady at 3.4 percent, and the capital adequacy ratio remained above 15 percent, indicating that the banking system has the buffers necessary to weather shocks. Credit growth to the private sector picked up to 12.1 percent, the highest since 2022, even as the government continues to grapple with fiscal constraints.

Fiscal Strain and External Risks Call for Caution

While inflation and financial indicators have improved, fiscal policy remains under pressure. The fiscal deficit surged to 7.3 percent of GDP in Q1 2025, a significant increase from 4.5 percent the previous year. This spike is attributed to increased government spending ahead of the May elections, particularly on social programs, local government transfers, and capital infrastructure. Public debt rose to 62 percent of GDP, though the World Bank deems it sustainable for now.

The report cautions that the Philippines’ current account deficit has also widened, driven by rising imports and weaker export earnings. Meanwhile, foreign direct investment has declined to its lowest first-quarter level since the pandemic. These trends suggest continued vulnerability to global trade volatility, commodity price swings, and tightening financial conditions.

Looking ahead, growth is projected at 5.3 percent for 2025, slightly down from earlier forecasts, with external risks tilted to the downside. The Philippines' resilience will hinge on its ability to maintain macroeconomic stability while executing structural reforms that can boost productivity and domestic competitiveness.

SMEs: A Sleeping Giant in the Philippine Economy

A central theme of the report is the untapped potential of Philippine SMEs. Comprising 63 percent of total employment and 36 percent of value-added, SMEs are vital to the domestic economy. However, they remain largely absent from export markets and global value chains. Compared to their peers in neighboring countries, Filipino SMEs are far less likely to export or obtain internationally recognized quality certifications. This lack of integration stunts productivity growth and job creation.

Firm-level research and interviews identified three key barriers: restricted access to affordable testing and certification services; limited access to credit for upgrading equipment and meeting standards; and poor access to market intelligence and business matchmaking. Addressing these issues is not just a matter of economic efficiency; it’s a strategy for equitable development.

The report calls for a more strategic government approach that focuses on high-potential SMEs. It recommends that the Department of Trade and Industry (DTI) lead this effort, leveraging its Negosyo Centers and global attaché network to facilitate certification, connect SMEs with multinational buyers, and support scale-up efforts. It also suggests treating livelihood grants to microenterprises as social protection, allowing DTI to concentrate on more dynamic, export-ready firms.

Unlocking Growth Through Reform and Strategic Investment

Despite external challenges, the Philippines retains strong fundamentals. The labor market remains dynamic, and poverty is declining, projected to fall to 14.4 percent in 2025 and 12.1 percent by 2027. Still, climate vulnerability and food inflation could derail gains without careful policy responses. The report concludes that the key to long-term, inclusive growth lies in strengthening fiscal foundations, enhancing business readiness, and unlocking the productivity potential of SMEs. With smart reforms and targeted investment, small businesses may yet deliver the biggest impact on the nation’s economic future.