Philippine purchasing power seen to grow but key risks linger

Consumer purchasing power in the Philippines is projected to rise, BMI Research said, underpinned by steady economic growth and a tight labor market that supports real wage gains.

The outlook, however, faces risks from persistently high inflation, declining remittances and elevated household debt levels.

In a note to clients, BMI, a unit of the Fitch Group, held a “a cautious but positive” view on consumption in the country, expecting a slowdown in real household spending growth to 4.5 percent this 2026 from 4.7 percent last year.

This, BMI said, may weigh on the country’s gross domestic product (GDP), which historically gets about 70 percent of its fuel from consumer spending. The firm said GDP may grow by 5.2 percent this year, though still within the downwardly-revised government target of 5 percent to 6 percent.

“Spending will remain influenced by the elevated inflationary pressures as well as currently high debt levels, along with related debt servicing costs,’ BMI said.

“A tight labor market will support spending, as real wage growth returns to positive territory, which will support purchasing power over 2026,” it added.

The economy expanded by just 3 percent in the fourth quarter of 2025 — the slowest pace in more than 14 years outside the pandemic — and well below market consensus.

The weak outturn dragged the average 2025 growth to 4.4 percent, missing the government’s 5.5 percent to 6.5 percent target. Officials and analysts pointed to a mix of climate-related disruptions and the Marcos administration’s sweeping anti-corruption drive, which had curbed government spending and weighed on business and consumer confidence.

‘Tailwinds’ to growth

BMI shared the same view. “The recent weakness in consumer sentiment is driven by concerns over governmental corruption, spiking inflation and natural disasters,” it noted.

Looking ahead, the Fitch unit said improving outlook over the medium term means that consumers would expand spending, leading to a growth in consumption and providing tailwinds to the growth of the Philippine retail sector over 2026.

But the firm believes there are “wider economic challenges” that Filipino consumers will confront this year.

“In 2026, the consumer sector faces significant headwinds amid a highly uncertain macroeconomic landscape,” BMI said.

“Stubborn core and services inflation, escalating global trade barriers, potential labor market softening and widespread geopolitical uncertainty are shaping consumer behavior and market dynamics,” it added.

Source: Inquirer

Filipino families and VAT

For nearly two decades, Filipinos have lived under the weight of the 12-percent value-added tax (VAT), once 10 percent, under Republic Act 9337, or the Expanded Value Added Tax Law. The increase was justified as a fiscal necessity as the government needed to stabilize revenues, reduce deficits and strengthen its financial performance.

In many aspects, the policy worked. VAT has become one of the government’s most reliable revenue streams, funding education, health care and infrastructure projects essential for national development. However, what was once fiscally sound for the government has not been socially sustainable for Filipino households.

The 2-percent hike may look small on paper but in reality it has drained billions from consumers over the years. VAT touches nearly every aspect of daily life, taxing Filipinos at every turn — from food, utilities, tuition fees, health care and even internet subscriptions.

Unlike direct taxes, it is unavoidable and embedded in every transaction. It is a burden that is shifted from the seller to the final consumer. For families already struggling with inflation, stagnant wages and rising costs of living, that extra 2 percent is not just a number, it’s a decision-maker. It can mean the difference between a meal on the table and an empty stomach, keeping the lights on or sitting in the dark, or paying for medicine or skipping treatment.

It is a silent deduction from every peso earned, making it a burden, and consumers have no choice but to endure higher costs on goods and services. In a country where private consumption accounts for more than 70 percent of the gross domestic product (GDP), the strain on households reverberates across the economy. When families spend less, businesses earn less and growth slows.

The debate over the country’s VAT has resurfaced as some lawmakers push to reduce the rate back to its original 10 percent under Senate Bill 1152, also known as the VAT Reduction Act. By comparison, the Philippines currently imposes one of the highest VAT rates in Southeast Asia — Thailand’s is 7 percent, Malaysia’s is 5 percent and Indonesia’s is 11 percent.

A higher VAT not only leaves consumers with less disposable income, it also affects the competitiveness and cost structures for businesses, making the country less attractive for investment. The VAT Reduction Act seeks to change that by boosting GDP while also easing the burden on Filipino households, particularly low- and middle-income families who see a substantial portion of their earnings consumed by VAT every time they spend.

Supporters of the proposal argue that lowering the VAT rate will immediately increase household disposable income and stimulate consumption. With more money left in the hands of consumers, families could spend beyond basic necessities, reshaping consumption patterns and fueling demand across industries. The added purchasing power will reinforce the households’ role as the primary driver of the Philippine economy.

In theory, the reduction in VAT could even offset part of the government’s revenue loss as higher sales may improve business performance and potentially increase collections from other tax types. Supporters also highlight the public trust issue, arguing that allowing households to retain more of their income may be more efficient than relying on government redistribution programs that are often viewed as vulnerable to inefficiency or leakages.

On the other hand, the Department of Finance (DOF) stresses that rolling back VAT could lead to annual revenue loss of roughly 1 percent of GDP, or about P330 billion from 2026 to 2030. VAT accounts for 26.5 percent of total tax collections and nearly 29.9 percent of government revenues. For fiscal managers, a reduction could widen the budget deficit and likely force the government to borrow more, potentially raising debt, increasing interest payments and affecting the country’s credit rating.

The DOF cautions that while lowering VAT will reduce prices and increase household purchasing power, it could slow down fiscal consolidation efforts that aim to stabilize the country’s finances over the long sterm.

Beyond economics, the debate is also shaped by public sentiment. Issues surrounding corruption, inefficiency and misuse of funds have damaged public trust and influenced how citizens perceive taxation. For many households, VAT has become more than a consumption tax — it is a symbol of governance challenges. When taxpayers see reports of waste, fraud or mismanagement, the willingness to accept a high tax burden declines. Conversely, when revenues are used effectively, taxation can be perceived as a necessary contribution to national development.

If passed, the VAT rollback could mark a turning point in economic policy, one that reconsiders how the government balances revenue generation with household welfare. It could provide a breathing room for families, stimulate consumption, influence business confidence and strengthen the economy from the ground up.

However, this also raises questions about fiscal sustainability and the government’s ability to fund critical services. Policymakers must evaluate whether the potential short-term boost to spending outweighs the long-term implications for public finances and whether complementary reforms, such as improved tax administration, reduced leakages, or a broadened tax base are necessary. Strengthening transparency, improving service delivery and ensuring accountability may be as important as tax reform itself in restoring public confidence.

Ultimately, the VAT debate highlights the need for a balanced, evidence-based approach. Policymakers must weigh immediate household needs against long-term fiscal stability, considering how each option aligns with the country’s broader goals of inclusive growth, resilience and competitiveness. The question is not simply whether VAT should be reduced or maintained, but how any decision fits into a coherent, responsible and forward-looking economic strategy.

Whether the government chooses to retain the 12-percent rate or revert to 10 percent, the path forward should be grounded in credible analysis, realistic planning and transparent communication. As the discussion continues, the challenge for policymakers is to craft a policy approach that secures long-term fiscal health and also acknowledges the everyday realities faced by Filipino families who are affected by every price increase.

Source: Manila Times

Rules for big cash withdrawals tweaked

The Bangko Sentral ng Pilipinas (BSP) said banks should apply enhanced due diligence (EDD) to cash withdrawals exceeding P500,000 on a per-customer—rather than per-transaction—basis, with reviews anchored on a depositor’s normal business activity.

In a memorandum signed on Feb. 6 by Governor Eli Remolona Jr., the central bank said the clarification was meant to ensure that due diligence checks do not unnecessarily delay legitimate transactions. Banks were also instructed to streamline procedures for customers and provide targeted training for branch staff to ensure consistent and effective implementation.

The guidance follows last year’s order requiring closer scrutiny of over-the-counter cash withdrawals above P500,000 to curb money-laundering risks tied to large-value transactions. Under the rules, customers seeking to withdraw more than that amount in cash need only present documents showing a legitimate purpose, such as a deed of sale or hospital bill, while withdrawals made through traceable, non-cash channels do not require additional documentation.

According to the BSP, EDD process must consider the customer’s risk profile, nature of business or operations, and transaction patterns. A streamlined process may be applied to bank-to-bank transactions, such as interbranch or interbank cash requirements or loan disbursements.

For cash payouts or withdrawals during declared calamities or emergencies, the BSP said certification from the head of agency may be obtained.

Meanwhile, more rigorous due diligence checks will be applied when transactions deviate from a customer’s expected behavior or present heightened risks.

Former Finance Secretary Cesar Purisima earlier called on local policymakers to adopt tougher curbs on cash transactions. He warned that the country’s reliance on envelopes and bags of banknotes has made it easier for corruption to thrive.

This, amid a widening probe into anomalous flood control projects, which implicated lawmakers, members of the Cabinet, government engineers and private contractors.

Since the start of its crackdown last year, the Anti-Money Laundering Council has obtained court approvals to freeze assets totaling P24.7 billion, believed to be connected to the massive corruption scandal.

Remolona had warned that the graft fallout could risk dragging the Philippines back onto the Financial Action Task Force’s “gray list”—a watch list the country had just exited in early 2025 after over three years of efforts to remedy gaps in its antimoney laundering and counterterrorism financing campaigns.

Source: Inquirer