Economic Outlook for Emerging Markets

Central banks in emerging markets, including the Bangko Sentral ng Pilipinas (BSP), are expected to take a cautious approach to monetary policy in the coming year. This is due to changes in global trade dynamics, according to S&P Global Ratings. The credit rating agency believes that despite the US Federal Reserve’s recent decision to lower borrowing costs, emerging market policy rates will remain relatively stable.

Monetary Policy Adjustments

The US Federal Reserve reduced its key interest rate by 25 basis points to a range of 3.5 percent to 3.75 percent. This move aims to support employment and stabilize inflation at its two percent target. In response, the BSP also lowered its benchmark rate to 4.5 percent from 4.75 percent. This is the fifth rate cut of the year, following a sharp slowdown in the Philippine economy, which saw growth slump to four percent in the third quarter.

Philippine Economic Performance

The Philippine economy expanded by an average of five percent over the first nine months of 2025. However, this growth was hampered by concerns over flood-control governance. Since beginning its easing cycle in August 2024, the BSP has slashed borrowing costs by a cumulative 200 basis points from a peak of 6.5 percent. Despite this aggressive easing, the credit market has yet to fully respond.

Credit Growth and Lending

Data on domestic lending reflects the sluggishness of the credit market. Loans from universal and commercial banks grew 10.3 percent in October, slowing from 10.5 percent in September. This marks the weakest pace in 16 months, despite significant expansion in liquidity in the financial system. BSP Governor Eli Remolona Jr. stated that the latest quarter-point reduction is intended to revive an economy struggling with a spending slump and dampened investor confidence.

Projections and Expectations

S&P Global projects Philippine GDP will grow 4.8 percent this year, missing the government’s target of 5.5 percent to 6.5 percent. However, the ratings agency expects a recovery to 5.7 percent in 2026, with growth accelerating to 6.5 percent in 2027 and 2028. While the Philippines is expected to gain momentum, S&P Global warned of a "modest slowdown" for emerging markets broadly in 2026 following a stronger-than-expected 2025.

Diverging Trade Performance

Trade performance will increasingly diverge, with tech and AI exporters in Asia outperforming while non-AI exporters face headwinds from higher US tariffs. This divergence will have significant implications for emerging markets, as they navigate the changing global trade landscape.

Conclusion

In conclusion, central banks in emerging markets, including the BSP, are likely to take a measured approach to monetary policy in the coming year. While the Philippine economy is expected to recover, emerging markets broadly may experience a modest slowdown in 2026. As trade dynamics continue to shift, it is essential for these economies to adapt and respond to the changing global landscape.