Philippine Growth Faces New Pressure as Banks Tighten Lending

 

The Philippine economy could face another obstacle to recovery in the second half of 2026 as banks become more selective in extending loans to households and businesses, potentially weakening borrowing, investment and consumer activity.

Jonathan Koh, Asia economist at Standard Chartered Bank, said tighter lending standards are already becoming visible across major corporations, middle-market firms and small and medium enterprises. The trend is also reaching consumers, with growth in credit card and salary loans beginning to moderate.

The development adds another layer of pressure to an economy that has already lost momentum. Philippine gross domestic product expanded by just 2.3 percent in the second quarter, down from 2.8 percent in the first quarter. Growth for the first half of the year consequently stood at 2.6 percent.

Banks Become More Cautious

Koh pointed to the Bangko Sentral ng Pilipinas Senior Bank Loan Officers’ Survey as evidence that lending conditions have become more restrictive across several segments of the economy.

One factor weighing on banks is the decline in the market value of government securities held on their balance sheets. These mark-to-market losses have not erased banks’ capital buffers, but they have reduced some of the flexibility institutions have when deciding how aggressively to lend.

That caution is particularly relevant at a time when confidence in the economic outlook remains subdued. When lenders become less willing to assume risk, companies can find it harder to finance expansion, while consumers may postpone major purchases that depend on credit.

In practical terms, tighter lending can act like a brake on an economy. Even when businesses and households remain willing to spend or invest, more expensive or harder-to-obtain financing can prevent those plans from moving forward.

Higher Rates Begin to Reach Borrowers

The lending slowdown is also being reinforced by the delayed effects of previous BSP interest-rate increases.

Business loan growth has already begun to soften, and Standard Chartered expects the deceleration to become more pronounced as higher policy rates work their way through commercial lending rates.

For companies, more expensive financing can raise the cost of expansion, equipment purchases and working capital. Smaller businesses may be particularly sensitive because they often rely more heavily on bank credit than larger firms with access to broader financing options.

Households are facing a similar squeeze. Moderating growth in credit card and salary loans suggests that consumers are becoming more restrained in taking on additional debt. If borrowing costs remain elevated and banks maintain stricter lending standards, household credit could provide less support to consumption in the months ahead.

Growth Forecasts Have Been Cut

The increasingly restrictive financial environment comes as economic activity is already running below expectations.

Standard Chartered has reduced its 2026 Philippine GDP growth forecast to 3.5 percent, putting its projection at the bottom of the government's 3.5 percent to 4.5 percent target range.

The bank's assessment reflects several overlapping concerns, including weak investment, elevated inflation, softer household spending and slower credit expansion.

Citi is also cautious about domestic demand, although it sees a potential improvement in the third quarter. The bank expects growth to recover to the low-3 percent range as easing inflation could strengthen household purchasing power and encourage consumption.

Citi has retained its full-year growth forecast at 3.2 percent, below both the Standard Chartered estimate and the government's official target.

BSP Rate Decision Comes Under Greater Scrutiny

The competing economic forecasts have also intensified attention on the BSP's next policy move.

Standard Chartered has reversed its earlier expectation of a 25-basis-point rate increase on August 27. Koh said the combination of weak economic growth and early signs that underlying inflation may be easing gives the central bank greater room to remain on hold.

Citi takes a different position. It continues to anticipate a 25-basis-point increase in August, followed by another hike in October.

The bank argues that the current 4.75 percent policy rate provides only a limited cushion above its 4.5 percent inflation forecast for 2027, leaving policymakers with reason to remain cautious about future price pressures.

However, Citi also sees circumstances that could lead to an October pause. Such a shift could become more likely if the BSP reduces its inflation outlook following its August meeting or if third-quarter economic data confirm that growth remains weak.

Credit Could Become a Key Test for the Recovery

The central issue for the Philippine economy is increasingly whether lower inflation can translate into stronger spending and investment quickly enough to offset the drag from expensive and less accessible credit.

If borrowing costs remain elevated while banks continue tightening standards, businesses may defer investments and households may limit debt-financed consumption. That could make an already subdued growth environment even more difficult to reverse.

For policymakers, the challenge is therefore not limited to inflation alone. The BSP must also weigh how financial conditions are affecting economic activity, particularly as previous rate increases continue to filter through the banking system.

The next few months will reveal whether easing price pressures can revive domestic demand or whether tighter credit will remain a significant constraint on the Philippine economy through the remainder of 2026.