Marcos Orders 10% Cut to Philippine Government Spending as Iran War Fuels Stagflation Risks

Manila pushes fiscal restraint amid Iran‑driven shock

President Ferdinand Marcos Jr. announced on May 18 that all government agencies must slash operating costs by at least 10 %, translating to roughly $4.8 billion in annual savings. The directive comes as the Iran‑UAE war pushes global oil prices above $115 per barrel, inflating import bills and tightening the Philippines’ already narrow current‑account balance.

Market context: energy shock meets fiscal pressure

• Oil import bill: The Philippines imports about 70 % of its oil needs. With Brent crude up 22 % year‑to‑date, the nation’s quarterly oil import cost is projected to rise from $6.2 billion in Q1 2025 to $7.6 billion in Q2 2025, a $1.4 billion jump.
• Inflation: Consumer price index (CPI) inflation hit 5.9 % in April, well above the Bangko Sentral ng Pilipinas (BSP) target range of 2‑4 %. Food and transport categories are the primary drivers, both reacting sharply to fuel price spikes.
• Fiscal gap: The 2025 budget showed a primary deficit of 2.3 % of GDP. With the oil shock, the deficit is now estimated at 3.1 %, prompting the Treasury to seek immediate savings.
• Currency pressure: The peso weakened to ₱58.5 per US$, its lowest level since 2022, raising the cost of debt service on foreign‑currency loans.
• Growth outlook: Fitch Ratings downgraded the Philippines’ outlook to negative in April, citing “energy‑price volatility and fiscal strain.” The agency now projects GDP growth of 4.8 % for 2025, down from the previously forecast 5.4 %.

Strategic implications for the economy

1. Fiscal tightening vs. stimulus balance – The 10 % cut is a clear pivot toward austerity. While it will help narrow the fiscal gap, it risks dampening demand in the short term, especially in sectors reliant on government contracts such as infrastructure, health, and education.
2. Public‑sector efficiency push – Agencies are expected to prioritize digital procurement, reduce travel expenses, and defer non‑essential capital projects. This could accelerate the adoption of e‑procurement platforms like Procurement Management System (PMS), delivering longer‑term cost savings.
3. Energy security considerations – The announcement dovetails with ASEAN’s proposal for a shared fuel reserve. If realized, the Philippines could mitigate future supply shocks, but the reserve will require upfront capital—potentially conflicting with the current spending freeze.
4. Impact on social programs – Cuts may affect cash‑transfer schemes and subsidies. The administration has signaled that conditional cash transfers (CCT) will be protected, but ancillary programs (e.g., local government unit (LGU) development funds) could see reductions, raising concerns about widening inequality.
5. Investor sentiment – Bond yields on the 10‑year Philippine Treasury rose to 7.85 % after the announcement, reflecting heightened risk perception. However, the clear fiscal signal could stabilize yields over the medium term if the government demonstrates disciplined execution.

What it means for businesses and investors

• Energy‑intensive industries (e.g., petrochemicals, shipping) will face higher input costs. Companies with hedged fuel contracts will outperform peers lacking such protection.
• Construction and infrastructure firms should anticipate a slowdown in public‑sector projects. Those with strong private‑sector pipelines or regional diversification may weather the dip better.
• Consumer goods firms will need to manage pricing pressure as households grapple with higher transport and food costs. Brands that can offer value‑oriented SKUs are likely to retain market share.
• Financial institutions may see a rise in non‑performing loans if the spending cuts affect borrower cash flow. Banks with robust credit‑risk frameworks and exposure to resilient sectors (e.g., telecom, fintech) will be better positioned.

Outlook

Marcos’ 10 % expense reduction is a decisive fiscal response to an external shock that is unlikely to abate soon. The move should help contain the widening deficit and reassure credit rating agencies, but it will also test the resilience of a domestic economy already strained by inflation and a weakening peso. The key for policymakers will be to balance short‑term austerity with targeted support for the most vulnerable households, while accelerating reforms that improve public‑sector efficiency and diversify energy sources.

*For a deeper look at the Philippines’ fiscal position, see the latest BSP Monetary Policy Report and Fitch’s Country Report – Philippines, May 2026.*