The Philippines has quietly pushed back its deficit targets again, and Fitch Ratings says the country's investment grade now depends on a recovery in investment that has yet to appear.

The 2027 budget proposal targets a deficit of 5.1% of GDP, slower consolidation than the 4.8% envisaged in last year's medium-term fiscal framework. The government now forecasts a 3.5% deficit by 2030, against 3.1% in last year's plan. "Repeated upward revisions to medium-term deficit targets suggest the government continues to prioritise supporting growth over a faster pace of consolidation," Fitch said in a Fitch Wire commentary published on August 20.

The revisions themselves are small. The growing pressure is not. The government has cut its medium-term revenue expectation to around 15.5% of GDP from about 16.5%, and is absorbing the shortfall by trimming infrastructure disbursements to roughly 4% of GDP - just over a percentage point lower across the projection horizon than last year's budget assumed.

Slowing growth is to blame. GDP expanded just 2.3% year on year in the second quarter, with gross fixed capital formation contracting 8% quarter on quarter. Fitch attributes the investment slump to the global energy-price shock and to public infrastructure disbursements that remain subdued after last year's corruption investigations into flood-control projects. High energy costs weighed on household consumption too, and the weakness runs across both the public and private sectors.

A country cutting capital spending because growth is weak, when weak growth is what the capital spending was supposed to fix, is in an awkward place. Fitch is careful about the mechanics - governance reforms could raise spending efficiency, and a shift towards public-private partnerships and local government units may offset lower central disbursements - but the direction of travel is a state investing less in the years it most needs to invest more.

The agency revised the outlook on the Philippines' 'BBB' rating to negative from stable in April, citing risks to medium-term growth potential, and its language has not softened since. "Medium-term debt stabilisation and the evolution of the 'BBB' sovereign rating will depend increasingly on how sharply growth and investment recover from subdued levels," it said.

Manila has been marking down its own ambitions in step. The government now forecasts medium-term growth of 5%-6%, down from 6%-7% in last year's budget and 6.5%-8% two years ago. Fitch expects about 6% but says risks are tilted towards weaker outcomes, and sees general government debt rising slightly in the near term before stabilising.

It is a sharp reversal for a sovereign that was a step away from an 'A' rating as recently as late 2024. The energy shock that broke the investment cycle is the same one that has been exposing fiscal fragility around the world; the Philippines is simply further through it than most.