Political Stability in the Philippines and Its Impact on Foreign Direct Investment: A Risk Assessment and Long-Term Outlook

The Philippines stands at a crossroads in its economic trajectory, balancing the promise of a dynamic, English-speaking workforce and strategic geopolitical positioning against persistent challenges to political stability and governance. For foreign investors, the interplay between these factors is critical in assessing long-term market access and risk. Recent data and policy developments underscore both the opportunities and vulnerabilities inherent in the country's investment climate.

Political Stability: A Mixed Picture

The Philippines was rated "medium risk" in the 2025 Economic Crime and Geopolitics Index (ECGI), scoring 69.2 out of 100, reflecting moderate exposure to corruption, economic crime, and geopolitical pressures, according to the 2025 ECGI rating. This assessment aligns with the World Bank's 2023 percentile rank of 23.7% for political stability and absence of violence, indicating a relatively low level of stability compared to global peers, as noted in the IMF FSAP. The country's political landscape has been shaped by a shift toward authoritarian governance under former President Rodrigo Duterte, marked by the suppression of opposition and consolidation of power, according to the BTI country report. While the 2022 election of Ferdinand Marcos Jr. introduced a veneer of democratic continuity, tensions between his administration and Duterte's political bloc persist, raising concerns about policy fragmentation and delayed reforms, the CMSR assessment warns.

FDI Trends and Structural Challenges

Foreign direct investment (FDI) inflows in the Philippines have shown significant volatility. In early 2025, net FDI plummeted by 61.9% year-on-year in February, with equity capital placements declining by 85.9%-the lowest inflow in five months, as detailed in an FDI plunge analysis. This decline reflects broader structural issues, including poor infrastructure, high logistics costs, and a cumbersome bureaucracy, which have historically hampered investment, as Asianews reported. Despite legislative efforts such as the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE) Act-extending tax exemptions for up to 27 years and streamlining local tax policies-these reforms have yet to fully offset systemic inefficiencies, the Asianews piece noted.

The manufacturing, information and communications technology (ICT), and real estate sectors remain primary recipients of FDI, with equity investments often concentrated in utilities and public services, according to the CMSR assessment. However, the Philippines lags behind regional peers in attracting capital, partly due to political instability and legal uncertainties, an observation echoed by the FDI plunge analysis. For instance, the South China Sea territorial dispute introduces geopolitical risks, as China's military activities and U.S. support for the Philippines create regional tensions that could disrupt trade and investment flows, a risk flagged in the CMSR assessment.

Macroeconomic Resilience and Reform Imperatives

The Philippine economy is projected to grow by 5.4% in 2025 and 5.7% in 2026, supported by monetary easing and legislative measures to stimulate private investment, as the IMF assessment projects. Inflation remains low, and the banking sector is stable, with strong capital buffers, the IMF assessment notes. Yet, structural challenges-such as inadequate infrastructure and limited manufacturing capacity-threaten to constrain growth, a point underscored by the BTI country report. Public debt is also a concern, expected to reach 60% of GDP in 2025–2026, driven by elevated fiscal deficits since the pandemic, Asianews reported.

To enhance investor confidence, the Philippines must address governance weaknesses, including corruption and judicial inefficiencies. The IMF has emphasized the need for fiscal consolidation and improved governance to attract foreign capital. Meanwhile, the Allianz Country Risk Report highlights the importance of resolving political tensions between major factions to avoid delays in critical reforms, as the CMSR assessment observes.

Long-Term Outlook: Risks and Opportunities

For foreign investors, the Philippines offers a compelling mix of advantages: a young, English-speaking workforce; strong remittance inflows; and a growing domestic consumption sector. However, these benefits are tempered by risks. Political instability, if unresolved, could deter long-term commitments, while geopolitical tensions in the South China Sea may disrupt supply chains. Conversely, sustained reforms-particularly in infrastructure, governance, and regulatory clarity-could position the Philippines as a regional investment hub.

The CREATE MORE Act and recent liberalizations in sectors like internet services and wellness centers signal progress, the CMSR assessment notes. Yet, without addressing systemic issues such as corruption and bureaucratic inertia, the country risks falling short of its potential. As one analyst wrote in the FDI plunge analysis, "The Philippines has the ingredients for success, but the recipe requires consistent execution."

Conclusion

The Philippines' investment climate is a study in contrasts: a resilient economy with ambitious reform agendas, yet plagued by political and structural fragilities. For foreign investors, the key lies in balancing optimism about long-term growth with caution regarding short-term risks. Political stability, while improving, remains a work in progress. Until governance reforms and infrastructure development accelerate, the Philippines will continue to straddle the line between opportunity and uncertainty.