Political Uncertainty and Investment Risk in the Philippines Amid Sara Duterte's Graft Allegations

The Philippines' political landscape in 2025 has been defined by a toxic mix of graft allegations against Vice President Sara Duterte and a sprawling corruption scandal in flood control projects. These developments have not only deepened public distrust in institutions but also cast a long shadow over foreign direct investment (FDI) and market confidence. As the country heads into 2026, the interplay between political instability and economic performance underscores the fragility of its democratic framework and the risks it poses to long-term investment.

Sara Duterte's Graft Case: A Catalyst for Political Fracture

Vice President Sara Duterte's legal troubles began in February 2025, when the House of Representatives approved an impeachment motion accusing her of graft, betrayal of public trust, and misuse of confidential funds. The Supreme Court later nullified the impeachment as unconstitutional, delaying proceedings until February 2026. This legal limbo has exacerbated tensions between Duterte and President Ferdinand Marcos Jr., fracturing the once-unified UniTeam coalition. The vice president's alleged misuse of P612.5 million in confidential funds during her tenure as Department of Education secretary and vice president has further inflamed public outrage.

The political theatrics surrounding Duterte's case have polarized public opinion. While some view the impeachment as a necessary check on power, others see it as a politically motivated move that distracts from pressing socioeconomic issues like inflation and poverty. This polarization has eroded trust in both the executive and judicial branches, raising questions about the independence of institutions critical to investor confidence.

Flood Control Scandal: A Systemic Governance Crisis

Compounding the political instability is the flood control corruption scandal, which has exposed systemic weaknesses in governance. Since 2023, the Philippines has lost an estimated 42.3–118.5 billion pesos annually due to corruption in flood mitigation projects. Substandard infrastructure, such as incomplete river walls and dikes, has left flood-prone areas vulnerable, exacerbating the damage from typhoons. Public protests demanding accountability have intensified, with thousands calling for the prosecution of officials and the recovery of stolen funds. Thousands have protested demanding accountability and return of stolen funds.

President Marcos Jr. has pledged to jail 37 high-profile figures implicated in the scandal by Christmas 2025, but the fallout has already weakened his administration's credibility. The scandal has also fueled calls for military intervention, though the Armed Forces of the Philippines has reaffirmed its commitment to democratic stability. This erosion of trust in governance has further deterred foreign investors, who now perceive the Philippines as a high-risk destination.

Impact on FDI and Market Confidence

The combined effect of these crises has been a sharp decline in FDI inflows and a deterioration in market sentiment. In March 2025, net FDI dropped to $498 million, the lowest in three months, while by September 2025, it had fallen further to $320 million. Analysts attribute this decline to heightened political uncertainty and governance risks, which have made the Philippines less competitive compared to regional peers like Vietnam and Indonesia.

The Philippine Stock Exchange (PSE) has also underperformed, with liquidity and trading volumes lagging behind those of Thailand and Vietnam. In May 2025, the PSE recorded only $3.0 billion in trading, compared to Thailand's $25.2 billion and Vietnam's $17.9 billion. This disparity reflects divergent investor confidence, with foreign capital favoring markets perceived as more stable and reform-oriented.

Credit rating agencies have taken notice. Fitch Ratings has highlighted the Philippines' political instability as a risk to fiscal policy implementation, while S&P Global has maintained its investment-grade rating but warned of potential downgrades if governance issues persist. The third-quarter GDP growth of 4% in 2025-the weakest non-pandemic rate since 2011-further underscores the economic toll of political dysfunction.

Regional Comparisons and Long-Term Implications

The Philippines' struggles stand in stark contrast to its ASEAN neighbors. Vietnam, for instance, attracted $21.52 billion in FDI in the first half of 2025, driven by political stability and proactive reforms. Indonesia and Malaysia have also maintained steady economic fundamentals, with Indonesia's robust consumer demand and Malaysia's diversified economy insulating them from some of the volatility affecting the Philippines.

For the Philippines to regain investor confidence, it must address the root causes of political instability. This includes strengthening institutional integrity, accelerating infrastructure projects, and ensuring policy continuity. As one analyst noted, "Political noise raises the risk premium investors place on the Philippines compared to neighboring ASEAN countries seen as more stable." Without meaningful reforms, the country risks further capital flight and a prolonged economic slowdown.

Conclusion

The Philippines' political instability in 2025, driven by Sara Duterte's graft allegations and the flood control scandal, has created a high-risk environment for foreign investors. The erosion of trust in governance, coupled with declining FDI and market underperformance, highlights the urgent need for institutional reforms. While the Marcos administration has taken steps to address corruption, the path to restoring investor confidence will require sustained efforts to depoliticize institutions and prioritize long-term economic stability over short-term political gains.