The Impact of Government Policies on Business in the Philippines

The Philippine economy grew by 5.6 percent in 2024, falling short of the government’s 6 to 6.5 percent target. This gap between ambition and outcome is where the conversation about government policy and business gets real. For anyone running a company or planning to start one in the Philippines, the question isn’t whether policies matter—it’s which ones change the math on your costs, your competition, and your ability to plan ahead.

The gap between the 5.6 percent actual and the 6 to 8 percent target for 2025 reflects real headwinds: high inflation, elevated interest rates, typhoon damage, and weak global demand. But policy changes over the past several years have also reshaped the landscape for businesses in ways that are still playing out. Understanding which reforms matter most—and which complications remain—can help business owners make better decisions about where to invest, how to structure, and what to expect.

Tax Reforms That Changed the Bottom Line

Tax policy has been the most direct lever affecting business costs. The 2021 Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act reduced the corporate income tax rate and restructured incentives for foreign investors. The follow-up CREATE MORE Act, passed in November 2024, extended tax exemptions up to 27 years, added tax-deductible expenses, and streamlined local tax policies. For a manufacturing firm or a BPO operator deciding where to locate within Southeast Asia, that extended incentive window changes the comparison with Vietnam or Thailand.

Earlier reforms also left their mark. The Extended VAT Reform raised VAT from 10 to 12 percent and corporate income tax from 32 to 35 percent, a move that seems counterintuitive compared to the recent cuts. The Sin Tax Law imposed higher taxes on smoking and drinking products, with 2024 sin taxes contributing about P300 billion to PhilHealth. These reforms helped achieve macroeconomic stability: growth rose from 2–3 percent in the 1990s to 5–6 percent by the 2020s, while inflation fell from 10–12 percent to 2–4 percent over the same period.

Foreign Ownership Rules and What They Mean for Competition

For years, foreign investors cited ownership restrictions as a primary reason to bypass the Philippines. That changed with three legislative packages passed in 2022. The amendments to the Public Service Act allowed 100 percent foreign ownership in public services such as railways, airports, and expressways, while retaining restrictions in six public utilities: electricity distribution and transmission, water and wastewater systems, petroleum pipeline transmission, seaports, and public utility vehicles. The Retail Trade Liberalization Act lowered paid-up capital requirements for foreign-owned retail businesses and reduced local content requirements. The Foreign Investment Act amendments eliminated foreign ownership restrictions in most sectors except those reserved by the 1987 Constitution and the Foreign Investment Negative List.

The practical effect for local businesses is mixed. A Filipino-owned logistics company now faces potential competition from fully foreign-owned entrants in expressways and airports. But a small retailer can also benefit from foreign partners who bring capital and supply chain expertise that wasn’t accessible before. The key distinction is sector-specific: if your business operates in one of the six reserved public utilities, the ownership restrictions still apply. If you’re in retail, services, or manufacturing, the playing field has shifted.

Interest Rates, Inflation, and the Cost of Capital

Monetary policy has been a dominant concern for businesses carrying debt or planning expansion. The Bangko Sentral ng Pilipinas (BSP) cut benchmark interest rates by 100 basis points since August 2024, with a 5.5 percent benchmark rate that remains restrictive. For a small business with a variable-rate loan, each rate cut reduces monthly interest payments, but the cumulative effect of earlier hikes still means borrowing costs are higher than they were in 2022.

Inflation averaged 3.2 percent in 2024, within the BSP target range of 2 to 4 percent for the first time in three years. A June 2024 reduction in the rice tariff from 35 to 15 percent helped bring food prices down. For 2025, the BSP forecasts inflation to settle at 2.3 percent, supported by declining international oil prices and weaker global activity. Lower inflation means more predictable input costs and stronger consumer purchasing power, which directly benefits businesses in retail, food service, and consumer goods.

But the external picture is less certain. The International Monetary Fund suggests the Philippines could grow only 5.5 percent in 2025 due to U.S. tariffs on global trade and investments. The balance of payments recorded a surplus of $609 million in 2024, down from $3.7 billion the previous year, while the current account deficit widened to $17.5 billion (3.8 percent of GDP) from $12.4 billion (2.8 percent of GDP) in 2023. A wider current account deficit means the country is importing more than it exports, which can pressure the peso and raise costs for businesses that rely on imported raw materials or equipment.

What Businesses Should Do With This Information

Reassess Your Sector’s Ownership and Incentive Landscape

If your business falls under a sector now open to 100 percent foreign ownership, expect new competitors with deeper pockets. The response isn’t to panic but to identify advantages that foreign entrants can’t easily replicate: local market knowledge, established supplier relationships, and regulatory familiarity. If you’re in a sector with extended tax incentives under CREATE MORE, now is the time to review whether your expansion plans qualify for the 27-year exemption window. The souvenir business model is one example of a sector where local knowledge remains a durable advantage.

Manage Interest Rate Exposure

With the BSP benchmark at 5.5 percent and further cuts possible, businesses with variable-rate loans should model their cash flow under different rate scenarios. If you’re planning to take on new debt, locking in fixed rates for the medium term may be prudent while rates are declining but still elevated relative to historical lows. For businesses with significant import exposure, the widening current account deficit and potential peso depreciation mean hedging currency risk deserves attention.

Prepare for Regulatory Compliance Costs

Despite liberalization, the Philippines still ranks 52nd in competitiveness, and investors cite red tape and regulatory uncertainty as persistent issues. Businesses should budget for compliance costs—permits, local government fees, legal counsel—as a fixed operating expense rather than a one-time setup cost. The CREATE MORE Act streamlined some local tax policies, but inconsistent enforcement across municipalities remains a challenge. Building relationships with local government units and industry associations can help navigate these inconsistencies.

Frequently Asked Questions

Government policy in the Philippines is not a single force but a collection of overlapping changes—some that lower costs and open markets, others that create uncertainty and compliance burdens. The businesses that navigate this environment best are those that track which policies affect their specific sector, model the financial impact of interest rate and inflation trends, and build regulatory compliance into their operating budget rather than treating it as an afterthought. The gap between what the law says and how it’s implemented on the ground is where the real work happens.

If this was useful, you might also want to read basic IT support strategies for small businesses navigating regulatory compliance.

Sources

Print Your Way to Profit: Souvenir Business in the Philippines — A practical guide to starting a souvenir business, illustrating how local market knowledge creates advantages even as foreign ownership rules change.

Basic IT Support for Small Businesses: Keeping Things Running — Covers technology strategies that help small businesses manage compliance and operational costs in a changing regulatory environment.

Philippines Market Overview. U.S. International Trade Administration, 2025.

Economic Policy Reforms and the Philippine Economy. BusinessWorld, November 2024.

Philippines Economic Update. World Bank, various editions 2020–2025.