The Philippines, ASEAN’s new chair, starts 2026 on a ‘weaker footing’ after trade tensions and a $2 billion corruption scandal

The Philippines is on a “weaker footing” heading into 2026, thanks to corruption scandals and a complicated trade environment, testing President Ferdinand “Bongbong” Marcos Jr. as he assumes the chairmanship of the Association of Southeast Asian Nations (ASEAN).

Malaysia, the previous chair, had a busy 2025, needing to handle both the effects of U.S. President Donald Trump’s steep tariffs on Southeast Asian economies, and a violent border conflict between member countries Thailand and Cambodia.

Marcos, now leading the 11-nation bloc, has bold plans for his chairmanship in 2026, including signing a pact to integrate the region’s digital economy. But he has economic problems closer to home.

Investor confidence has withered in the wake of a corruption scandal, as probes discovered that $2 billion in government funding for flood management projects had disappeared. Since September, the Philippines has been rocked by investigations into misallocated funds, tight links between politicians and contractors, substandard materials and “ghost projects.” Marcos’s approval ratings have dropped amid the scandal.

The corruption scandal has sparked greater public outrage due to the Philippines’ continual problems with tropical storms and flooding. In November, Typhoon Kalmaegi wreaked havoc on portions of central Philippines, causing a death toll of over 200 and economic losses of more than $60 million, from damage to crops and farmland alone.

The news has put the Philippines’ economy on a “weaker footing,” says Lavanya Venkateswaran, senior ASEAN economist at OCBC Bank. Third-quarter GDP growth fell to a four-year low of 4%, prompting Manila to slash growth targets for 2026 through 2028. 

“The authorities will need to prioritize addressing administrative and bureaucratic challenges to restore confidence in public administration,” Venkateswaran says, pointing to persistent inefficiencies like corruption, uneven digitalization and excessive red tape, which hinder economic growth in the Philippines. 

Challenging trade dynamics

The Philippines also occupies a complex position in world trade. Manila boasts closer security ties with the U.S., which officials at times present as an asset as Washington embraces “friendshoring” and supply chains based in friendly countries. Yet economists are skeptical that relatively friendly relations with Washington will confer a trade advantage.

The U.S. and the Philippines signed a trade deal last July that set a 19% tariff on U.S.-bound exports from the Southeast Asian country. In exchange, the Philippines agreed to remove tariffs on key U.S. goods, including agricultural and pharmaceutical products. 

Closer to home, the nation also faces strong competition from ASEAN peers like Singapore, Malaysia, Indonesia and Vietnam, both in terms of attracting foreign investment and connecting into global supply chains. 

In the immediate aftermath of “Liberation Day”, when the U.S. imposed steep tariffs on the rest of the world, some Philippine officials hoped that a relatively lower import duty on the island nation might give it a competitive advantage over other Southeast Asian countries. Yet the U.S.’s recent trade deals with major Asian trading partners has eroded that gap: Vietnam and Malaysia now have tariffs of 20% and 19% respectively, compared to 19% for the Philippines.

The Philippines also has a long-running territorial dispute with China over islands in the South China Sea. Over $5 trillion worth of trade passes through the region annually, and conflict could disrupt critical shipping lanes through the waterway. 

The biggest problem for the country, however, is its limited manufacturing depth, says Andrew Tsang, the senior economist at the ASEAN+3 Macroeconomic Research Office (AMRO). Unlike its peers like Vietnam, the Philippines relies heavily on imported intermediate goods, used as inputs in manufacturing. That means the country has struggled to integrate itself into regional supply chains. “Without faster investment execution and industrial upgrading, the Philippines risks missing the next wave of supply-chain reconfiguration,” he cautions.

Wielding ASEAN leadership

Despite these challenges, experts are hopeful that the Philippines can use its ASEAN chairmanship to rebuild its reputation and strengthen investor trust. 

With its new position, the country “gains a valuable convening role to advance regional priorities on connectivity, resilience, the digital economy, and supply chains,” says Tsang of AMRO.

The Philippines can also leverage multilateral accords like the ASEAN Digital Economy Framework Agreement (DEFA)—which the bloc is set to sign in 2026—to secure its own future by setting broader goals which benefit all neighbors.

The agreement, slated to be the world’s first regional digital economy agreement, would boost not just the country’s business process outsourcing (BPO) industry, but also create a $2 trillion unified digital market across Southeast Asia. This way, “a small business in Mindanao can sell to a customer in Jakarta as easily as they do at home,” explains Nona Pepito, a professor of economics at the Singapore Management University (SMU).

The Philippines can also help make regional supply chains more resilient. It can “lead a push to weave the bloc’s diverse strengths—like Vietnamese manufacturing, Thai automotive parts, and Philippine electronics—into a single, unbreakable ASEAN factory that is shielded from the U.S.-China trade wars,” she adds.

Finally, experts say the country should also invest in equipping its population with digital literacy skills, while pushing for regional standards in AI ethics.

The Philippines’ services sector is a pillar of the country’s growth and a major employer, yet AI could threaten jobs in the BPO sector. Investing in training could help workers find new employment opportunities and avoid getting automated out of a job. 

“The key macroeconomic risk lies in the speed of adjustment,” says Tan Sook Rei, a senior lecturer at Singapore’s James Cook University (JCU). “Whether 2026’s opportunity translates into durable economic gains will ultimately depend on credibility, execution, and governance.”

This story was originally featured on Fortune.com