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In the Philippine flood-control corruption scandal, the multibillion-dollar net losses are huge. But without adequate resolution, international pressures could multiply the damage.

In fall 2025, a major government corruption scandal erupted around flood control and mitigation projects under the Department of Public Works and Highways (DPWH).

What makes this scandal different is its magnitude and critical areas. According to international indicators, the Philippines is the world’s most disaster-prone country, plus highly vulnerable to extreme climate events.

Yet, billions of dollars from public funds that were supposed to protect communities from flooding and climate impacts have been plundered.

Investigations revealed a large number of “ghost” projects (funded but never built or poorly executed), inflated costs, and kickbacks to politicians, officials, and contractors — with estimates suggesting a huge portion of budgets was lost to irregularities.

Public outrage grew because these weren’t abstract failures — flooding repeatedly hit vulnerable areas, causing deaths and major damage while projects meant to prevent such harm were allegedly corrupted.

In 2025, economic growth plunged to a historical low of 4.4%. After tanking, markets are ailing.

Meanwhile, the massive collateral damage and spillovers have gone international.
 

From domestic protest...

Domestically, reputational damage has spread since early fall 2025. As a result, public trust has plummeted. Polls show 90% of Filipinos believe officials have colluded to steal flood control funds, indicating widespread corruption at the highest levels of government.

Confidence in key institutions like the Department of Public Works and Highways (DPWH) is extremely low.

Mass protests have erupted across Manila and other cities, signaling broad public fury over billions lost to corruption just as flooding worsens climate vulnerability. Political fallout is reflected by high-profile resignations.

The economic impact is tangible. At the minimum, corruption has cost the Philippine economy up to US$2 billion over two years through lost, substandard, or nonexistent projects. And this estimate is likely to be conservative.

Domestic debates on governance and accountability have intensified, putting sustained pressure on the current government, including efforts to impeach President Marcos Jr.

Unsurprisingly, the Bangko Sentral ng Pilipinas cut key interest rates to around 4.75% in late 2025, in part to support growth amid weaker investor sentiment tied to the corruption drag.

The Philippine Stock Exchange index (PSEi) ended 2025 in the red, underperforming regional peers, with analysts explicitly linking weak market performance to governance concerns including corruption.
 

... to international outrage  

In the 2024/25 Corruption Perceptions Index CPI, the country ranked 114^th out of 180 countries; and 3^rd in ASEAN. In these rankings, the Philippines is behind Laos and barely ahead of Sierra Leone and Angola. It is not a good company.

Let’s follow the money. In terms of illicit financial flows (IFFs), Manila is among the world leaders. In 1960-2011, $410+ billion was moved illegally in or out the Philippines, as well as $5.1 billion flows in 2008-2017.

Risks are compounded by drug trafficking, scams, corruption, tax evasion, with medium-to-high risks in casinos, real estate, money services virtual asset services, and medium risks in banking, securities, and trusts.

International investors and businesses have taken notice. Foreign investors and business groups like European Chamber of Commerce in the Philippines say the scandal stains the country’s reputation as an investment destination.

Similarly, the Nordic Chamber of Commerce has stressed that the rule of law needs to be appropriately enforced in the country.

In international comparison, the ongoing corruption debacle reduces confidence, especially in infrastructure sectors where transparency and accountability are major determinants of investment.
 

Increasing international alarm

Foreign governments and diplomats have intensified their monitoring. Reports by the U.S. State Department have long highlighted “pervasive” corruption in Philippine governance.

Environmental and global climate advocacy groups (e.g., Greenpeace) have come forward to condemn the misuse of climate-tagged funds, framing the scandal as a betrayal of international climate finance commitments.

International media (e.g., TIME, New York Times, and The Guardian) have reported the scandal globally, linking corruption with real human and environmental impacts.

The international reputational damage has harsh economic and financial consequences.
 

Credit ratings at risk

Sovereign credit ratings are tracked by international credit ratings agencies and include focus on governance and corruption risks. Before the onset of the corruption debacle, the Philippines had been poised for a credit rating upgrade (e.g., from BBB+ toward an “A” rating), but the debacle has likely blocked or slowed that progress.

Higher ratings reduce the required return that investors demand and lower borrowing costs for both the government and corporates. A lost upgrade means continuing higher interest costs.

The ongoing political instability and corruption controversies could imperil future credit ratings, as Fitch has cautioned, essentially threatening a future downgrade if the crisis remains unresolved – or it is resolved inadequately.

Government debt costs are likely to rise as investors will demand higher yields on Philippine government bonds to compensate for perceived governance risk. The government must pay more interest to borrow the same amount of money.

Higher yields crowd out public spending on infrastructure, health, and education, which are vital to economic development.
 

Corporate costs, FDI fall, peso pressures

Corporate and financial costs could also rise. Credit rating differentials and governance flags push investors to demand risk premiums - not just for governments, but for private credit backed by their operating environment.

In the Philippines, foreign direct investment (FDI) inflows have slowed significantly, falling well below historical averages and prior to the pandemic levels. Due in part to corruption concerns, the share of FDI has plunged 25% from the prior year. Foreign investors are shifting investment to other ASEAN markets with stronger governance.

Markets and currency have been penalized. The Philippine peso has coped with historical pressure and depreciation linked to investor risk aversion. Today it hovers around 59 pesos per US dollar – that’s 20% less relative to the Duterte years (2016-22).

In October 2025, the onset of the crisis wiped out 1.7 trillion pesos ($29 billion) of the market cap in local equities. Stock market volatility and loss of market value reflect shaken investor confidence.

Slower growth in FDI reduces job creation, technology transfer, and foreign capital inflows. Without sustained growth, Manila is sleep-walking into a middle-income trap.
 

Bilateral aid and multilateral financing under pressure

A loss of trust makes it likelier that foreign aid providers — especially those tied to anti-corruption and climate finance conditions — will attach stricter oversight, audits, or even freeze disbursements.

Multilateral development institutions, such as the World Bank and Asian Development Bank, and climate funds tend to integrate Environmental, Social & Governance (ESG) criteria into financing frameworks.

If governance standards are seen as insufficient, a pervasive corruption scandal, especially one tied to climate resilience projects, could jeopardize access to concessional loans, blended finance, and climate adaptation funds.

Even if loans are not cancelled outright, future agreements will likely include tighter conditionalities and more rigorous anti-fraud safeguards, slowing disbursement timelines and increasing implementation costs.

Worse, global investors using ESG screens may downgrade the Philippine risk profile, making the country less attractive for funds targeting responsible investment.
 

Three scenarios

What about the future? There are three scenarios. If the corruption is tackled with credible structural reforms, a “credible cleanup” is possible. And it will be reflected by upgrades of credit rating, falling bond spreads, rising foreign investment, gradual recovery in ESG standing and expanded support in aid and climate finance.

Unfortunately, it is the least likely scenario to materialize.

If real reforms are shunned, prosecutions prove selective and juridical processes partisan, the “managed damage” scenario will ensure that the crisis will further penalize the political class and foster greater economic erosion.

In this case, the country will be haunted by new scandals.

The third scenario is the darkest. if neither reforms nor pretexts prevail, some form of “governance breakdown” may ensue. Ratings agencies downgrade Philippine outlook into negative as bond spreads soar and foreign investment plunges. The country may find itself excluded from ESG funds and diverted or suspended from aid and climate finance at a time when it needs both the most.

It is a scenario that could result in major instability.

Whatever the decisions today, they will cast a long shadow over future decades.

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