Think tank Capital Economics has slashed its 2026 growth forecast for the Philippines to just 3.8 percent, as the country suffers from soaring global oil prices amid a prolonged war in the Middle East.

A March 20 report by Capital Economics Asia economist Gareth Leather showed a sharp cut in the think tank’s gross domestic product (GDP) growth projection for the Philippines from 4.5 percent previously. The updated GDP growth estimate has fallen further below the government’s already downgraded target of five to six percent for the year and is lower than last year’s post-pandemic-low expansion of 4.4 percent.

For 2027, the think tank forecasts Philippine GDP growth of 4.8 percent, down from five percent previously and below the 5.5- to 6.5-percent target for next year.

Among the Asian economies covered by Capital Economics’ report, Philippine economic growth would be outpaced this year by Taiwan’s eight percent, Vietnam’s 7.7 percent, Bangladesh’s six percent, Indonesia’s five percent, Malaysia’s 4.7 percent, and Singapore’s 4.6 percent. But it would exceed projected growth rates for Sri Lanka (3.3 percent), Pakistan (2.7 percent), Thailand (two percent), and South Korea (1.6 percent).

Excluding China, Hong Kong, India, and Japan, Asian GDP growth is seen averaging 4.5 percent this year, slightly higher than the previous regional estimate of 4.4 percent.

Capital Economics slashed growth forecasts across the Asia-Pacific region, but the biggest reductions were in Gulf Cooperation Council (GCC) countries, Pakistan, and the Philippines.

Outside GCC countries, which are right in the thick of the war between United States (US)-backed Israel and Iran, Capital Economics warned that the Philippines, Pakistan, and Sri Lanka “will be hit hardest.”

“All are heavily dependent on imported energy from the Middle East and have limited fiscal space to cushion the shock,” the think tank noted. The Philippines is trying to narrow its yawning budget deficit and reduce debt levels post-pandemic.

“Fragile external positions heighten the risk that higher import bills and tighter global financial conditions trigger balance of payments (BOP) strains, exacerbating the blow to their economies,” Capital Economics added. The Philippines is a net importer not only of oil but also of most of the goods it consumes.

With weaker economic growth and potentially higher inflation in the Philippines, Capital Economics said it no longer expects another interest rate cut from the Bangko Sentral ng Pilipinas (BSP) and instead “now expects policy to remain on hold.”

Based on Capital Economics’ updated forecasts, headline inflation is seen rising to 3.5 percent this year before easing to 3.1 percent next year, still within the BSP’s two- to four-percent target range of annual price increases deemed manageable and conducive to economic growth. However, these latest inflation expectations are higher than previous projections of 2.3 percent for 2026 and three percent for 2027.

Because of this, Capital Economics now forecasts no change in the BSP’s reverse repurchase (RRP) rate, which currently stands at 4.25 percent, for the rest of the year. Previously, it projected the policy rate to end 2026 at four percent.

The think tank also expects the Philippine peso to close 2026 and 2027 at ₱60 against the US dollar. The local currency crossed the ₱60:$1 mark last Thursday, March 19, closing at a new historic low of ₱60.1 versus the greenback.

Capital Economics is nonetheless more optimistic about the Philippine Stock Exchange index (PSEi), which it sees soaring to 7,000 by year-end from the 6,000-level last week. The PSEi is seen rising further to 7,300 by end-2027.

According to Capital Economics, ongoing tensions in Iran have led to higher energy price assumptions, with Brent crude seen averaging nearly $100 per barrel in the second quarter before easing to around $80 by end-2026.

Asia’s heavy reliance on imported energy—especially via the Strait of Hormuz—makes it particularly vulnerable, driving sharp fuel price increases and prompting larger downgrades to the region’s 2026 growth forecasts compared with most other economies, the think tank added.

It said growth forecasts for South Korea and Taiwan have also been trimmed due to higher energy costs, though the impact is tempered by government subsidies, while Thailand faces greater downside risks given limited fiscal space.

In contrast, energy exporters Indonesia and Malaysia are expected to hold up better, supported by subsidy programs and likely fiscal expansion, though Indonesia may raise concerns about more populist policymaking, according to Capital Economics.