Philippine economic recovery from the flood-control corruption fallout last year is seen as being derailed by escalating geopolitical risks from the Middle East conflict, according to the Asian Development Bank (ADB), which slashed its 2026 growth forecast to below target.

Citing uncertainties tied to these risks, the Manila-based multilateral lender significantly trimmed its 2026 gross domestic product (GDP) growth projection for its host country by nearly one percentage point (ppt) to 4.4 percent from 5.3 percent previously.

It bears noting that the ADB’s updated forecast would match last year’s GDP expansion, which was the slowest post-pandemic annual growth, due in part to tempered confidence and investment in the aftermath of the flood-control corruption scandal.

“Growth will remain subdued as inflationary pressures from elevated global commodity prices and heightened uncertainties over the Middle East conflict weigh on consumer spending and investor confidence,” the ADB said in a report published on Friday, April 10.

In the Asian Development Outlook (ADO) April 2026 report, the ADB cited the Philippines’ extreme vulnerability to energy shocks, given its near-total reliance on imported crude oil and refined oil products, most of which pass through the Strait of Hormuz, a critical waterway.

ADB principal economics officer Teresa Mendoza explained that the 4.4-percent forecast for 2026 falls under a scenario where the Middle East conflict is “short-lived,” or subsides over the next one to two months.

Mendoza, however, said that while overseas Filipinos’ (OFs) remittances have been historically resilient, this major growth engine could also take a hit if the Middle East conflict further escalates.

Taking into account the ongoing conflict, private consumption is forecast to expand moderately in 2026, as remittance inflows—which reached $35.6 billion in 2025, equivalent to 7.3 percent of GDP—are expected to remain steady.

“Remittances have been fairly resilient during past shocks, and in some years have even proven to be counter-cyclical. That is, more remittances tend to be sent during crises. However, if this crisis becomes prolonged, even remittances could become highly vulnerable,” Mendoza said.

“Remittances from OFs are an important buffer to household income,” Mendoza added, noting that while inflows have been steady early this year, a prolonged conflict could hurt remittances, as around 17 percent of inflows come from Saudi Arabia and the United Arab Emirates (UAE).

Mendoza added that the investment climate remains cautious, as firms have to stabilize inventories in a highly volatile economic environment.

While the Bangko Sentral ng Pilipinas (BSP) may tighten monetary policy to tame surging energy costs, the ADB is leaning toward a “neutral” stance.

ADB Philippines country director Andrew Jeffries argued that a policy hike will not prove effective in managing price pressures, as these are not demand-driven.

“Raising rates in response to an external shock is not necessarily as effective in addressing inflation as it is when the issue is driven by domestic demand. This puts the central bank in a very tricky position going forward, particularly in deciding whether to raise rates given the uncertain path of inflation,” said Jeffries.

Recall that the BSP brought the benchmark rate to 4.25 percent early this year to offset the growth slump seen last year. The central bank has also shifted to a more hawkish tone following the flare-up of military hostilities in the Middle East.

The ADB is looking at 2027 as the recovery point for the anemic economic activity expected this year. Mendoza said a projected rebound to 5.5-percent growth in 2027 is based on the assumption that price pressures will eventually ease.

“Domestic demand will continue to drive growth, although we expect it to remain subdued. Some business indicators entering 2026 were actually positive, though the pace quickly moderated,” Mendoza said.

Investment will also be propped up by the lagged effects of previous policy rate cuts, although gains will be partly offset by the recent surge in price pressures that could weigh on investment decisions and erode household spending, the ADB said.

“What the current global conditions underscore is the need for sustained reforms, especially in strengthening human capital, improving investment efficiency and the business environment, and protecting vulnerable households to ensure the country emerges unscathed and in a better growth position after the external shocks subside,” Jeffries said.

Inflation is projected to rise to four percent in 2026—hitting the upper end of the government’s two- to four-percent target range of manageable price increases deemed conducive to economic growth—largely due to high global commodity prices, before easing to 3.5 percent in 2027.

The ADB noted that the Philippine government has rolled out targeted assistance programs, such as cash and fuel subsidies, to cushion the impact of the Middle East conflict on vulnerable sectors such as farmers, fisherfolk, and public transport drivers. The government has also sought to secure more oil supplies from non-Middle East sources.

Additionally, severe weather events and delays in public investment could also weigh on growth, the ADB said.

According to the ADB, investment is projected to recover gradually as public infrastructure spending rebounds under improved budget execution and enhanced project monitoring. The ₱6.793-trillion 2026 national budget prioritizes health, education, workforce upskilling, social protection, agricultural infrastructure, and climate and disaster resilience, it added.

For the ADB, government infrastructure spending, along with expanded public–private partnerships (PPPs) and reforms allowing greater foreign investment in key sectors—such as telecommunications, shipping, railways, and renewable energy (RE)—are expected to support medium-term growth.

The ADB report also noted that strengthening inclusive, quality education and lifelong learning remains a critical policy challenge, as persistent learning gaps, high youth unemployment, and skills mismatches continue to threaten the country’s ability to fully harness its demographic potential.