Philippine economic growth is seen falling to a new post-pandemic low of three percent this year as the lingering impacts of last year’s multi-billion-peso flood-control corruption scandal and the prolonged war in the Middle East weigh on investor and business confidence, according to think tank Capital Economics.

In a May 28 report, Capital Economics senior Asia economist Gareth Leather and deputy chief emerging markets (EMs) economist Jason Tuvey noted that first-quarter gross domestic product (GDP) growth slowed further to merely 2.8 percent “amid an ongoing corruption scandal and the initial blow due to the Iran war.”

“Higher energy prices will cause the current account deficit, which had started to improve late last year, to widen again,” Capital Economics warned. This higher net outflow of United States (US) dollars would put more depreciation pressure on the Philippine peso, which already plunged to record-low levels nearing the ₱62:$1 mark as the Middle East conflict raged on.

On the positive side, the think tank noted that the government placed the country under a state of national energy emergency to suppress oil demand, which allowed the surge in domestic fuel prices at the onset of the war to unwind.

However, the combination of global energy price and supply shocks plus the peso’s weakness resulted in headline inflation hitting a more than three-year high of 7.2 percent in April, Capital Economics noted, while core inflation—which excludes volatile items like oil and gas—also moved nearer to the upper bound of the Bangko Sentral ng Pilipinas’ (BSP) two- to four-percent tolerance band.

An earlier forecast showed the think tank expects inflation to average 6.4 percent this year, which, if realized, would be the highest annual rate since the 8.2 percent recorded at the height of the global financial crisis (GFC) in 2008.

As such, the BSP hiked key interest rates by 25 basis points (bps) in April, bringing the policy rate to 4.5 percent.

For Capital Economics, the central bank “will deliver a bit more tightening over the coming months.” The think tank sees the policy rate hitting five percent by end-2026, which means a cumulative 50 bps of hikes before year-end.

It does not help that “spillovers from the war are acting as a fresh headwind to economic activity, with the PMI [purchasing managers’ index] in contractionary territory last month,” Capital Economics said.

As such, the think tank expects full-year 2026 GDP growth to once again underperform, with its below-consensus forecast falling below not only last year’s dismal 4.4-percent expansion but also the government’s downgraded five- to six-percent target range.

In the Geneva-based World Economic Forum’s (WEF) latest Chief Economists’ Outlook Insight Report, also published last May 28, it cited that “the Philippines is an example of how that lag [due to the global energy crisis] played out in practice: late March brought an energy emergency, and late April brought a rate rise as policy-makers tried to contain fuel- and fertilizer-driven inflation risks.”