The Washington-based International Monetary Fund (IMF) has further lowered its 2026 and 2027 economic growth forecasts for the Philippines on the assessment that the country sustained deeper wounds from the Middle East war.

According to the July update of the IMF’s flagship World Economic Outlook (WEO) report, growth projections for the Philippines have been reduced further to 3.9 percent for 2026 from 4.1 percent in its April assumptions and to 5.5 percent for 2027 from 5.8 percent previously.

Revisions for both years fall within the downgraded growth assumptions of the Cabinet-level, interagency Development Budget Coordination Committee (DBCC) of 3.5 to 4.5 percent in 2026 and five to six percent in 2027.

“This reflects a weaker-than-expected outturn in the first quarter of 2026 at 2.8 percent alongside a larger-than-expected effect of the war in the Middle East on prices and activity in the Philippines,” the IMF said in a statement on Wednesday, July 8.

Headline inflation overheated to a peak of 7.2 percent in April as spiking global oil prices swiftly spilled over into domestic retail prices. Consumer price movements remained elevated in May at 6.8 percent and June at 6.4 percent despite the cooldown.

These above-target inflation prints risked stalling domestic activity, triggering the deployment of monetary policy measures as military hostilities between the United States (US) and Iran persisted.

To tame price pressures, the Bangko Sentral ng Pilipinas (BSP) has already tightened monetary policy by raising the key benchmark rate by a cumulative 50 basis points (bps) to 4.75 percent since the war flared up. The latest hike still flagged elevated inflationary pressures.

Higher borrowing costs typically cool inflation by restraining domestic demand and private consumption, though they also risk dampening overall economic momentum.

According to the IMF, economic growth could accelerate at a slower pace than expected, while inflation could climb higher than anticipated. This implies that stagflationary risks still linger, due largely to a mix of pressures, including tighter global monetary conditions and lower remittances.

“Risks to growth are tilted to the downside while inflation risks are tilted to the upside, reflecting the risk of renewed geopolitical tensions in the Middle East and higher food prices, de-anchoring of inflation expectations, tighter global monetary conditions, and lower remittances,” the IMF said.

Domestically, the IMF pointed to growth risks emanating from the sluggish rebound in public investment and “weaker-than-expected reform momentum.” Recall that business and investor confidence stepped on the brakes due to the unearthing of the multibillion-peso flood-control corruption in late 2025, prompting a probe, particularly into ghost infrastructure projects.

Public disbursements also slowed as state agencies faced more stringent review processes and tighter oversight following controversies surrounding flood control projects.

Apart from the cleanup of this mess, the IMF has also identified “extreme” climate events, which could include El Niño, as factors that could throw sand in the economic wheels.

Meanwhile, a different economic trend could be seen should the government speed up the implementation of “structural and governance reforms.” Such efforts could regain investor confidence and galvanize foreign direct investment (FDI).

Fast-tracked reforms could also boost local output growth by increasing fiscal multipliers, the IMF said.

Additionally, the multilateral lender sees a “faster decline in energy and food prices” providing additional support for output expansion.

Looking ahead, the IMF said the gradual pickup in investment would be the main driver of the 2027 economic growth rebound. This boost should hinge on improving confidence and easing supply shocks tied to the more-than-four-month-old Middle East war.

BSP Governor Eli M. Remolona Jr. said the Philippine economy retains the capacity to absorb further monetary tightening. A potential 25-bp interest rate adjustment remains highly manageable because current nominal rates are low once adjusted for inflation, Remolona said.