The Philippine economy could weaken further in 2026 as the prolonged war in the Middle East, governance concerns, and El Niño threaten growth while elevated inflation and borrowing costs cloud the outlook, the Department of Economy, Planning, and Development (DEPDev) warned.

“The country’s economic growth may further weaken if uncertainties surrounding the resolution of the Middle East crisis persist and if the lingering effects of recent corruption issues are not resolved or reversed,” DEPDev said in its Fiscal Year (FY) 2025 Transparency and Accountability Report published last week.

The warning comes after gross domestic product (GDP) growth slowed to a post-pandemic low of 2.3 percent in the second quarter, bringing first-half growth to 2.6 percent.

DEPDev Secretary Arsenio M. Balisacan earlier said the economy would need to grow by at least 4.4 percent in the second half to reach the lower end of the government’s downgraded 3.5- to 4.5-percent GDP growth target for 2026.

The Cabinet-level interagency Development Budget Coordination Committee (DBCC) had already slashed the full-year growth target in June from the previous five to six percent, before expecting growth to recover to five to six percent in 2027 and 2028.

DEPDev said a fragile peace agreement in the Middle East could keep inflationary pressures elevated, while volatile global trade policies and other geopolitical tensions could intensify supply-chain disruptions and put additional depreciation pressure on the peso, which recently fell to record lows.

On the domestic front, an intensified El Niño could push food prices higher and disrupt agricultural output. Higher-than-expected wage hikes, transport fare increases, and utility rate adjustments could also raise business costs and trigger second-round inflationary effects.

The government now expects inflation to average six to seven percent in 2026, sharply higher than its previous assumption of two to four percent, as higher global oil and fertilizer prices feed into domestic fuel and food costs.

The Bangko Sentral ng Pilipinas (BSP) raised interest rates by a cumulative 50 basis points (bps) in April and June to anchor inflation expectations and contain second-round effects.

As a result, the 364-day treasury bill (T-bill) rate is expected to remain at five to six percent in 2026 and 2027, with elevated domestic yields seen weighing on public and private sector borrowing and investment activity.

The weaker economic outlook is also expected to weigh on the labor market, with the government raising its estimated unemployment rate for 2026 to 5.3 to 5.8 percent from the previous four to five percent.

Manila Bulletin first reported the higher estimated 2026 jobless rate based on the 2027 national budget documents submitted to Congress this month.

DEPDev said subdued demand and slower economic activity, combined with the possible return of overseas Filipino workers (OFWs) from conflict-affected areas in the Middle East, could put upward pressure on unemployment. The jobless rate is expected to return to the four- to five-percent range in 2027 and 2028.

Meanwhile, the peso is expected to remain under depreciation pressure in the short to medium term as domestic and external uncertainties drive capital toward safe-haven assets. Prolonged governance issues like the multibillion-peso flood-control corruption scandal could further weaken investor sentiment, although the country’s strong gross international reserves (GIR) provide room to manage foreign exchange (forex) volatility.

Against elevated borrowing costs, the government will continue implementing its Medium-Term Debt Management Strategy 2025-2028 to meet financing requirements at the lowest possible cost while maintaining prudent risk levels, with the debt portfolio to remain predominantly denominated in local currency.

To support the economy in the second half, the government plans to expedite delayed infrastructure projects through catch-up plans with clear milestones and accountability mechanisms, while seeking to restore consumer and business confidence. Capital imports are also expected to pick up as infrastructure projects resume.

The government will continue targeted measures for vulnerable sectors affected by the Middle East conflict and strengthen food and energy supply conditions to contain inflationary pressures.

It will also reactivate the El Niño Task Force, strengthen water and irrigation management, and ensure the effective functioning of flood control systems to minimize economic losses, particularly in agriculture. - Danielle T. Bayani