Souring investor sentiment in the aftermath of the flood control corruption scandal could hurt Philippine economic growth, according to think tank Capital Economics.

In an Oct. 31 report, Capital Economics senior Asia economist Gareth Leather and deputy chief emerging markets (EMs) economist Jason Tuvey pointed to faster gross domestic product (GDP) growth in the Philippines until midyear, “but that was before a corruption scandal engulfed the country and led to protests.” First-half growth averaged 5.5 percent.

Capital Economics forecasts Philippine GDP expansion to slow to 5.3 percent this year, below the 5.7-percent growth recorded last year and the government’s downscaled 5.5- to 6.5-percent target for 2025. The government’s report on the third-quarter GDP performance will be out on Friday, Nov. 7.

“The unrest and the ongoing corruption investigations appear to be weighing on activity, with the PMI [purchasing managers’ index] below the 50-mark,” Capital Economics noted.

The Philippines’ manufacturing PMI fell to 49.9 in September—below the neutral 50-mark, indicating a year-on-year decline in domestic manufacturing activity. The October PMI report will be released on Monday, Nov. 3.

For Capital Economics, “the key risk is that the corruption scandal causes investor sentiment toward the Philippines to sour.”

It does not help that “the large current account deficit leaves the peso vulnerable,” the think tank added, referring to the country’s net United States (US) dollar earnings.

The Philippines’ current account deficit widened to $9.2 billion in the first half of 2025 from $8.1 billion during the same period last year, despite a narrower $5-billion deficit in the second quarter from $5.9 billion a year ago.

Last week, the peso fell to a historic low, closing at ₱59.13 against the US dollar on Oct. 28.

“Signs of economic weakness, alongside low inflation, mean that the central bank in the Philippines is likely to cut rates further,” Capital Economics said.

The think tank expects the Bangko Sentral ng Pilipinas (BSP) to keep the key interest rate at 4.75 percent until year-end before resuming monetary policy easing with a 25-basis-point (bp) cut in the first quarter of 2026.

It projected headline inflation to average 1.6 percent in 2025, below the government’s two- to four-percent target range of manageable annual price hikes deemed conducive to economic growth.

End-September headline inflation stood at 1.7 percent. The government will release the October consumer price index (CPI) report on Wednesday, Nov. 5, amid expectations of faster price increases at the start of the fourth quarter.

Meanwhile, Japanese financial giant MUFG Bank Ltd. said the weaker peso stemmed from the flood control corruption scandal, a more dovish BSP stance, and the potential impact of US sanctions on a couple of Russian oil producers on global prices, as the Philippines is a net oil importer.

“While we had already been anticipating some headwinds to the Philippine peso from a more dovish BSP, coupled with the corruption issues arising from flood control projects, the move in the peso has admittedly been weaker than we anticipated,” MUFG Global Markets Research senior currency analyst Michael Wan said in an Oct. 31 report.

“While it is true that the corruption issues surrounding the flood control projects have resulted in slower disbursement of government spending and public infrastructure, we have also been building in other offsetting positives,” Wan said.

Domestic rice prices remain low despite import restrictions, helping keep inflation manageable, while lower interest rates and easing inflation are expected to boost consumption and private investment, Wan noted.

A strong pipeline of infrastructure projects—particularly in renewable energy (RE)—and the anticipated inclusion of the peso in the JPMorgan Government Bond Index-Emerging Markets (JPM GBI-EM) Index, which could attract up to $3 billion in inflows next year, are also seen supporting growth and foreign exchange (forex), he added.

“While we will relook our exact forecasts... we are not entirely comfortable abandoning our views for the US dollar-Philippine peso to move lower directionally, especially after the recent weakness,” according to Wan.