Philippine economic growth would continue to underperform this year and next as the country faces not only headwinds from a prolonged war in the Middle East but also domestic challenges related to politics and corruption, according to the Institute of International Finance (IIF).

The IIF’s latest capital flows report published last Thursday, May 21, showed that the Washington-based global financial industry association lowered its 2026 gross domestic product (GDP) growth forecast for the Philippines to 4.2 percent from its projection of 4.8 percent last December.

If realized, this year’s GDP expansion would be the slowest post-pandemic rate and even worse than the 4.4-percent growth last year, which was weighed down by tempered government spending and investor confidence in the aftermath of the billion-peso flood-control infrastructure corruption scandal.

For 2027, the IIF forecasts Philippine growth to pick up to 5.4 percent. However, its growth projections for this year and next year both fall below the government’s targets of five to six percent and 5.5 to 6.5 percent, respectively. They also fall short of the Philippines’ potential to grow by at least six percent yearly.

Among the eight Asia-Pacific emerging markets (EMs) covered by the IIF report, the 2026 growth forecast for the Philippines is surpassed by Vietnam’s 7.1 percent, India’s 6.4 percent, Indonesia’s 4.8 percent, and China’s 4.6 percent.

For next year, the IIF’s Philippine growth projection is lower than Vietnam’s seven percent and India’s 6.9 percent.

“‘The Philippines and Thailand confront stronger headwinds, as domestic vulnerabilities collide with higher external energy constraints yet low exposure to the semiconductor boom,’” IIF deputy chief economist Ashok Bhundia and economist Phoebe Feng said.

In the case of the Philippines, the IIF said the country “continues to face pressure from a corruption scandal, weaker public spending sentiment, and rating downgrades, although further rate hikes could provide some offset.”

Also, the IIF warned that “Philippine remittances may moderate after initial resilience,” as the war-torn Gulf region hosts millions of overseas Filipino workers (OFWs) who send money home, helping drive domestic consumption.

As Asian EMs struggle to attract portfolio flows amid the global energy crisis, “equity inflows are likely to remain subdued in Thailand and the Philippines,” the IIF said, citing that “bond flows remain constrained by the hawkish global backdrop and rising scrutiny of country-specific credibility.”

“Broad currency weakness and risk reduction have been evident across the region, with pressure concentrated in markets facing weaker external confidence or domestic credibility concerns,” the IIF pointed out.

For instance, the Philippine peso plunged to a new record low of ₱61.75 against the United States (US) dollar this week, blamed by economists not only on the war but also on domestic political noise.

The IIF cited that the Philippines and South Korea stand out in emerging Asia for the pressures they face from elevated energy costs, as both are net importers of the commodity worst hit by the war in Iran.

“‘The Philippines has allowed full pass-through of higher energy costs, which has led to inflationary pressures and prompted a rate hike in April,’” the IIF noted.

In a May 20 report, Capital Economics senior Asia economist Gareth Leather also noted that while inflation across Asia has been mostly low, “the Philippines has recorded the biggest increase in inflation, with the headline rate there reaching 7.2 percent year-on-year in April—almost double the top end of the central bank’s two- to four-percent target.”

Leather nonetheless said that the Bangko Sentral ng Pilipinas (BSP) is among the central banks in the region that have “responded accordingly” to inflation pressures, as it raised key interest rates by 25 basis points (bps) last month amid expectations of further monetary tightening.

The BSP had forecast average headline inflation this year to hit an 18-year high since the global financial crisis (GFC) in 2008.

Under Capital Economics’ baseline assumption that Middle East tensions would gradually ease and global energy prices would eventually moderate, “monetary tightening cycles across the region are likely to remain limited and concentrated in economies that have already seen the sharpest price increases” like in the Philippines, Leather said.