By Bettina V. Roc, Associate Editor
THE International Monetary Fund (IMF) now expects Philippine economic growth this year to fall far below the government’s target as the oil shock from the Middle East war adds to the impact of a graft scandal that stalled public spending.
The IMF slashed its 2026 gross domestic product (GDP) growth forecast to 4.1% from 5.6% in January, its latest World Economic Outlook (WEO) released on Tuesday showed.
This is way lower than the government’s 5%-6% target and also slower than the 4.4% full-year expansion in 2025, which was a post-pandemic low due to a corruption scandal involving flood control projects.
“Growth in the Philippines is revised downward by 1.5 percentage points for 2026, relative to January, with the war shock compounding the negative base effects from a weaker-than-expected 2025 outturn related to a sharp decline in public investment and confidence,” the IMF said.
Meanwhile, the IMF kept its 2027 growth projection at 5.8%. This is within the government’s 5.5%-6.5% growth goal.
“Risks to growth are tilted to the downside while inflation risks are tilted to the upside, reflecting the risk of a prolonged war in the Middle East, further escalation of geopolitical tensions, and higher trade policy uncertainty,” the IMF said.
Domestic risks stem from the impact of the corruption scandal, extreme climate events, and “weaker-than-expected reform momentum,” it added.
The 2026 forecast for the Philippines matches its expected growth pace for ASEAN-5, which includes Indonesia, Malaysia, Singapore, and Thailand.
For the Southeast Asian economies with specific forecasts in the WEO, the Philippines’ GDP growth this year is expected to trail Vietnam’s 7.1%, Indonesia’s 5%, and Malaysia’s 4.7%. It is only expected to expand faster than Thailand (1.5%) and Singapore (3.5%) this year.
“In several South and Southeast Asian economies, disruptions in the Middle East are expected to reduce tourism and remittance inflows, thereby weakening domestic demand,” it said.
This comes as the IMF also cut its global growth projection for this year as it expects the Middle East conflict to threaten the outlook, with the highly volatile situation also leading it to outline several scenarios depending on how long the war lasts or if it expands further.
Under its reference forecast, which assumes that the war’s duration, intensity, and scope will be limited and mean that disruptions could recede by midyear, the IMF sees the global economy growing by 3.1% this year, down from 3.3% in January. It retained its 2027 forecast at 3.2%.
“The global outlook has abruptly darkened following the outbreak of war in the Middle East on Feb. 28, 2026. The closure of the Strait of Hormuz and serious damage to critical production facilities in a region central to global hydrocarbon supply could cause an energy crisis on an unprecedented scale,” IMF Economic Counsellor and the Director of Research Pierre-Olivier Gourinchas said in the report’s foreword.
“The war interrupted what had been a steady growth trajectory… The duration and scale of the conflict and the time it will take for energy production and transit to normalize after the end of hostilities will determine the ultimate size of the shock to the global economy.”
READY TO TIGHTEN
Meanwhile, the IMF expects Philippine headline inflation to average 4.3% this year and 3.2% in 2027. Both are faster than the 2.8% and 3% estimates it gave following the conclusion of its Article IV Consultation in December last year.
The Bangko Sentral ng Pilipinas (BSP) expects the consumer price index to average 5.1% this year, above its 2%-4% target and last year’s 1.7% outturn as it expects higher global oil prices due to the war to drive up domestic food, fuel, energy, and transport costs. For 2027, its forecast is 3.8%.
Philippine headline inflation already breached the central bank’s goal in March, coming in at 4.1%, which was the fastest pace in nearly two years or since the 4.4% in July 2024 — also the last time that the monthly print was above target. This was also higher than the BSP’s own 3.1%-3.9% forecast for the month.
In the three months to March, inflation averaged 2.8%.
“An accommodative monetary policy stance remains appropriate amid a widening negative output gap; but the BSP should be ready to tighten monetary policy if risks of de-anchoring inflation expectations arise,” the IMF said.
In an off-cycle meeting last month, the Monetary Board left benchmark interest rates unchanged, but said that they remain vigilant about potential price risks amid the war.
BSP Governor Eli M. Remolona, Jr. has said that monetary policy has limited effectiveness against the supply-driven spikes in prices, but added that they are ready to act as needed to keep inflation expectations anchored and temper the potential effects of the oil price shock.
The BSP last hiked benchmark rates in October 2023. Its policy rate now stands at 4.25% following 225 basis points worth of cuts since it began its now-paused easing cycle in August 2024.
The IMF said policymakers will need to find the balance between preserving growth and keeping inflation in check, while also ensuring that they have enough fiscal ammo to support those that will be hit by rising costs due to the energy shock.
“Central banks should be ready to act decisively in line with their mandates. Monetary policy should preserve price stability and be carefully attuned to spillovers from actual inflation to inflation expectations, especially in the medium- to long-term horizon,” the multilateral lender said.
“With the memories of the post-pandemic inflation surge still fresh, second-round effects could possibly be larger than they were in 2021-2022. At the same time, tightening prematurely could be destabilizing, if financial conditions tighten further… or consumer and business confidence declines. Reacting strongly to flexible commodity prices, when supply constraints are present only in the related sectors, brings down inflation fast but risks a recession later.”
Meanwhile, the IMF sees the Philippines’ current account deficit widening to -4.4% of GDP this year from -3.3% in 2025. For 2027, the gap is seen at -3.5% of economic output. Both are bigger than the -3.4% and -3.1% forecasts published in December.
