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By Katherine K. Chan
THE PHILIPPINES’ economic expansion is facing a hurdle, expected to miss official targets through 2026, as a deepening corruption investigation into flood control projects impacts public spending and investor confidence, according to Deutsche Bank Research.
“The graft probe has influenced the mood locally and will likely keep growth from reaching its potential in the upcoming quarters as developments unfold,” stated Deutsche Bank economist Junjie Huang in a report on Nov. 22.
Caution among public officials might lead to inconsistent spending, even though President Ferdinand R. Marcos Jr. has confirmed plans to redirect unused infrastructure funds to essential areas like health and education.
Deutsche Bank Research has revised its GDP growth forecast for next year down to 5.1% from 5.7%, which trails the government’s goal of 6-7%. “The Philippines is anticipated to see a small growth recovery to 5.1%, as private demand compensates for weaker public spending.”
The 2025 projection has also been cut to 4.7% from 5.4%, indicating a slowdown compared to last year’s 5.7% growth.
In the third quarter, the economy grew by just 4%, the slowest rate in over four years, as the corruption scandal hindered government spending and dampened household consumption.
The cloud of uncertainty over fiscal policy has grown as the government deals with the ongoing scandal. Deutsche Bank Research predicts the budget deficit will settle at 5.4% of GDP in both 2025 and 2026.
“With ongoing corruption investigations and the recent reshuffle in the Cabinet, spending plans could see changes over the coming months (November to December),” Mr. Huang commented. The administration has reaffirmed that unspent infrastructure funds will be reassigned to vital sectors like health and education.
This modest growth outlook combined with low inflation might prompt additional monetary easing.
Mr. Huang anticipates that the Bangko Sentral ng Pilipinas (BSP) will reduce the key policy rate by 25 basis points in December, followed by another cut in February, lowering the benchmark to 4.25%. There’s also the potential for further reductions if the output gap widens.
Since August 2024, the BSP has cut rates by 175 bps, with the latest 25-bp cut in October bringing borrowing costs down to 4.75%—the lowest level in over three years. The final rate-setting meeting for 2025 is slated for Dec. 11.
Government actions in the rice market could also help stabilize inflation. Mr. Huang estimates headline inflation at 1.7% this year, bumping up to 2.9% next year, within the BSP’s 2-4% target range.
These measures include a 60-day nationwide price freeze on essentials, adjustments to rice import tariffs based on global prices, and halting regular rice imports until year-end. The government is planning an import window for January and a tariff scheme for 2026, ranging from 15% to 35%.
Foreign direct investment (FDI) inflows are being pressured as the corruption scandal sours sentiment. Fitch Solutions unit BMI believes corruption concerns, coupled with global trade uncertainties, will likely limit FDI next year.
In the second quarter, FDI as a share of GDP dropped to 1.3%, down from the pre-pandemic average of 2.5%. By August, net inflows plummeted 40.5% year-on-year to $494 million, marking the lowest level since June.
The peso has also weakened alongside falling investor confidence. It closed at P58.91 per dollar on Tuesday, a slight drop from the previous session. BMI forecasts the peso to be at P59 by year-end, with a possible dip to P59.50 in 2026, reflecting expectations of ongoing BSP rate cuts.
“The corruption scandal is expected to dampen foreign direct investment inflows through 2026, adding to pressures from macroeconomic uncertainty and global trade tensions,” BMI noted in a report dated Nov. 24.
“Further downward pressure is on the horizon as we expect the Bangko Sentral ng Pilipinas to cut rates by 25 bps in December in reaction to slower growth in the third quarter—potentially bringing the US-Philippine policy rate differential down to just 50 bps,” it added.
Meanwhile, SUN Life Investment Management and Trust Corp. predicts the Philippine economy will grow between 4% to 5% next year, as governance and corruption concerns cloud the future.
“Our forecast suggests we’ll likely be navigating through this for the next three quarters before we witness any significant shifts or improvements in the economy,” remarked SunLife President Michael Gerard D. Enriquez to reporters on Monday.
“Does this mean investments will drop? Not exactly, but the pace will probably be slow and somewhat stagnant compared to what we usually anticipate,” he added.
Poor investor sentiment has also impacted the local stock market, resulting in lower valuations for the company’s managed assets, according to Mr. Enriquez.
Sunlife sees the Philippine Stock Exchange index (PSEi) finishing the year around the 6,000 mark.
Recently, the PSEi declined by 0.75%, or 45.42 points, closing at 5,976.17, while the broader all-share index increased by 1.12%, or 39.64 points, to reach 3,574.82.
Mr. Enriquez noted that their managed assets were revalued at P425 billion, down from P430 billion due to PSEi losses.
“It could have been better, but we’re seeing a market revaluation on equities,” he explained. “Thus, it dipped because the equity market faced a downturn.” — with AMCS
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