ECONOMIC GROWTH is expected to pick up to 5.1% next year, which if realized would once again leave the government short of its targets, MUFG Global Markets Research said.
In its Asia FX Outlook 2026, MUFG Global said it cut its 2026 Gross Domestic Product (GDP) projection from 5.5% previously, but added that prospects for weak growth could signal easing moves by the central bank.
The government’s official target band for that year is 6-7%. If the MUFG Global forecast pans out, it would be the fourth straight year the target will be missed.
“We forecast the Philippines’ growth to improve slightly above 5% in 2026, as government spending picks up post the pullback from the flood control corruption cases,” MUFG Global analysts said.
In October, government spending fell for a third straight month to P430.6 billion, down 7.76% year on year.
President Ferdinand R. Marcos, Jr. has said that the government will boost spending in the fourth quarter in a bid to catch up with its growth targets.
However, MUFG Global said government spending typically picks up after six months to over a year after a scandal involving government funds, citing the case of the 2013 Priority Development Assistance Fund graft controversy.
“This is in a sense our implicit base case, and is reflected in our expectation for government spending to pick up next year, but with growth remaining below trend with a still negative output gap,” it added.
MUFG Global noted that slower expenditure in recent months led GDP growth to weaken significantly to 4% in the third quarter from 5.5% in the previous quarter and 5.2% a year earlier.
This brought the year-to-date average GDP growth to 5%, slightly above MUFG Global’s 4.7% full-year growth forecast, but short of the government’s 5.5-6.5% target for the year.
The Japanese bank also said that the anticipated ramping up of government expenditure and stronger capital inflows could help the peso strengthen to around P58 against the dollar in the first half of next year.
Last month, the peso breached the P59 level against the dollar several times, hitting a record-low P59.17 on Nov. 12.
However, further easing by the Bangko Sentral ng Pilipinas (BSP) could offset the currency’s projected recovery, MUFG noted.
“Nonetheless, we see this FX (foreign exchange) move as being shallow given a still dovish BSP, with the current account deficit unlikely to narrow significantly despite softer domestic demand,” it said.
According to a BusinessWorld poll, 17 out of 18 analysts surveyed expect the Monetary Board to cut the target reverse repurchase rate by 25 basis points (bps), with one expecting a 50-bp cut, at its last policy meeting of the year on Dec. 11.
If the consensus view holds, the benchmark rate will be at 4.5%, the lowest in over three years, or since the 4.25% rate set in September 2022.
Most analysts, including MUFG Global, also expect the BSP to deliver more rate cuts next year amid a weak growth outlook.
“Softer growth, uncertain fiscal impulse, and continued negative output gap we forecast in the Philippines implies the BSP is likely to remain dovish moving forward,” MUFG Global said. “We have another 50 bps of rate cuts in our forecast profile, and we see the risk tilted towards more cuts.”
Meanwhile, MUFG Global analysts expect Philippine inflation to average 2.4% next year, down from its earlier 3% forecast, as lower global oil and rice prices are expected to ease consumer price pressures.
If this estimate materializes, inflation will return to the BSP’s 2-4% target band.
“The lagged impact of a negative output gap is likely to weigh on core inflation, while low global oil and rice prices are also likely to cap any upside pressures on headline inflation more broadly,” it said.
“There are some risks arising from the government’s move to ban rice imports into end-2025 coupled with a new formula for rice import tariffs for 2026, but overall, we think low global rice prices and still decent domestic rice inventories should cap upside pressures for now,” it added.
The suspension of rice imports will be lifted in January before being reimposed between February and April.
The government has likewise approved a flexible tariff scheme for rice starting Jan. 1, with the 15% rate subject to adjustment by five percentage points, capped at 35%, for every 5% shift in global prices.
“With inflation likely remaining low and below the mid-point of the BSP’s inflation target in 2026, this should help support domestic demand and in particular consumption spending given the lagged impact of lower inflation and rates,” MUFG Global said. — Katherine K. Chan