Growth slump may drag until 2027 — Deutsche Bank

By Katherine K. Chan

THE PHILIPPINES’ economic slowdown may extend through 2027, raising the odds of deeper monetary easing by the Bangko Sentral ng Pilipinas (BSP), according to Deutsche Bank Research.

In a report, it said the widening corruption scandal in the Department of Public Works and Highways — involving alleged fund diversion and irregularities in flood control projects — is likely to weigh on public and private investment for several years. It warned that the fallout could suppress growth and push the central bank to cut policy rates more aggressively.

“The public works corruption scandal is likely to be a drag on growth, as it reduces public and private capex (capital expenditure),” Deutsche Bank economists Vaninder Singh and Joey Chung said in the report released on Thursday. “BSP is likely to cut twice more, with risks of an even deeper easing cycle.”

The BSP has lowered borrowing rates by 175 basis points (bps) since August 2024, including a fourth straight 25-bp cut in October that brought the benchmark rate to a three-year low of 4.75%.

BSP Governor Eli M. Remolona, Jr. this week signaled that a fifth cut is possible at the Monetary Board’s December meeting, citing expectations that full-year growth will fall well below target. “Baby steps” of 25 bps remain the most likely pace, he added, ruling out larger cuts.

Mr. Remolona has said the economy might expand by only 4-5% this year, compared with the government’s 5.5-6.5% goal — a target he acknowledged is now out of reach.

The economy grew 4% in the third quarter as consumer and investor sentiment weakened amid the budget scandal, pulling the nine-month average to 5%.

Deutsche Bank expects growth to remain subdued next year, projecting a 5.1% expansion in 2026, well below the government’s 6-7% goal. It sees a modest improvement to 6% in 2027 as investment conditions stabilize.

Its baseline view is for 50 bps of additional easing, bringing the policy rate to a terminal 4.25% by mid-2026.

“DB Economics expects two further rate cuts in response to a deeper negative output gap that will last longer, likely well into 2027,” according to the report. “The risk is, if anything, for an even deeper easing cycle.”

Meanwhile, ING Think also sees room for more easing next year, anchored on its expectation that inflation across major Asian economies including the Philippines will stay within target in 2026.

“In 2026, inflation is unlikely to rise above the central bank targets in any of the Asian economies under our coverage, and we still expect rate cuts in… the Philippines,” it said in a separate report.

Philippine inflation averaged 1.7% in the first 10 months of the year, matching the BSP’s full-year forecast. The central bank expects inflation to settle at 3.1% in 2026 and 2.8% in 2027.

Deutsche Bank also flagged risks to the peso, warning that the currency could temporarily weaken past P60 a dollar next year if corporate sentiment deteriorates further.

It expects a recovery later in the year as import demand eases and the current account deficit narrows.

“Poor corporate sentiment is showing through not just in potential capex decisions but also in views on the currency,” it said, citing conversations with onshore clients.

“We suspect this will play out in phases over the course of 2026 — a possible peso weakness first, followed by some recovery as the current account deficit shrinks due to the infrastructure and capex factors,” it added.

It also noted that while stretched short-peso positions could push the currency beyond P60, the exchange rate should eventually return to P57-P58 or firmer if the dollar softens.

The peso fell to P59.17 a dollar on Nov. 12, its weakest on record.