MANDALUYONG CITY, Philippines — The Asian Development Bank (ADB) has lowered its growth forecasts for the Philippine economy for both 2026 and 2027, citing the prolonged Middle East conflict, weaker investment and the expected impact of severe dry weather associated with the El Niño phenomenon.

In its September Asian Development Outlook (ADO), the Manila-based lender said gross domestic product (GDP) is now expected to expand by 3.3 percent this year and 5.1 percent next year, down from its July forecasts of 3.8 percent and 5.3 percent, respectively.

ADB officials presented the latest ADO at their offices on Wednesday morning.

“I think ongoing gradual recovery in public investment, slower than we had been anticipating, is one of the factors behind that on the domestic side,” said John Beirne, ADB principal economist.

“Another factor would be tightening global financial conditions, which also has an impact on financial conditions in the Philippines on consumption and investment. And that's not even mentioning the El Nino, which also contributes to this as well,” he added.

The downgrade follows a much weaker-than-expected first half, with the ADB saying the prolonged conflict in the Middle East had dampened economic activity through higher prices for imported fuel and other key commodities, compounding the slump in public infrastructure investment that began following last year’s flood control scandal.

“Public infrastructure spending continued to decline due to tighter budget controls, which led to delays in project implementation,” said Teresa Mendoza, principal economics officer for ADB.

“Cushioning the slowdown in domestic demand was the growth that we saw in merchandise exports, which was primarily driven by electronic products, benefited from strong global demand,” she added.

The Philippine economy grew 2.8 percent in the first quarter, its slowest expansion since the 3.8 percent contraction recorded in the first quarter of 2021 during the COVID-19 lockdowns. Growth slowed further to 2.3 percent in the second quarter, the weakest pace since the fourth quarter of 2009 when excluding the pandemic-era contractions.

The multilateral lender maintained its 5.9 percent inflation forecast for the year while raising its 2027 headline inflation forecast to 4.4 percent. Price pressures have also stemmed from the broader impact of the Gulf conflict, with global oil prices rising amid shipping disruptions in the Strait of Hormuz.

“Food inflation was a key contributor, led by rice prices, along with higher fuel and transport costs. Low-income households were disproportionately affected, reflecting the larger share of food in their consumption basket,” said Mendoza.

“Currency depreciation, where we saw the exchange rate reach record lows in September, also adds to imported inflation,” she added.

Despite the downgrade, the lender expects growth to regain momentum in 2027 as services and industry improve and government spending supports economic activity.

“We've already seen indications of more government outlays for infrastructure projects, including large transportation projects. So I know there's an intent, you know, to rebound public investment and get it back on track as compared to, you know, what happened the second half of last year and earlier,” ADB Country Director Andrew Jeffries said.

“[The] easing of this whole crisis, and if there's a dampening of inflation, [can really result in] a rebound in public spending.”