BSP sees external pressures until 2027

The Bangko Sentral ng Pilipinas expects the Philippines’ external sector to remain under pressure in 2026–2027 as elevated energy prices, tighter financial conditions, and volatile capital flows continue to weigh on the country’s balance of payments.

The outlook reflects a global economy projected to grow by only 2.5–3.0 percent in 2026–2027, slower than pre-pandemic norms and constrained by geopolitical shocks. The BSP said world output is adjusting to tighter financial conditions and lingering uncertainty, while persistent energy price pressures, particularly amid continuing tensions in the Middle East, are emerging as a more binding constraint on the external environment.

The earlier global disinflation trend has stalled, with inflation expected to be somewhat higher in 2026, especially in developing economies. Elevated oil and refined product prices are feeding through transport, production, and food costs, raising input costs and reducing real incomes.

The BSP said this dynamic could weigh on consumption and investment while complicating the policy trade-off between supporting growth and containing price pressures, especially if supply disruptions continue into 2027.

Risks remain tilted to the downside due to the possibility of a prolonged or broader Middle East conflict, deeper geopolitical fragmentation, renewed trade tensions, and weaker-than-expected productivity gains from new technologies.

Global trade and capital flows are expected to remain subdued and volatile under this environment. Higher effective trade barriers, shifting supply chains, and elevated uncertainty continue to weigh on cross-border activity.

Global trade is seen to ease in 2026 after a stronger performance in 2025. The BSP said cost-driven factors are likely to play a more prominent role in shaping external balances, alongside tight financial conditions and elevated risk premia.

Elevated and volatile energy prices, rather than weak global demand, are expected to be the main source of pressure on the Philippines’ external position.

Domestic demand has also softened amid weaker confidence and investment. Real gross domestic product growth slowed to 2.8 percent year on year in the first quarter of 2026, reflecting global headwinds and domestic factors such as weaker public infrastructure spending and more cautious private investment.

The BSP said growth is expected to recover gradually as external pressures ease and investment conditions improve, but the recovery depends on the absence of further adverse shocks.

The country’s balance of payments deficit widened in Q1 2026, consistent with the weaker global and domestic conditions. The BOP summarizes a country’s economic transactions with the rest of the world and includes current account, capital account, and financial account developments, according to the BSP.

The wider Q1 deficit was driven by higher import costs and weaker capital inflows. The Middle East crisis raised fuel and commodity prices, increasing the import bill, while dampening financial inflows through weaker other investment flows and subdued foreign direct investment.

The current account deficit widened to 4.8 percent of GDP, reflecting the impact of elevated import costs on the trade balance, along with weaker income and services balances.

Imports expanded due to higher fuel and commodity prices and continued demand for capital and intermediate goods, including mineral fuels, telecommunications equipment, electrical machinery, and semiconductor inputs.

Export growth remained largely volume-driven, supported by stronger shipments of electronics, machinery and transport equipment, and gold, with the latter benefiting from higher global prices. These gains, however, were not enough to offset the rise in import costs.

Primary income declined due to lower dividend and interest earnings, while the services surplus narrowed as import payments outpaced receipts.

Still, nontrade inflows continued to support the country’s external accounts. Travel receipts reached USD 3.2 billion, remittances amounted to USD 8.7 billion, and business process outsourcing revenues totaled USD 7.3 billion.

On the financing side, financial account inflows weakened significantly, reinforcing pressures from the widening current account deficit.

Other investment inflows fell sharply by 77.0 percent due to foreign loan repayments by domestic banks and withdrawals of nonresident deposits. Net FDI inflows also declined, particularly in debt instruments.

Portfolio outflows moderated as both residents and nonresidents reduced investments in debt securities, although overall portfolio flows remained subdued amid cautious investor sentiment.

Exchange rate pressures intensified even as external buffers remained adequate. Gross international reserves stood at USD 106.6 billion as of end-March 2026, covering 6.9 months of imports and 4.2 times short-term external debt based on residual maturity.

The peso depreciated in both nominal and real terms and showed greater volatility, reflecting the combined effects of elevated import costs, weaker financial inflows, and heightened global uncertainty.

Looking ahead, the BSP expects the Philippines’ external position to remain under pressure in 2026–2027. Cost-driven trade imbalances and tighter financial conditions are expected to shape both current account and financing dynamics.

The current account deficit is projected to widen relative to 2025, though less than earlier expected, as weaker domestic demand tempers import growth while export performance remains constrained.

Elevated global energy prices are expected to sustain adverse terms-of-trade pressures, keeping the trade deficit elevated despite softer demand.

Structural import requirements, particularly for energy and investment-related goods, limit the pace of adjustment. Gains in electronics may also be partly offset by climate-related risks to agricultural exports, easing commodity price support, and slower global trade.

Nontrade inflows are expected to provide only a partial offset and show signs of moderation. Remittance growth is seen to slow due to reduced deployment, particularly to the Middle East.

Information technology and business process management earnings are likely to be tempered by artificial intelligence-related restructuring and weaker investment, while tourism recovery is expected to remain gradual amid high travel costs.

Financing inflows are expected to remain positive but moderated, with the BSP citing tighter global liquidity, higher-for-longer interest rates, and increased investor selectivity.

FDI is likely to remain constrained by cautious global investment behavior and domestic structural challenges. Portfolio flows are expected to remain volatile and sensitive to global risk sentiment and financial conditions.

Some recovery is anticipated in 2027, supported by improving global conditions and structural catalysts such as bond index inclusion and sectoral investment pipelines.

The BSP said the rebound in inflows is likely to be gradual and uneven.