Investments in the Philippines could rebound in 2027 if tensions ease in the Middle East, reducing oil price volatility and weakening inflationary pressure, according to Citigroup.

“(Easing inflation) will create a little bit more (leeway). Also, our view is that the Fed still has one hike. I know the market is pricing in another hike next year, but we’re not. In fact, we’re very out of consensus…. But more or less… there’s this view that the rate will peak,” Johanna Chua, Citigroup managing director and head of Emerging Market Economics and chief Asia economist, said at a briefing on Monday.

She added that such conditions could “eventually” pave the way “for bond yields to come off. And that will help global financial conditions.”

The outlook comes after the Philippines reported weaker-than-expected economic growth for the third quarter, a result Ms. Chua said underscored the need for a pickup in public investment.

Gross domestic product growth slowed sharply to 2.1% in the third quarter, from the 4% posted a year earlier and the revised 2.4% in the second quarter. The reading was well below the 2.7% median forecast in a BusinessWorld poll conducted last week, and also trailed Citi’s own 3.8% projection.

It was the economy’s weakest performance since the 3.8% contraction in the first quarter of 2021, during the coronavirus pandemic. Excluding the pandemic years, it marked the slowest growth in more than 16 years, or since the 1.8% expansion recorded in the fourth quarter of 2009.

Citi Philippines Country Head and Chief Executive Officer Paul Raymond A. Favila told reporters that corporate margins have thinned after companies absorbed the impact of high inflation and weak consumption.

According to Ms. Chua, the third-quarter growth report and October inflation data indicate that the Philippines is already in a state of stagflation, a combination of sluggish growth and elevated inflation. She noted that the slowdown was partially driven by the flood control scandal of 2025, which weighed on government spending.

“Obviously, you can say stagflation, you can say slowflation. It’s not a good macroeconomic outcome. Some of it is self-inflicted because, again, it’s because of the whole corruption scandal and the lack of capacity to spend. What a government should do should be to have productive spending, and that didn’t quite happen,” Ms. Chua said.

Mr. Favila, meanwhile, said an investment recovery will also hinge on how the national budget for next year moves through the approval process.

“The question is whether this current budget is going to be vetoed. Either way, there is money there that’s already planned. I think the bigger challenge is to ensure that (the funds) actually get deployed. The absorptive capacity of the (Public Works department), especially after having gone through massive investigations, is still quite low. There’s a reluctance to actually go out and spend for fear of being investigated,” Mr. Favila said.

“As a nation, we need to encourage our agencies to spend, rather than hold off. Because every day that money is sequestered and not deployed is another day where our economy weakens further,” he added.

Ms. Chua also cited investment opportunities being pushed by the government, including regional partnerships such as the Luzon Economic Corridor and the Pax Silica industrial hub, especially given the global push for artificial intelligence.

“There’s a lot of things happening that’s kind of just out of (the Philippines’) control, (with the proposed investments representing) such a large capex build-out,” she said.

“I think this Pax Silica gives us an opportunity… (it could be) a unique place within ASEAN. You know, a lot of ASEAN countries have benefited as China connectors,” she said, referring to attempts to circumvent trade barriers. “They build a lot of factories and data centers in Malaysia or Thailand. (Those countries) don’t want to choose. They want to work with both US and China.”

“The Philippines is kind of unique in ASEAN (with) Pax Silica” at a time of lagging development, she said. “You can have some kind of competitive advantage from labor costs. You would love to get some capital inflow for infrastructure.”

On the outlook, Citi sees inflation averaging 7.8% this year before easing to 5.9% by the end of 2027 and approaching the 3% level in 2028. The Bangko Sentral ng Pilipinas is expected to raise rates by 25 basis points (a quarter of a percentage point) in December and once again next year, bringing the policy rate to 6%, before beginning to ease in early 2028. Until that expected easing phase begins, the conditions Citi laid out — easing Middle East tensions, a peaking policy rate and the pace at which already-planned public funds get deployed — frame what to watch as the BSP’s December decision and next year’s budget process approach.