MANILA, Philippines – Swiss investment bank UBS sees the country’s economic expansion easing next year amid the expected slowdown in domestic demand.

In its 2017 Economic Outlook for the Philippines, UBS expects a slower growth of 5.6 percent for the economy next year before recovering to six percent in 2018.

Economic managers of the Duterte administration see a growth rate of between 6.5 and 7.5 percent from a range of six to seven percent this year.

The GDP expansion accelerated to 7.1 percent in the third quarter from seven percent in the second quarter, bringing the average growth to seven percent in the first nine months.

“Growth in the Philippines is set to slow, having accelerated sharply in 2016. So far 2016 has seen extremely strong domestic demand and, in particular, booming investment growth delivered better than expected real GDP growth,” UBS said.

It said the drivers of the 2016 boom include election related spending as well as the loose monetary conditions laid down by the Bangko Sentral ng Pilipinas (BSP) that fuelled credit growth.

“We expect both of these to reverse in 2017 as deficit projections show a smaller fiscal impulse, and global monetary conditions tighten. We forecast real GDP growth of 5.6 percent and six percent year-on-year in 2017 and 2018 respectively,” it said.

The Duterte administration has committed to ramp up infrastructure spending to five percent of GDP. To achieve this, the government raised its budget deficit ceiling to three percent of GDP instead of two percent of GDP.

“This could allow fiscal policy to be more supportive of growth than the deficit implies. We doubt this boost will come as early as 2017, infrastructure projects tend to be plagued by delays, but better traction on public projects could lift growth in 2018,” UBS said.

According to the investment bank, oil prices would average $60 per barrel in 2017 and $70 per barrel in 2018 putting more pressure and pushing the country’s inflation to above three percent in 2018.

“Inflation has remained fairly benign in the Philippines, a consequence of the disinflationary pressures of falling oil prices,” it said.

The BSP has retained its inflation target of two to four percent until 2020.

UBS said the central bank is likely to hike interest rates by 100 basis points over the next two years after the US Federal Reserve jacked up policy rates by 25 basis points last Dec. 14 as it shifted to a more “hawkish” stance.

“We look for BSP to raise rates by 50 basis points in 2017 and by 50 basis in 2018, following the Fed,” UBS said.

The investment bank sees the peso weakening further to 51 to $1 in 2017 and to 55 to $1 in 2018. The peso weakened by more than five percent this year.