- We see the Philippines Peso as vulnerable and USD/PHP possibly rising above the 60 levels if the Iran and Middle East conflict is sustained and the Strait of Hormuz remains closed, with oil prices already reaching above US$100/bbl at the time of writing: While we do not yet know how the Iran and Middle East conflict will play out from here, it’s important to stress our current base case USD/PHP forecast of 58.00 by 4Q2026 assumes a resolution after March 2026 and implicitly for oil prices to fall towards the US$70/bbl levels. Our model-based estimates tell us that USD/PHP could range between 59.00-60.00 in a scenario of US$90/bbl oil prices, and between 60.00-61.00 with US$100/bbl oil prices, especially if this is coupled with a hawkish Fed. Of course, not all things are equal in practice, and the BSP may choose to not just pause on policy rates but even hike rates, which would provide some offsetting support to PHP. Overall, we see our scenario and sensitivity analysis as reasonable given the meaningfully different nature of today’s crisis.
- This time is different in this crisis - it is not just about higher oil prices but a potential looming energy shortage, with the Philippines and Asia disproportionately hit by a prolonged Strait of Hormuz closure: We highlight three key areas of direct energy supply shortage stress in this crisis - crude oil, petroleum products, and natural gas and natural gas liquids like LPG/propane.
- First, crude oil. 95% of the crude oil that the Philippines imports and on average 65% that Asia imports comes from the Middle East, with relatively limited ability to bypass the Strait of Hormuz chokepoint even with existing pipelines out of Saudi Arabia and the UAE.
- Second, refined petroleum products especially in Asia are facing significant risk of shortages especially in jet fuel, diesel and gasoline, with production shut-ins in the Middle East exacerbated by reduction in refinery runs in Asia and some initial signs of export restrictions on refined petroleum products from our region. While the Philippines only imports 3% of its refined product needs directly from the Middle East, shortages from regional refineries and the global spillovers of higher product prices will no doubt impact the Philippines. The Philippines’ President has said that the country has around 2 months of petroleum inventory, and being able to fully utilise and distribute this inventory to manage a possible supply shortage would be key.
- Third, natural gas and associated products. Virtually all of the natural gas supply from the Middle East is subject to the Strait of Hormuz chokepoint especially from Qatar. For the Philippines, imports of LNG are not very meaningful today, but we note 91% of propane/LPG imports and 35% of imports of natural gas liquids (inputs into the chemicals industry) are from the Middle East.
- The indirect effects across a range of sectors could also be meaningful for the Philippines beyond the first order impact, and ultimately points to a stagflationary environment of higher inflation and weaker growth for the Philippines. With possible production and supply chain disruptions negatively impacting energy-intensive sectors such as manufacturing, transportation, travel, and food production, a lengthy Strait of Hormuz closure scenario may well morph into something akin to COVID lockdowns and coupled with sharp increases in commodity prices, but more concentrated in specific sectors given the very different origin of today’s shock. Key indirect channels include:
- First, fertiliser prices and food costs. While the Philippines only imports 7% of its fertilisers directly from the Middle East, regional food producers such as India and Thailand have quite high dependence on fertiliser imports from the Middle East (40% and 34% respectively). In addition, globally 15% of overall fertiliser and closer to 20-30% of urea-based fertilisers are dependent on the Middle East region. All these could over time have some spillover impact to global food prices and hence also inflation, the impact which may only be seen from 2H2026.
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- Second, electricity prices. For the Philippines, 50-60% of electricity generation still depends on coal today, even as the share of renewables has been rising over the past few years. Coal is not directly impacted by today’s crisis, but shortages in LNG and natural gas in Asia and Europe could result in some switching towards coal globally for electricity generation, pushing up global coal prices – and as such raising electricity prices for the Philippines over time.
- Third, manufacturing. Overall, the direct exposure of the Philippines to Middle East is quite limited at around just 1% of non-energy exports and 0.5% of non-energy imports. Nonetheless, the tech and semiconductor-dependent markets in our region such as South Korea and Taiwan are quite dependent on natural gas and LNG for imports (~20-35%), and potential supply chain and manufacturing disruptions there may have some negative spillovers to the Philippines’ manufacturing sector as well, including in electronics exports which have been growing well so far in the Philippines. In addition, upstream disruptions to chemicals feedstock will likely have downstream impact to other areas of manufacturing. Direct manufacturing production cuts in the Philippines from electricity shortages are far less likely to materialise, but is still a key risk to watch nonetheless.
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- Fourth, travel and transportation. Just 2% of tourism arrivals for the Philippines are from the Middle East, but we think this number understates the possible impact to the travel and transportation sector for the Philippines. With transportation hubs in the Middle East such as Doha and Dubai becoming more important transit points such as between Europe and Asia especially after the Russia-Ukraine war, a prolonged air travel disruption could fundamentally change the economics of air travel in some ways, including for the air transport sector in the Philippines. In addition, air cargo and container freight cost spikes could also add further to costs from supply chain disruptions.
- Fifth, remittances. OFW cash remittances from the Middle East makes up around 18% of total remittances for the Philippines, while 40% of Overseas Foreign Workers and ~20% of total estimated immigrants from the Philippines are based in the Middle East. Historically, remittances growth has been relatively resilient in the Philippines even during major shocks such as COVID, but a prolonged period of uncertainty stemming from the Middle East could result in some eventual slowdown in local incomes and hence remittances.
- Overall, we estimate that every US$10/bbl increase in oil prices cuts GDP growth by around 0.2pp and raises inflation by around 0.6pp in the Philippines. These historical sensitivities however likely under-estimates the macro impact, because the specific transmission mechanisms in this crisis may not just be about oil prices, but also includes potential energy shortages, meaningful negative indirect spillovers across sectors over time, coupled with non-linear effects as oil prices rise above certain thresholds (as mentioned above). Our current GDP forecasts for the Philippines of 4% in 2026 and 6% in 2027 are already below consensus, but if oil prices were to spike to US$100/bbl on a sustained perspective, GDP may easily fall closer to 3.7% in 2026 and 5.7% in 2027, after incorporating the lagged impact of higher oil prices to the economy. If oil prices were to spike to US$130/bbl, GDP will likely be cut by more than 1%, with GDP growth coming in at 3.4% and 5.4% in 2026 and 2027 respectively. Once again, these are probably under-estimates, and the negative impact could well be bigger after incorporating indirect spillovers which are much harder to accurately estimate now. How the Philippines’ government responds through fiscal policy support moving forward will also be key.
- Will BSP hike rates if the crisis worsens and oil prices spike further? We think the answer is likely “no” right now, but the key distinction is whether this is a temporary supply-side shock perhaps analogous to COVID lockdowns, or proves something more permanent with the potential to raise inflation expectations over time. Our current base case forecast is for the BSP to cut rates twice more to 3.75%, likely in June and October, but this is predicated on the crisis resolving by March 2026 and for oil prices to move to US$70/bbl by 2Q2026. A scenario of sustained oil prices at US$90/bbl will likely see inflation breach the upper-end of the BSP’s inflation target of 4% in 2026 before coming down to 3.2% in 2027. Meanwhile, risk scenarios of sustained oil prices above US$100/bbl will likely see inflation in the Philippines above the 4% upper-end inflation threshold not just for 2026 but also very likely 2027 as well. Whether this crisis proves to be a temporary supply-side shock perhaps analogous to the COVID lockdowns with an eventual resolution in the supply capacity of the global economy and energy supply, or more perniciously proves to be something more permanent in terms of destruction to global economic and energy supply capacity will be crucial for the BSP. In the latter, we could well see more permanence in inflation rates (and not just price levels) and hence inflation expectations, and warrant a policy rate response, despite being accompanied with far weaker growth prospects.
- From a FX and rates perspective, we think USD/PHP could trade between 59-60 levels with US$90 oil prices, 60-61 levels with US$100 oil prices, and above that if coupled with a stronger Dollar and/or a hawkish Fed. These scenarios are partly informed by our USD/PHP modelling exercise. We estimate that every US$10/bbl increase in oil prices raises the Philippines’ current account deficit by 0.4-0.5% of GDP, and US$100/bbl oil prices could imply the Philippines’ current account deficit closer to 3% of GDP. We could also see some rise in BVAL yields as oil prices rise, but even as PH CDS spreads should widen the absolute increase should remain below that seen during recent historical episodes such as COVID and the Russia/Ukraine war.
