Middle East Conflict Threatens Philippines' Economic Gains

Strategic Insights -

Tensions in the Middle East following US airstrikes on Iran's nuclear sites may derail the Philippines' price stability gains and dampen economic growth, economists warn. The escalation of the conflict could lead to a spike in global oil prices, reducing recent gains in price stability. Higher fuel costs would increase domestic transport and power costs, driving up inflation, which has been a concern in recent years. The Philippines imports nearly all of its oil, making it vulnerable to disruptions in the global supply chain.

Key Takeaways:

  • The escalating conflict in the Middle East poses significant economic risks to the Philippines, including a potential spike in global oil prices.
  • A 14% increase in global crude oil prices and a 3% depreciation of the peso could be passed on locally in terms of additional input costs.
  • Higher fuel costs could lead to increased transportation and production expenses, driving up the prices of goods and services.
  • Potential inflation increase of 0.5 to 0.7 percentage point could hinder economic growth.
  • The manufacturing, logistics, and agriculture sectors could be particularly affected by increased energy costs and inflation.
  • Overseas Filipino workers in the Middle East could face disruption, affecting remittance flows and household income.
  • Sustained geopolitical instability may create uncertainty, slowing investment and trade, and further dampening growth prospects.
  • The overall impact on the economy would depend on how long the conflict lasts and how it affects global supply chains.
  • The conflict may delay the Bangko Sentral ng Pilipinas' planned monetary policy easing, affecting household budgets and slowing the growth trajectory.

Statistics:

  • Global crude oil prices have risen by approximately 14% since Israel launched large-scale attacks on Iran on June 13.
  • The peso has depreciated by about 3% since the attacks.
  • Headline inflation could pick up by 0.5 to 0.7 percentage point if sustained.
  • Average inflation from January to May stood at 1.9%, below the government's two to four percent target.
  • The Philippine economy grew by 5.4% in the first quarter, below expectations.
  • The country's economic growth is aiming for a six to eight percent growth rate this year.

Sources:

  • The STAR
  • Philippine Institute for Development Studies senior research fellow John Paolo Rivera
  • Reyes, Tacandong and Co. senior adviser Jonathan Ravelas
  • Rizal Commercial Banking Corp. chief economist Michael Ricafort
  • Moody's Analytics economist Sarah Tan