Mideast war poses credit risks to PHL

By Katherine K. Chan, Reporter 

THE PHILIPPINES faces credit risks as the widening conflict in the Middle East, especially if prolonged, could strain the country’s oil imports, overseas Filipinos’ remittances, and the peso, Fitch Ratings said.

In a commentary posted on Saturday, the debt watcher said emerging markets including the Philippines could see a “substantial impact” on their credit rating if the Strait of Hormuz remains closed for over a month.

“The Iran conflict could raise additional challenges for some emerging market sovereigns, through such channels as energy imports, remittances, fiscal subsidies, exchange rates and access to international finance,” Fitch said.

“Under our baseline, in which the effective closure of the Strait of Hormuz lasts less than a month and major damage to the region’s oil production infrastructure is avoided, risks to emerging market ratings should be contained, but a longer closure or more sustained effects could lead to a more substantial impact,” it added.

Fitch affirmed its “BBB” long-term foreign currency issuer default rating and “stable” outlook for the Philippines in April last year.

A “stable” outlook means the Philippines will likely maintain its rating in the next 18 to 24 months.

Since the start of the United States and Israel’s attacks on Iran late last month, the Strait of Hormuz has been shut down, raising concerns over oil trade from the region as experts have warned that any disruption in the vital chokepoint could push fuel prices up globally.

Nearly a fifth of the world’s oil supply, including over 90% of the Philippines’ crude requirements, is shipped via vessels from the Middle East that traverse the Strait of Hormuz.

According to Fitch, the Philippines’ net fossil fuel imports account for about 4.2% of the country’s gross domestic product (GDP), making the country vulnerable to global oil price swings.

“More protracted high energy prices could add to external strains facing these sovereigns, especially if other stresses emerge, for example, disruption to remittances,” it said.

On Friday, Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. said the ongoing war in the Middle East could affect remittance flows as many migrant Filipinos work in the region.

“There’s some downside risk in terms of demand for our labor services. We’re a major exporter of labor services,” he said in an interview with CNBC. “We have 2.5 million Filipinos in the Middle East and they send a lot of money home. About 18% of remittances come from the Middle East. So, that’s a concern.”

In 2025, overseas Filipino workers’ remittances rose by 3.3% year on year to hit a record high of $35.634 billion, with 18.19% or $6.481 billion coming from the Middle East.

FURTHER EASING UNLIKELY
Meanwhile, Nomura Global Markets Research said the ongoing geopolitical tensions could affect the Philippines’ current account position and push up inflation, which could prompt the BSP to end its current easing cycle.

“The conflict in Iran poses significant risks to the inflation outlook and external balances,” Nomura Chief ASEAN Economist Euben Paracuelles and Research Analyst Yiru Chen said in a March 6 report. “Despite a still-weak growth outlook, BSP will likely pivot to a more cautious stance soon.”

At its first policy review of the year on Feb. 19, the central bank trimmed benchmark interest rates by 25 basis points (bps) for a sixth straight meeting, bringing the policy rate to an over three-year low of 4.25%.

The decision came on the back of a still manageable inflation outlook and as it sought to support domestic demand amid the economic fallout from a corruption scandal that has dented both consumer and business confidence.

The latest cut brought total reductions to 225 bps since it began easing in August 2024.

Mr. Remolona said in an interview on Bloomberg Television on Friday that while the increase in fuel costs so far amid the conflict remains “manageable,” the Monetary Board could be forced to hike rates once oil price hits $100 per barrel as it could bring inflation past 4%.

“We’re hoping we don’t have to tighten in the face of higher inflation,” Mr. Remolona said. He added that if current risks don’t materialize, the central bank would likely maintain its current policy stance.

The consumer price index (CPI) averaged 2.2% for the first two months after costlier energy prices in the country, particularly fuel and liquefied petroleum gas brought the headline print to 2.4% in February.

Nomura said they now expect inflation to average 3.2% this year, up from their previous 2.5% estimate. It also sees the country’s current account deficit widening to 4% of GDP by yearend from 3.7% previously.

“Our higher CPI inflation forecast for 2026 reflects a quick and full pass-through from rising oil prices,” it said. “With the change in our inflation forecast, which pencils in an upward trajectory to the upper end of BSP’s 2-4% target in coming months, we remove the final 25-bp rate cut we forecast in April and expect BSP to leave the policy rate unchanged at 4.25%.”

The central bank wants to keep inflation between 2% and 4%, with Mr. Remolona noting that their “sweet spot” remains at 3%.