Rising rates to drive up PHL borrowing costs

BORROWING COSTS may climb further as the risk of imported inflation and tighter financial conditions amid elevated oil prices may keep bond yields high, Fitch Ratings said.

The Philippines remains one of the most exposed to the energy crisis, with higher global oil prices seen driving expectations of faster domestic inflation, the debt watcher said in a report on dated May 22.

This could push up local-currency 10-year government bond yields further and eventually lead to higher sovereign borrowing costs and spending on interest payments.

“Local-currency 10-year yields have risen most sharply since late February 2026 in countries more exposed to the energy shock, such as Pakistan, the Philippines and Thailand,” Fitch analysts said on Friday.

Yields on the 10-year Treasury bond increased by 13.1 basis points week on week to end at 7.7461% as of May 22.

Fitch also said in the same report that countries’ foreign reserves allow them to better absorb shocks stemming from the Middle East war.

However, the Philippines’ gross international reserves (GIR) have declined amid the central bank’s continued efforts to smoothen out sharp movements in the foreign exchange (FX) market as uncertainties over the war weakened the local currency.

“Economies with larger FX reserve buffers and deeper financing flexibility should absorb the shock more easily,” Fitch said. “FX reserve adequacy helps determine the room policymakers have to absorb a higher oil import bill, smoothen exchange rate volatility and maintain investor confidence without abrupt macroeconomic adjustments.”

As of end-April, the country’s GIR fell to its lowest level in over a year at $104.328 billion, central bank data showed.

The Philippines’ dollar reserves declined by 8% between February and April, bigger than the 7% drop recorded in Sri Lanka, 4% in India and Indonesia, and 2% in China and Thailand over the same period.

If its reserves continue to go down, the country may end up more exposed to shocks, especially given its dependence on oil imports and limited financing flexibility, the debt watcher said. 

Fitch said currencies of emerging markets in Asia have been under strain since the United States and Israel first attacked Iran in late February.

“This may reflect sovereigns’ oil-import dependence and fuel buffers, as well as the perceived room to absorb a prolonged energy shock without FX reserve use, tighter monetary policy settings or higher government spending,” it said.

Since the onset of the Middle East conflict on Feb. 28, the peso has been on a steady decline. From trading at the P58 range prewar, it is now moving at the P61 level.

On Monday, the peso closed at P61.465 versus the dollar, up 22.5 centavos from its P61.69 finish on Friday, according to Bankers Association of the Philippines data. — Katherine K. Chan