From best case to worst: How Middle East conflict will affect Philippine economy

2026-03-06 - 00:03

A day before the US and Isarael launched their twin attack against Iran last week, former lawmaker and now chair of Salceda Institute for Risk and Strategic Studies Inc. (Salceda Research), Joey Sarte, posted with excitement his views about the government being on the cusp of A-level credit rating in two years, following the positive sovereign rating outlook given by global debt watcher S&P Global Ratings for the Philippines in 2026 – an honor given to only two other countries in the Asia-Pacific (APAC) region. A sovereign credit rating upgrade is essentially a “seal of approval” signaling to the global financial community that a country has become a safer, and more reliable borrower. The upgrade has tangible impacts on the economy. The most direct benefit is lower interest rates. This saves the government significant money on interest payments, which can then be redirected toward public services like infrastructure, education, or healthcare. When a country climbs to “investment grade,” massive pools of capital are suddenly unlocked, leading to increased investment in the country’s stock market, bond market, and businesses. It also leads to higher foreign direct investment (FDI): multinational companies often view a stable, high-rated country as a safer place to build factories, open offices, and expand operations, which leads to job creation and technology transfer. Another benefit is that it leads to a stronger currency. While a very strong currency can sometimes make exports more expensive, a stable and predictable currency generally helps manage inflation and makes importing essential goods like machinery and fuel to be more affordable. Must Read [Vantage Point] Pricing confidence, not growth Route to A-level rating Arguing against the narrative that the Philippines may not get the upgrade because the country has a 63.2% debt-to-GDP ratio, Salceda cited several countries who are under similar circumstances but still got an A-rating status. For instance, Japan has 235% debt-to-GDP but still holds an A+ rating from S&P. The answer, according to Salceda, lies in Japan’s consolidated balance sheet (government financial assets, central bank holdings, foreign reserves). Japan’s net debt-to-GDP comes to about 77% only. Malaysia is another example. Even with a slightly higher debt-to-GDP ratio than the Philippines at 65%, it has an A- rating. The answer, according to Salceda, is that “Malaysia’s debt is backed by Petronas sovereign wealth, a deep housing and mortgage market at 35 percent of GDP, and strong institutional credibility.” Salceda identified three strategic pillars that would serve — at the same time demonstrate to rating agencies — that the Philippines has productive assets to back its debt, namely: housing, industrial policy, and tourism. On housing, Salceda said: “Our mortgage-to-GDP ratio is less than 5 percent. Malaysia is at 35 percent. Thailand is at 20 percent. We have a 6.5 million units housing backlog and 60 percent of OFW remittances — that’s US$38 billion — go to real estate, mostly informally. If we deepen the mortgage market through Pag-IBIG reform, formalize remittance channels into housing finance, and accelerate land titling, we create visible household wealth that securitizes our national debt at the household level.” On industrial policy: “Fitch explicitly flagged our low per capita GDP as a constraint to a credit upgrade. At US$3,500, we are well below Malaysia’s US$12,500 and Thailand’s US$7,200. Strategic investments in semiconductors, food processing, energy, and digital infrastructure — using the PPP [Public-Private Partnership] Code framework — will raise per capita income and directly address Fitch’s binding constraint,” Salceda said. On tourism: “This is the quickest fix for our current account deficit, which is S&P’s other stated condition for the upgrade. We had 5.9 million international arrivals in 2024. Thailand had 35 million. Vietnam had 17.5 million. Our tourism receipts were $13.1 billion against Thailand’s roughly $60 billion. If we close even half that gap through airport upgrades in Palawan, Siargao, and Bohol, visa liberalization, and a serious marketing budget, that’s US$10 to US$15 billion in additional foreign exchange earnings per year,” Salceda said. Salceda called the attention of President “Bongbong” Marcos Jr. (PBBM) that the Department of Tourism’s (DOT) branding and marketing budget was cut from P1.3 billion in 2023 to just P100 million in 2025, while neighboring countries spend three to ten times more. “We’re bringing a knife to a gunfight on tourism promotion. That needs to change,” he said. Salceda also credited PBBM’s fiscal managers for putting the upgrade within reach: “The DOF (Department of Finance) posted a revenue effort of 16.7 percent last year — the highest in 27 years. Tax collections have expanded by 11.5 percent annually. The Medium-Term Fiscal Framework targets a deficit of around 4 percent of GDP by 2028 and 3 percent by 2030. If we stay on that path, the upgrade is ours to lose,” he said. S&P’s February 2026 Asia-Pacific Sovereign Rating Trends report, according to Salceda, confirmed that the Philippines’ sovereign credit metrics are expected to strengthen over the next one to two years, with narrowing fiscal and current account deficits potentially supporting a higher rating. “The flood control cleanup is now strengthening the rating case. It demonstrates institutional self-correction capacity, which is exactly what governance-focused agencies like want to see,” Salceda added. Must Read Flood control in PH: Analyses, explainers Repercussions of the conflict in the Middle East All this seems now to be at risk with the US-Israeli war on Iran. Two days ago, fuel prices started to increase: oil prices have been raised this week, with another round of bigger price increases expected in the next two weeks. Prices of liquified natural gas (LNG) is next. (Below are the scenario projections for crude oil price of Joey Salceda, Institute of Risk and Strategic Studies: As expected, the US-Israeli war against Iran has spilled over into the Strait of Hormuz. The strait is one of the world’s most critical energy chokepoints. One-fifth of the oil consumed globally — including LNG — passes through the strait that its blockage could prompt a surge in oil prices. As of this writing, shipping through the strait has gone “to a near halt” amid Iranian attacks on oil tankers in the region. At least five tankers have been damaged, two personnel killed and about 150 ships stranded around the strait, which separates Iran and Oman. Reports say “Iran maintains 5,000 – 6,000 naval mines deployable via midget submarines or fast boats, particularly at night when detection is difficult. Clearing operations would be protracted and costly, potentially forcing US escorts along Gulf coasts and cutting throughput by more than 50%.” More precisely, traffic is now reportedly down to at least 80%. The shipping industry is already grappling with a “huge spike” in freight costs for routes out of the Middle East and the Gulf. Of immediate concern is LNG disruption rather than crude supply. Oil supply is estimated to remain globally ample but LNG inventories are tight. DBS Research estimates that the escalation scenarios on oil prices could turn up as follows: If conflict lasts from 1–2 weeks (Base Case): US$80 – US$85/barrel of oil (bbl); with 60% chance of staying within US$80–US$100 if conflict remains contained. If conflict lasts for about 30 days (Prolonged Disruption): More than 25% probability of reaching US$100/bbl as ships reroute or lose insurance cover. If conflict goes over one month (Full Blockade): Prices will move well above US$100/bbl with genuine supply losses. Most Asian countries hold roughly 2 weeks of reserves; India turns vulnerable thereafter. DBS Research also estimates that North Asia will experience an acute exposure to LNG supply: Japan, South Korea, and Taiwan face total import dependence for power generation. Based on estimates, a one to two weeks of power outage could lift prices by about 20%, but a prolonged blockage could push up spot prices for LNG to US$20 — US$30/MMBtu, up from US$10 at present. While the US and Australia have the capacity to offer relief, this may not mean a total refill or relief of the requirement. Activity around the Red Sea and Bab el‐Mandeb also remains a leading indicator of broader destabilization. It is believed that the Hezbollah, Houthis, and Shia militias could stage low‐intensity attacks on shipping lanes, energy sites, or US assets. These moves heighten insurance and logistics risks even without a formal blockade. Bad side and bright side to watch With approximately 90% to 100% of its oil imports sourced from the Middle East, the Philippines will be — as it has been — extremely vulnerable to oil price shocks and may drive the country to face severe inflationary pressure, “characterized by skyrocketing fuel and commodity prices that could cripple domestic purchasing power.” The blockade of the Strait of Hormuz has already led to immediate increases in fuel prices. The Department of Energy (DOE) had already advised that pump prices may again increase up to another P10 per liter in the next two weeks, and cause a chain reaction — increasing the cost of transportation, basic goods, and electricity. The escalation of the conflict also poses a severe threat to both the physical safety and the stability of remittances by the over 2.16 million Filipinos who work in the region. It could lead to large-scale forced repatriation, which would not only create a humanitarian crisis but also to a massive drop in remittances. The conflict may as well result in higher domestic fertilizer prices: 66% of the Philippines’ nitrogen-based fertilizer imports come from the region. Any disruption to supply routes would likely directly threaten our food security, too. In a “worst-case” scenario, the Philippines may suffer a double shock: a sustained energy crisis that causes high inflation, combined with a massive reduction in remittances due to the displacement of workers. Last Wednesday, March 4, the Philippine Stock Exchange Index (PSEi) fell by 2.13% at 6,307.84. Investors are selling off amid rising global uncertainty linked to the escalating conflict involving Iran. Before the attack by the US and Israel on Iran, Salceda called for a “whole-of-government push” — particularly calling on Congress and the executive branch to align on a coordinated push for the A rating. “The Road to “A,” he said, “will not be paved with austerity... but about asset and wealth creation.” “The countries with the highest credit ratings despite high debt — Japan, the United States, the United Kingdom — all share one characteristic: their debt is backed by a deep asset base and institutional credibility. We don’t need to shrink our debt to 50 percent. We need to show that our borrowing creates household wealth through housing, productive capacity through industrial policy, and foreign exchange through tourism... this is within reach under President Marcos. Let’s not waste the opportunity,” he added. But the stakes to “The Road to A” have become complicated with the escalating conflict in the Middle East. There is one good window left though according to some analysts: a regime-change in Iran which is more open, and modernized alongside the reform‐driven Gulf Cooperation Council (GCC) states. This could make the Gulf transform into a more stable region and bring back long-term investment prospects — that may as well allow the Philippines to go on and achieve its A-level rating. – Rappler.com (The article has been prepared for general circulation for the reading public and must not be construed as an offer, or solicitation of an offer to buy or sell any securities or financial instruments whether referred to herein or otherwise. Moreover, the public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that could affect the objectivity of their reported or mentioned investment activity. You may reach the writer at densomera@yahoo.com) Must Read LIST: Contact numbers, hotlines for Filipinos in the Middle East