​​[In This Economy] How will the US–Iran conflict affect the Philippine economy?

2026-03-06 - 07:23

Not content with the global economic havoc he has already wrought, US President Donald Trump has now drawn the United States and Israel into war with Iran. Brace for economic turmoil that might last months if not years. On many fronts, the Philippines will feel the brunt. Since the attacks started over the weekend, oil prices have surged nearly 14%. Iran’s Revolutionary Guards have threatened to close the Strait of Hormuz, through which roughly a fifth of global oil transits. Qatar has halted LNG production. An Iranian general has vowed to push oil to $200 a barrel. These developments will surely hurt Filipinos. We import over 90% of our crude oil, with no meaningful domestic production to fall back on. When global oil prices spike, we absorb the hit almost entirely. Expect inflation to spike, too. By raising the cost of fuel, higher world oil prices will almost surely raise the cost of transportation and the cost of practically everything else. Food, commuting, electricity, goods that need to be shipped — all of these will get more expensive. This comes at a bad time since inflation, easing in recent months, is already ticking back up: it was 2.4% in February 2026. While that’s still within the government’s target of 2–4%, a sustained oil price shock could push inflation significantly higher in the coming weeks. The last time we went through a major oil shock, during the TRAIN-induced price hikes of 2018, inflation peaked at 6.9% in 2018 and dragged down consumer spending and sentiment for months. We’re far from those levels yet, but the direction is clear. We also need to watch out for so-called “second-round effects,” that is, whether the initial price shock feeds into wages, expectations, and other prices in a self-reinforcing spiral. If it’s but a temporary supply-driven spike, the damage of the war will be manageable. But if it doesn’t, and we’re facing a months-long (or even years-long) war, we have a bigger problem. Already, analysts are dropping the S-word: stagflation, which means economic stagnation (low growth) and high inflation. What government should (and shouldn’t) do How should the administration of President Ferdinand Marcos Jr. respond? Sound policy at this time requires close coordination across agencies involved in monetary and fiscal policy. The Bangko Sentral ng Pilipinas (BSP), for instance, will do well to resist the temptation to mechanically tighten (raise interest rates) just because headline inflation rises. If Filipinos’ inflation expectations remain stable and anchored, the right move would be a measured response: hold interest rates at the same level or, at most, impose a small hike. This can be paired with clear communication that the oil shock is supply-driven and that second-round effects won’t be tolerated. The BSP will want to avoid raising interest rates too much, since that move might crush output, which was already slowed down by corruption from last year, without addressing the root cause (conflict in the Middle East). The Department of Finance, for its part, might want to roll out temporary, targeted relief for affected sectors. This may come in the form of transport vouchers (like the Pantawid Pasada Fuel Card for PUV drivers during the 2018 inflation spike) or targeted cash transfers for the poorest households. The key word is targeted. The government will want to avoid large-scale oil price subsidies because they are expensive and even regressive (they disproportionately benefit car owners). They are also fiscally unsustainable if the crisis drags on. Government recently reported that its outstanding debt climbed to P18.13 trillion in January 2026, and before that the debt-to-GDP ratio climbed to more than 63.2% by end-2025 (the highest in 20 years). The Department of Energy, meanwhile, as an emergency measure, should push energy conservation, improve logistics, enforce competition in the downstream oil sector, and build up buffer stocks where feasible. As a rule, a country must have at least 90 days worth of oil reserves. But President Marcos admitted a few days ago we only have reserves worth 50–60 days. The response so far There are signs, however, that the Marcos administration is pushing for Band-Aid solutions. For instance, President Marcos is seeking congressional authority to reduce excise taxes on petroleum products if Dubai crude exceeds $80 per barrel. On the face of it, this sounds helpful. In practice, it raises several concerns. Excise tax cuts on fuel are an untargeted intervention, meaning they benefit everyone who buys fuel, not just those who need help most. They tend to erode revenues at a time when the fiscal position is already stretched. At best, they are politically easy but economically lazy, since they fail to address the underlying vulnerability of the country, which is nearly totally dependent on imported oil. Besides, our experience from previous oil crises suggests the benefits of fuel tax cuts don’t always get fully passed on to consumers. If the government, say, cuts the pump prices by P5 per liter, petroleum companies might only cut it by P3 per liter. (In the economics literature this is also called asymmetric price adjustments.) The Marcos administration has also mentioned targeted fuel subsidies for transport, agriculture, and fisheries, as well as free bus rides. These are okay, but what we need is a coherent package and not a mixed bag of measures announced piecemeal in press conferences. Appeals to carpool and save energy by setting aircon thermostats at a certain level (no lower than 24 degrees Celsius), while fine as general advice, barely constitute a solid economic strategy. The Middle East conflict also raises the question of remittances. The region hosts hundreds of thousands of overseas Filipinos, and any sustained disruption to economic activity there could dampen remittance flows. While this is unlikely to be catastrophic in the short run (remittances are spread across many countries and sectors), it’s a risk worth monitoring, especially if the conflict escalates or drags on. Even a marginal decline in remittances, combined with higher domestic prices, would squeeze the budgets of their loved ones here at home. Caught unawares (yet again) Once again, this new war in the Middle East exposes the structural vulnerability of the Philippine economy, insofar as it imports nearly all of its oil and has done too little to diversify its energy sources for the long-haul. Every oil shock hits us hard because we’ve failed to do our assignment and beef up domestic energy capacity, invest adequately in renewables (solar and wind), and promote transport infrastructure that reduces oil dependence (e.g., active transportation like biking). Sure, President Marcos announced promising new reserves of natural gas in Malampaya. But we still don’t know exactly how much gas can be extracted there, and it will take at least a few years before extraction can start in earnest to meet our energy need. These are tough times for the already beleaguered global economy, and we should all closely monitor the Philippine government’s policy responses. Let’s pressure the government to do much more and go beyond another array of Band-Aid solutions like convenient excise tax cuts, carpool advisories, and prescribed thermostat levels. – Rappler.com Dr. JC Punongbayan is an assistant professor at the UP School of Economics and the author of False Nostalgia: The Marcos “Golden Age” Myths and How to Debunk Them. In 2024, he received The Outstanding Young Men (TOYM) Award for economics. Follow him on Instagram (@jcpunongbayan). Click here for more In This Economy by JC Punongbayan.