Philippines Faces Stagflationary Risks from Prolonged Strait of Hormuz Closure
A sustained closure of the Strait of Hormuz poses severe stagflationary risks for the Philippines, combining higher inflation with weaker economic growth, according to an analysis published in early March 2026. The assessment highlights the country’s vulnerability to both energy shortages and broader economic disruptions stemming from the ongoing Iran conflict.
Currency Vulnerability and Oil Price Sensitivity
The Philippine peso is identified as particularly vulnerable in the current crisis. Analysts project that the USD/PHP exchange rate could rise above 60 levels if the conflict persists and the strait remains closed. This baseline assessment assumes a resolution after March 2026, with oil prices falling toward $70 per barrel, supporting a forecast of 58.00 for the peso by the fourth quarter of 2026.However, scenario-based modeling suggests that with oil prices at $90 per barrel, USD/PHP could range between 59.00 and 60.00. Should prices reach $100 per barrel, the exchange rate could trade between 60.00 and 61.00, particularly if accompanied by a hawkish stance from the US Federal Reserve. The Bangko Sentral ng Pilipinas may respond not only by pausing policy rates but potentially hiking them, which would provide some offsetting support to the currency.
Direct Energy Supply Threats
The current crisis differs fundamentally from previous oil price shocks due to the risk of actual energy shortages, not merely higher prices. Three key areas of direct supply stress have been identified for the Philippines and the broader Asian region.First, crude oil imports face severe exposure. Approximately 95 percent of the crude oil imported by the Philippines originates from the Middle East, matching the regional average of 65 percent for Asia. The ability to bypass the Strait of Hormuz chokepoint remains limited, even with existing pipelines from Saudi Arabia and the United Arab Emirates.
Second, refined petroleum products are at significant risk. Production shut-ins in the Middle East are being exacerbated by reduced refinery runs across Asia, with early indications of export restrictions on refined products emerging in the region. Although the Philippines directly imports only 3 percent of its refined product needs from the Middle East, shortages from regional refineries and global spillovers of higher product prices will inevitably affect the country. The Philippine president has stated that the nation holds approximately two months of petroleum inventory, making efficient utilization and distribution critical to managing potential supply shortages.
Third, natural gas and associated products face major disruption. Virtually all natural gas supply from the Middle East, particularly from Qatar, must transit the Strait of Hormuz. While Philippine imports of liquefied natural gas remain modest at present, 91 percent of propane and LPG imports, as well as 35 percent of natural gas liquid imports used as inputs for the chemicals industry, originate from the Middle East.
Indirect Economic Channels
Beyond first-order energy impacts, indirect effects across multiple sectors could prove equally significant for the Philippine economy, pointing toward a stagflationary environment of higher inflation and weaker growth. Production and supply chain disruptions are expected to negatively affect energy-intensive sectors including manufacturing, transportation, travel, and food production. A prolonged closure scenario may produce effects comparable to COVID-19 lockdowns, though concentrated in specific sectors given the different origin of the shock.Fertilizer prices and food costs represent a primary indirect channel. Although the Philippines directly imports only 7 percent of its fertilizers from the Middle East, regional food producers such as India and Thailand have high dependence on fertilizer imports from the region, at 40 percent and 34 percent respectively. Globally, 15 percent of overall fertilizer supply and 20 to 30 percent of urea-based fertilizers depend on the Middle East. These factors could over time spill over into global food prices and Philippine inflation, with effects likely visible from the second half of 2026.
Electricity prices face upward pressure through an indirect channel. Coal accounts for 50 to 60 percent of Philippine electricity generation, even as the share of renewables has increased in recent years. While coal is not directly impacted by the current crisis, shortages of LNG and natural gas in Asia and Europe could drive a global switch toward coal for electricity generation, pushing up coal prices and consequently raising Philippine electricity prices over time.
Manufacturing sector exposure, while limited directly, carries risks through regional supply chains. The Philippines has only about 1 percent of non-energy exports and 0.5 percent of non-energy imports directly tied to the Middle East. However, technology and semiconductor-dependent markets in the region, such as South Korea and Taiwan, rely substantially on natural gas and LNG imports at approximately 20 to 35 percent of their needs. Potential supply chain and manufacturing disruptions in those economies may produce negative spillovers to the Philippine manufacturing sector, including electronics exports, which have shown strong growth to date. Upstream disruptions to chemical feedstocks will likely have downstream impacts on other manufacturing areas. Direct manufacturing production cuts from electricity shortages in the Philippines remain less likely but constitute a key risk to monitor.
Travel and transportation face indirect effects that may be understated by direct exposure figures. Only 2 percent of tourism arrivals to the Philippines originate from the Middle East. However, Middle Eastern transportation hubs such as Doha and Dubai have become increasingly important transit points between Europe and Asia, particularly following the Russia-Ukraine war. A prolonged air travel disruption could fundamentally alter the economics of air transport, including for the Philippine aviation sector. Additionally, spikes in air cargo and container freight costs could add further supply chain expenses.
Remittances from overseas Filipino workers in the Middle East constitute approximately 18 percent of total remittances to the Philippines, with 40 percent of overseas foreign workers and roughly 20 percent of total estimated Filipino immigrants based in the region. Historically, remittance growth has remained relatively resilient in the Philippines even during major shocks such as the COVID-19 pandemic. Nevertheless, a prolonged period of uncertainty stemming from the Middle East could eventually slow local incomes and, consequently, remittance flows.
Macroeconomic Impact Estimates
Quantitative modeling indicates that every $10 per barrel increase in oil prices reduces Philippine GDP growth by approximately 0.2 percentage points and raises inflation by around 0.6 percentage points. These historical sensitivities likely underestimate the actual macroeconomic impact, as the current crisis involves not only oil prices but also potential energy shortages, meaningful negative indirect spillovers across sectors over time, and non-linear effects as oil prices exceed certain thresholds.Current GDP forecasts for the Philippines stand at 4 percent for 2026 and 6 percent for 2027, already below consensus estimates. However, sustained oil prices at $100 per barrel could reduce GDP to approximately 3.7 percent in 2026 and 5.7 percent in 2027, after incorporating the lagged impact of higher oil prices. Should oil prices spike to $130 per barrel, GDP would likely be reduced by more than 1 percentage point, yielding growth of 3.4 percent in 2026 and 5.4 percent in 2027. These estimates probably remain conservative, as the negative impact could be larger after incorporating indirect spillovers that remain difficult to quantify accurately. The Philippine government’s fiscal policy response will also be a critical factor moving forward.
Monetary Policy Implications
Regarding whether the Bangko Sentral ng Pilipinas would hike rates if the crisis worsens and oil prices spike further, the current assessment suggests the answer is likely negative. However, a key distinction exists between a temporary supply-side shock, perhaps analogous to COVID-19 lockdowns, and a more permanent shock with the potential to raise inflation expectations over time.The baseline forecast anticipates two further rate cuts from the BSP, bringing the policy rate to 3.75 percent, likely in June and October 2026. This projection assumes a resolution of the crisis by March 2026 and oil prices moving to $70 per barrel by the second quarter of 2026. A scenario of sustained oil prices at $90 per barrel would likely see inflation breach the upper end of the BSP’s 4 percent inflation target in 2026 before moderating to 3.2 percent in 2027. Risk scenarios with sustained oil prices above $100 per barrel would likely keep Philippine inflation above the 4 percent upper threshold not only for 2026 but also very likely for 2027.
Whether the crisis proves to be a temporary supply-side shock with an eventual resolution in global economic and energy supply capacity, or a more permanent destruction of that capacity, will be crucial for the BSP’s policy response. In the latter case, more permanence in inflation rates, not merely price levels, and consequently in inflation expectations, would warrant a policy rate response even if accompanied by far weaker growth prospects.
