Fragile Philippines Battered by Oil Shock as Iran War Hits Asia

A street vendor stands under a shelter during rain at Quiapo Market in Manila, the Philippines, on Wednesday, Sept. 4, 2024. Philippine inflation eased to the slowest in seven months in August and returned to the central bank's target, increasing policymakers' scope to sustain the rate-cut cycle. Photographer: Geric Cruz/Bloomberg Photo by Geric Cruz /Bloomberg

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(Bloomberg) — The Philippines is creaking under the weight of Iran war oil shock, with economic growth and consumption grinding to the weakest in more than a decade as inflation soars. 

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Economic data Thursday revealed how vulnerable the Southeast Asian nation is versus its neighbors to the energy choke from the US-Iran standoff, particularly in a region that relies on the Middle East for two-thirds of its oil. Its economy expanded at 2.8% last quarter, below estimates and the slowest pace outside the pandemic since the end of 2009, while household spending was the weakest since 2010. 

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With inflation running at the fastest in three years, President Ferdinand Marcos Jr. and the central bank are left with few easy options to contain the damage. They must spend more to shield households, or tighten policy further after last month’s rate hike.

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The country also faces threats from a looming El Nino, which risks driving up food costs further. 

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To be sure, the Philippines started this year in a weak position, as a massive corruption scandal related to flood-control projects dented confidence and slowed government spending.

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“Our growth performance trails Vietnam, Indonesia and China among others in the region,” Economic Planning Secretary Arsenio Balisacan said at a briefing in Manila. “This outcome reflects the combined impact of significant domestic and global challenges.”

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The biggest factor was the Middle East conflict, he said. The US-Israeli war on Iran has spiked oil prices globally, but the Philippines is acutely affected because it imports more than 90% of its requirements from region.

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The peso pared gains after the data, while Philippine stocks remained around 2% higher amid a regional rally.

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Investment fell 3.3% last quarter, while industrial production edged down 0.1%, according to Thursday’s data. Consumer spending rose 3% from a year earlier, while government expenditure gained 4.8%. 

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The Philippines is most at risk in the region of stagflation — characterized by weak growth, high inflation and unemployment, according to Lavanya Venkateswaran, senior Asean economist at Oversea-Chinese Banking Corp. in Singapore.

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The dismal figures come as the Philippines hosts leaders of the 11-member Association of Southeast Asian Nations, which are seeking to bolster cooperation and regional resilience amid the economic fallout from the Iran war.

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The region is facing a significant increase in fuel and energy costs, which will eventually feed into agricultural inputs, foods and basic commodities, the Philippines Foreign Affairs Secretary Theresa Lazaro said Wednesday at the opening of the meetings. 

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The central bank has little room to support the economy because of peso weakness and surging consumer prices. Meanwhile, growth and investment have slowed dramatically since Marcos announced a probe into the misuse of flood-control funds last year. Gross domestic product for the year slumped to 4.4%, the weakest pace in more than a decade outside the pandemic.