ME turmoil impact depends on duration

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With the Middle East turmoil already on its second week and no clear path to a cessation of military hostilities between Israel and the United States against Iran — and the collateral attacks on Gulf Cooperation Council countries — the Philippines and the rest of the world face variable scenarios that are already raising inflation fears, lowering economic activity and potentially reducing remittances, particularly for our country, from a dip in remittances of overseas Filipino workers based in the affected region.

In a briefing for members of the Monday Circle, First Metro Securities Brokerage Corp. economists Mark Angeles and Estella Dhel Villamiel explained the actions taken so far that have escalated the turmoil in the Middle East and its impact on the Philippines.

The turmoil began on Feb. 28 when the US and Israel carried out sustained strikes across Iran targeting military and industrial infrastructure, nuclear-linked sites and state and command facilities. In response, Iran responded not only against Israel but across the wider Gulf region, including US military bases, energy facilities and shipping routes.

In response, Iran has targeted oil and gas facilities and ships transporting hydrocarbons for the rest of the world.

First Metro’s analysis highlighted the Gulf’s critical role as one-third of the world’s seaborne oil normally passes through the 39-kilometer Strait of Hormuz, a chokepoint linking Gulf producers to global markets.

Following the joint Israel and US attack, tanker flows have slowed “to a trickle,” insurance and freight risk premiums have surged and the partial disruption has affected crude oil, refined fuels, LNG and LPG cargoes.

Thus, First Metro explained that the current Middle East turmoil is a cost-push shock, not a global demand collapse. This conflict, Villamiel elaborated, is a supply-risk and logistics shock that has triggered higher energy prices and higher shipping and insurance costs that are increasing inflation risk globally.

Inflation transmits the shock into corporate margins, household purchasing power and foreign exchange and interest-rate expectations. The longer the conflict lasts, the broader inflation becomes.

Transport, First Metro said, is the first and fastest inflation channel and shapes inflation expectations early. Food, it said, is the channel that turns an energy shock into a cost-of-living issue. Although food is not directly imported from the Middle East, energy imports affect food via transport and logistics, cold storage and processing and fertilizers linked to gas prices. Food has the largest CPI weight at 37.75 percent.

Services inflation signals that second-round effects are taking hold. Services absorb higher food costs, electricity costs, transport and delivery costs. Pricing decisions, First Metro reiterated, depend on duration, not just magnitude. The longer the energy shock lasts, the broader and more persistent inflation becomes.

Villamiel clarified that this conflict is not (yet) a collapse in global trade volumes, nor is it a global recession signal at this point. She added that it is also not a demand-destruction shock.

Additionally, she said, “This is not a geopolitical trading story but a macro transmission story.”

The primary risk, according to First Metro, “is duration: short shocks hit sentiment, while prolonged shocks hit fundamentals.”

The conflict’s impact, First Metro’s analysis pointed out, is on direct trade as the Philippines has a structural energy deficit with the Middle East, dominated by energy imports. As such, the Middle East conflict has resulted in an import-cost shock, which means higher crude and LPG prices that raise the energy import bill even if volumes don’t change. Higher fuel and power costs, in turn, pressure the margins of energy-intensive sectors.

Additionally, it also has an impact on indirect trade, specifically the transmission into import-price inflation and on remittances.

As the Philippines’ top trade partners also run large energy deficits with the Middle East, higher energy costs – higher manufacturing costs – imported inflation in the Philippines, presenting a cost pass-through risk for manufacturers, consumers and construction supply chains.

Remittances, First Metro acknowledged, serve as a foreign exchange buffer, but they are duration-sensitive. The Middle East hosts the largest concentration of overseas Filipino workers and their remittances are a structural pillar of the Philippine economy.

Remittances support household consumption and provide steady FX inflows that help cushion external account pressures during shocks and have historically acted as a counter-cyclical buffer. The inflows can partially offset higher import and energy costs, stabilizing spending.

First Metro warned that depending on the duration of the conflict, “resilience depends on continued employment.” A prolonged conflict raises risks of reduced working hours or delayed wages, higher living costs in host countries and repatriation or job displacement.

First Metro outlined three possible scenarios, with the first being a “short-lived logistics disruption, not a structural supply loss.” Thus, the first scenario assumes shipping lanes reopen and full traffic resumes within about two weeks, resulting in geopolitical risk premium being priced out; Brent crude oil normalizes to $65 to $70/bbl (pre-event levels); inflation noise fades; no regime shift in policy; BSP stays on (or resumes) its normalization path and the peso strengthens modestly as safe-haven demand unwinds.

Scenario 2: A transitory supply shock, but with scars, assumes that tanker flows slow but do not collapse; there is progressive improvement in traffic over the next two weeks; full normalization takes longer; insurance and routing frictions create temporary supply loss; Brent crude trades at $85 to $100/bbl; inflation rises modestly and the BSP shifts to a “wait-and-see” stance.

Scenario 2 also sees the growth impact as mild and contained while the peso stays around P58 to P59 to the US dollar.

Scenario 3 outlines a prolonged disruption — from a logistics issue to a full-scale supply shock. It assumes that war-risk insurance is withdrawn, not just repriced; tanker flows are curtailed true supply loss; Brent crude trades at $100 to $150/bbl until demand destruction occurs; inflation spikes and stays elevated; growth deteriorates faster than inflation falls; BSP faces a sequencing problem, which means near-term: cuts priced out; later: a pivot toward growth support; the peso weakens on wider trade deficits and risk aversion.