The Philippine peso and broader economy could take a compounding hit if the Middle East conflict disrupts remittance flows from the region, London-based think tank Capital Economics warned in a report released Friday.
The think tank flagged that cash remittances sent by overseas Filipino workers in the Gulf are equivalent to 0.8 percent of the country’s GDP — the highest share among Southeast Asian nations — making the Philippines particularly exposed to any disruption in migrant worker incomes.
Capital Economics deputy chief emerging markets economist Shilan Shan said a wholesale collapse in global remittance flows is not expected, but cautioned that even a partial decline would worsen external imbalances. “Any drop in inflows would cause external deficits in the Philippines and much of South Asia to widen further at a time when high energy prices will already be pushing deficits deeper into the red,” Shan said.
The think tank outlined two scenarios. A short-lived conflict could trim Gulf GDP by one to two percent and reduce remittances by around five percent. A prolonged crisis — particularly one damaging energy infrastructure — could shrink Gulf economies by 10 to 15 percent and cut remittance flows by 30 to 35 percent.
Sectors employing large numbers of migrant workers, including construction, hospitality, retail, and transport, are seen as most vulnerable to an economic slowdown in the Gulf states. Capital Economics said it does not anticipate a mass voluntary departure of migrant workers from the region, but slower Gulf growth could still depress employment and wages enough to reduce the money workers send home.
What makes the current situation more concerning than previous remittance downturns, the think tank noted, is the timing. Past declines in Middle East remittances typically coincided with lower oil prices, which softened the blow for oil-importing economies. This time, a remittance drop could arrive alongside elevated energy costs — a double strain for the Philippines, which runs a current account deficit of three percent of GDP and is a net importer of oil.
“That could put more pressure on currencies and force central banks to keep policy tighter than it would otherwise need to be,” Capital Economics said.
The peso has already felt that strain. It fell to a record low of ₱59.50 against the US dollar on March 9. Bangko Sentral ng Pilipinas Governor Eli Remolona Jr. said last week that if oil prices breach $100 per barrel — a threshold already crossed — the central bank could be forced to reverse its easing cycle and raise interest rates.
National Statistician Claire Dennis Mapa has noted that over 36 percent of the consumer price index basket is directly or indirectly sensitive to oil prices. Transport fuels, electricity, LPG, and kerosene account for 8.23 percent of the CPI, while secondary effects on agricultural goods, meals outside the home, and road transport could affect a further 28 percent of the index.
Capital Economics said the Philippines may have limited room to absorb these simultaneous pressures. “If falling remittances put the peso under more pressure, the central bank may need to respond with interest rate hikes,” it said.
