High oil prices could dent PHL output by 1 ppt this year

PHILIPPINE economic output could be reduced by up to one percentage point (ppt) this year if oil prices breach $130 per barrel, an economist said.

Francisco Cid L. Terosa, an associate professor and former dean of the School of Economics of the University of Asia and the Pacific (UA&P), said the extent of the potential economic slowdown will depend on the oil shock and disruption to supply.

“There’s going to be a potential slowdown in overall economic growth, and my initial estimates, depending on the severity of the price shocks and supply disruption, will be a decrease in GDP by around 0.3 to as high as 1 percentage point,” he said in a lecture on Wednesday.

Mr. Terosa warned that the Philippines could see a “high reduction in output” if oil prices exceed $130 per barrel.

Reuters reported US crude futures rose more than 3% higher to $99.39 per barrel, while Brent futures jumped to $111.19 a barrel in early trading on Thursday.

Iran accused Israel of striking its facilities in the huge South Pars gas field on Wednesday and retaliated by vowing attacks on oil and gas targets throughout the Gulf, firing missiles at Qatar and Saudi Arabia.

Mr. Terosa said that if the war in the Middle East lasts longer, he expects the inflation rate to quicken to at least 6%.

“The inflation rate can go as high as 6% or 7%, or worst case is maybe 8%, like during COVID-19 time if the conflict is prolonged,” he said.

Mr. Terosa said prices of food products, food and beverage service activities, retail trade, and air transport are expected to go up further.

If prices of refined petroleum products rise by 10%, Mr. Terosa said inflation will go up by 0.68 ppt.

A 10% jump in land transport costs is likely to drive inflation up by 0.46 ppt, while a similar increase in electricity costs is expected to result in a 0.41 ppt rise in inflation.

A 10% rise in air transport and water transport will translate into a 0.31 ppt and 0.07 ppt increase in inflation, respectively.

While not included in the basket of goods, Mr. Terosa noted the biggest inflationary pressure may come from retail trade because of the pass-through costs.

“Retail trade, by itself, has the potential to push inflation by 1.9 percentage points,” he added.

Mr. Terosa also noted that a drop in output in key industries has a ripple effect across the economy.

If there is a P1 decline in the supply of refined petroleum products, total economic output could fall by about P4.68.

“The impact of the decrease in production of refined petroleum products will lead to the greatest decrease in total production across the different industries in the economy,” he said.

A P1 drop in supply in electricity, water transport, land transport and air transport could lead to a P2.55, P2.4, P1.98, and P1.22 decrease in total economic production, respectively.

Mr. Terosa also expects severe production declines in the construction, retail trade, and food products industries, as they are largely exposed to supply disruptions in refined petroleum, electricity, and transport.

A moderate impact is expected on the wholesale trade, professional, scientific, technical activities, computer, electronic and optical products, basic metals, and chemical and chemical products sectors, he added.

At the same time, MUFG Global Markets Research said rising oil prices are likely to push food prices higher as well, adding pressure to consumer prices.

“Across Asia, economies such as Thailand, India, and the Philippines, where food carries a relatively high weight in CPI (consumer price index) baskets, are also particularly vulnerable to second-round inflation pressures, as higher energy costs are likely to spill over into food prices,” MUFG Senior Currency Analyst Lloyd Chan said in a separate note on Thursday.

Before the war broke out in late February, inflation quickened to a 13-month high of 2.4% on the back of rising energy costs.

FUEL EXCISE TAX CUT
To address the impact of rising fuel costs on inflation, the Philippine government has been looking at a number of interventions, including the suspension or reduction of the excise tax on fuel.

Peter Lee U, an associate professor and former dean of the UA&P School of Economics, however, argued that the policy would benefit mostly those who drive private cars.

He said the government should continue collecting excise tax on fuel products and focus on targeted interventions.

“I think the better alternative would be not to take it out, keep collecting the taxes, and then at least you have more tax revenue, and the country has more tax revenue that you can take to use for the helping of these sectors,” he said.

On the other hand, Mr. Terosa said that suspension or reduction of the excise tax on fuel products will help in slowing down inflation.

“It will probably lower the inflation rate by around 0.38 percentage point. It will slow down the rise, and that will be good, but of course only for crisis situations,” he said.

For this reason, he said that the suspension of the excise tax indirectly benefits commuters in the long run.

“But at the first glance, for me, it is regressive. Because when you lift the excise tax, you ease the burden of those who drive cars,” he said.

WIDER CURRENT ACCOUNT
Meanwhile, the Bangko Sentral ng Pilipinas (BSP) may tighten its monetary policy later this year as persistent high oil prices could widen the country’s current account gap, Capital Economics said.

Gareth Leather, an Asia economist at Capital Economics, said the Philippine central bank is unlikely to take monetary policy action immediately, but continued oil price shocks could eventually trigger a rate hike.

“Most other central banks will be more reluctant to tighten but those in Indonesia, the Philippines, Mexico and parts of Central Europe could eventually do so if the price spike is sustained,” Mr. Leather said in a March 18 note.

He noted that the Philippines is among the countries that are “unlikely to respond immediately, but where a prolonged period of high energy prices would trigger tightening.”

BSP Governor Eli M. Remolona, Jr. earlier said inflation could breach 4% if oil prices hold at $100 per barrel, which may prompt the BSP to raise its key rate.

The central bank wants inflation to stay between 2% and 4%, with 3% as their “sweet spot.”

Finance Secretary Frederick D. Go also said the Monetary Board will consider tightening in their next meeting if oil prices remain elevated for long.

The central bank has eased borrowing costs since August 2024, delivering a total of 225 (bps) to bring the benchmark policy rate to an over three-year low of 4.25%.

“In the Philippines, heavy reliance on imported energy could push the current account deficit deeper into negative territory,” Mr. Leather said.

The Philippines exports over 90% of its oil from the Middle East, making it vulnerable to major price or supply shocks from the region.

The country’s current account deficit (CAD) narrowed by 12.3% to $16.291 billion last year or -3.3% of Philippine gross domestic product (GDP) from the $18.565-billion gap in 2024, the latest BSP data showed.

The central bank expects the CAD to narrow to $15.3 billion or -3% of GDP this year. — Justine Irish D. Tabile and Katherine K. Chan