Middle East tensions may impact OFW remittances, inflation


By Luisa Maria Jacinta C. Jocson, Reporter

THE ONGOING Israel-Iran conflict may hurt remittances from Middle East-based overseas Filipino workers (OFWs), as well as increase volatility in oil prices that may stoke inflation, analysts said.

“This might be exacerbated by the potential effect on Filipino OFWs. While in the past, alternative jobs were explored by Filipino contract workers outside the war zone, still any serious outbreak of a war could definitely make a dent on workers’ remittances,” Diwa C. Guinigundo, country analyst for the Philippines of GlobalSource Partners, said in a Viber message.

“In turn, we might be looking at lower remittances, lower consumption expenditure and lower economic growth,” he added.

Markets were rattled after Iran launched hundreds of drones and missiles against Israel last week in retaliation for an alleged airstrike by Israel on the Iranian consulate in Syria earlier this month.

Remittances may be affected if the conflict intensifies and the government sees it necessary for OFWs to return home, Jonathan L. Ravelas, senior adviser at professional service firm Reyes Tacandong & Co., said in a phone call.

Latest data from the Department of Foreign Affairs showed that there are about 30,000 Filipinos in Israel and 2,000 in Iran.

Cash remittances in the first two months of the year rose by 2.8% to $5.48 billion, data from the central bank showed.

In the January-February period, Middle East countries were among the top sources of remittances.

Saudi Arabia was the third-highest source of overall remittances, equivalent to $307.981 million or 5.6% of the total. The United Arab Emirates also accounted for $206.29 million or 3.8% of remittances during the period.

Remittances from Israel stood at $24.402 million in the first two months of the year, inching down by 1.5% from the previous year. The BSP did not record any remittances from Iran.


Analysts also warned that oil prices may spike amid the unrest in the Middle East.

“The escalation of tensions in the Middle East poses a threat to the Philippine economy in the form of higher oil prices. As the Philippines is a net oil importer, it is vulnerable to global oil spikes,” Sarah Tan, an economist from Moody’s Ana-lytics, said in an e-mail.

Iran, the third-largest producer among members of the Organization of the Petroleum Exporting Countries (OPEC), produces about 3 million barrels of oil per day (bpd). Iran’s output accounts for around 3% of total world output, Reuters re-ported.

Ms. Tan said that higher oil prices will add to energy and fuel costs, lifting the cost of production across the country.

“Rising oil prices due to geopolitical tensions pose a significant upside risk to the outlook on inflation as well as current account deficits in the Philippines,” Nomura Global Markets Research Chief ASEAN Economist Euben Para-cuelles said in an e-mail.

Mr. Guinigundo said the increase in petroleum prices will have “pervasive” effects on inflation, the peso and overall economic growth.

“Some observers even now are looking at a possible $100 per barrel in case of a more serious outbreak of war. Recall that in 2018 there was an unprecedented rise in oil prices that pushed inflation beyond 5%,” he said.

The Development Budget Coordination Committee (DBCC) adjusted the assumptions for Dubai crude oil to $70-$90 per barrel this year but kept the assumptions at $65-$85 per barrel from 2025 to 2028.

Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc., said in a Viber message that if oil prices continue to be elevated, this will weigh on inflation.

“Indeed, the escalation of tensions threatens to derail the country’s already choppy progress on inflation,” Ms. Tan added.

Inflation accelerated for a second straight month to 3.7% in March from 3.4% in February.

Transport inflation rose to 2.1% in March from 1.2% in the previous month amid an increase in the prices of oil products.

The BSP said it expects inflation to temporarily overshoot the 2-4% target range over the next two quarters as upside risks remain. The central bank sees inflation averaging 3.8% this year.

“Any hit on the peso due to higher fuel imports could upset actual inflation and inflation expectations,” Mr. Guinigundo said.

The peso closed at P57.78 per dollar on Thursday, depreciating by 23 centavos from its P57.55 finish on Wednesday. This was its worst finish in more than 17 months or since its P58.19 a dollar close on Nov. 10, 2022.

“The BSP will likely become more vigilant of a scenario where headline inflation could breach its 2-4% for longer and the risk of further currency weakness given the double whammy from higher oil imports and a hawkish Fed,” Mr. Para-cuelles added.


On the other hand, analysts said the spillovers from the geopolitical tensions may not be as severe, though the central bank will still need to remain vigilant about risks to inflation.

“The spillover effects will be minimal on the Philippine economy and on monetary policy making at the central bank,” Moody’s Analytics Chief Asia and Pacific (APAC) Economist Steve Cochrane said in an e-mail.

“It does, however, put the BSP on high alert regarding the evolving shape of the conflict in the Middle East, and other geopolitical risks such as China’s aggressiveness in the South China Sea,” he added.

Miguel Chanco, Pantheon Macroeconomics chief Emerging Asia economist, said that the potential spillovers to global oil prices seems “fairly contained” at the moment.

“But it’s obviously impossible to predict, and what’s undeniable is that the risk of much higher oil prices is more acute today than they were late last year,” he said in an email.

Mr. Cochrane also noted that the volatility in oil prices would subside since there was no “sharp response” from Iran.

Despite this, Mr. Cochrane said that the BSP will still need to remain cautious.

“The BSP will want to be sure that external sources of inflation, such as imported energy, do not generate upside pressure on prices. And with the US Federal Reserve appearing to be positioned to keep the Federal Funds Rate at its current cyclical peak for longer, the BSP will likely keep its policy rate unchanged for longer as well,” Mr. Cochrane said.

For Mr. Chanco, any further escalation that would lead to a material spike in global prices would have an impact on inflation in the Philippines, “likely keeping it stickier for a little longer and, by extension, preventing the BSP from considering monetary policy easing in the foreseeable future.”

Analysts said that the Philippine central bank will likely extend its policy pause if upside inflation risks remain.

“It is clear that the BSP is in a waiting game. Until inflation stabilizes firmly within the BSP’s 2-4% target range, BSP will stand pat. Should it take longer than earlier anticipated, this will push back the prospect of rate cuts and see the BSP delay monetary easing,” Ms. Tan said.

The central bank stood pat for a fourth straight meeting in April, keeping its benchmark rate at a near 17-year high of 6.5%.

“My baseline remains at this stage that the BSP’s cutting cycle starts only in October, but clearly this could easily be delayed,” Mr. Paracuelles said.

BSP Governor Eli M. Remolona, Jr. said that the central bank may postpone policy easing as late as the first quarter of 2025 if macroeconomic conditions worsen.

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