Philippines outlook cut as oil shock bites

S&P Global Ratings has lowered the Philippines’ outlook to stable from positive, while affirming its long-term sovereign credit rating at BBB+, saying the war in the Middle East has raised the risks facing the country’s external accounts and public finances. The move keeps the nation within investment-grade territory but signals that a near-term upgrade is now less likely as higher energy costs, inflation pressure and a weaker peso complicate the policy outlook.

The ratings agency said elevated oil prices are likely to widen the current-account deficit this year and weaken external buffers, even as it still expects the economy to expand at a healthy pace and the fiscal deficit to narrow over the next two years. S&P projected growth of 5.8% in 2026 after the economy expanded 4.4% in 2025, with softer momentum in the first half and a rebound later in the year.

The decision lands at a delicate moment for Manila. The Bangko Sentral ng Pilipinas warned this week that higher fuel costs were already feeding into broader prices after March inflation accelerated to 4.1%, above the central bank’s 2% to 4% target band and sharply higher than February’s 2.4%. Transport costs were the main driver, with diesel prices up 59.5% from a year earlier and gasoline up 27.3%, while core inflation also edged higher, suggesting second-round effects may be starting to build.

That inflation pulse helps explain why S&P has become more cautious. A country that depends heavily on imported fuel is especially exposed when conflict disrupts Middle East energy flows, and the Philippines has been among the Asian economies hit hardest by the latest oil shock. Reuters reported that Brent crude had risen 55% since the Iran war began on February 28, while the Philippine peso slid to record lows against the dollar, adding another layer of imported inflation pressure.

The external vulnerability is not new, but the conflict has made it harder to ignore. Philippine officials have been scrambling to secure energy supplies, including seeking assurances over safe passage for Philippine-flagged ships and fuel cargoes through the Strait of Hormuz. Manila has also explored alternative sources of crude and emergency measures to protect domestic supply, underlining how quickly a geopolitical crisis can turn into a ratings issue for an energy-importing economy.

For investors, the key point is that S&P did not cut the rating itself. The agency kept the BBB+ grade in place, indicating that it still sees underlying strengths in the economy, including growth potential, remittance support and expectations of gradual fiscal repair. That distinction matters. An outlook change signals rising risk over the medium term, but it is not the same as a downgrade, and it leaves room for the sovereign to stabilise if external pressures ease and macroeconomic management holds firm.

Still, the downgrade in outlook will sharpen attention on the government’s fiscal path. The Philippines has already lowered its medium-term growth targets to reflect the impact of Middle East tensions and shifts in US trade policy. Official forecasts now put 2025 growth at 5.5% to 6.5%, down from 6% to 8%, while targets for 2026 to 2028 have been narrowed to 6% to 7%. That softer growth backdrop makes deficit reduction harder, particularly if the state is forced to spend more on fuel relief, transport support or other measures to cushion households and businesses.

There are signs, however, that the fiscal picture is not uniformly worsening. Treasury data showed the budget deficit in February narrowed marginally from a year earlier, while year-to-date figures improved sharply because of stronger revenues and earlier remittance of dividends. S&P’s own statement suggests it still expects fiscal metrics to improve, even if the war has made that path more vulnerable to setbacks.

Beyond the government balance sheet, the social cost of the energy spike is becoming harder to miss. Reuters reported that some farmers in Benguet province were abandoning harvests because higher fuel, labour and transport costs made it uneconomic to bring produce to market. That kind of strain matters for credit analysis because it shows how an oil shock can move from shipping lanes and currency markets into household spending, food supply chains and political pressure for intervention.