The state of emergency imposed in the Philippines grants the government broad powers to manage acute pressures on access to essential inputs, but it will not shield the economy from a downturn in the long-run, a note from Capital Economics says. The Philippines’ central bank chose to look through the sharp rise in domestic fuel prices, placing greater weight on risks to activity as it held interest rates steady at 4.25% during an off-cycle meeting.

A rate increase would likely require a much larger and more sustained rise in global energy prices, alongside severe balance of payments pressures.

The emergency measures, introduced this week amid concerns over the availability and stability of the country’s energy supply, allow the president to direct the distribution of fuel, food, medicines and other essential goods. Authorities are also permitted to bypass standard procurement rules and make advance payments exceeding 15% of contract values to secure petroleum supplies and ensure timely availability.

The Philippines remains a notable net energy importer, equivalent to 4.2% of GDP in 2024, although its reliance on oil and gas is lower than in many Asian economies. Coal, a fuel almost entirely sourced from Indonesia, accounts for more than 60% of electricity generation, while renewables, particularly geothermal and hydropower, contribute a further 22%.

Nonetheless, the country imports all of its crude oil, gas and refined petroleum products, with the majority sourced from the Middle East. This leaves it vulnerable not only to rising prices but also to potential supply disruptions, particularly in the event of a closure of the Strait of Hormuz.

At present, the emergency declaration is framed as a precautionary measure. Fuel stockpiles are estimated to cover around 45 days, offering some protection against supply interruptions, CAPECON writes. The government is in discussions to secure alternative hydrocarbon sources and is already seeking waivers from the US to purchase oil from sanctioned producers.

Steps have also already been taken to curb fuel demand. These include the introduction of a four-day working week for the public sector, excluding essential services, as well as directives for government agencies to reduce energy consumption and limit non-essential travel.

In addition, rising fuel prices are expected to dampen demand further. Unlike many regional peers, the Philippines does not maintain extensive fuel subsidies, leading to a sharp increase in prices of late. Petrol has risen by roughly 50%, from about PHP60 ($1) per litre before the conflict to around PHP90 as of late March, while diesel prices have climbed by approximately 80%. The government has indicated that support will be provided to transport operators to limit the pass-through of higher costs, alongside plans to temporarily reduce or suspend fuel taxes.

Despite these measures, higher fuel costs will still lift headline inflation, which stood at 2.4% year on year in February. Under a baseline scenario in which the Iran conflict ends by late April, fuel prices are expected to add around 0.8 percentage points to inflation in the coming months, pushing it slightly above 4%, just beyond the central bank’s 2–4% target range.

Meanwhile, elevated energy prices also pose risks to the balance of payments. The current account deficit reached 3.3% of GDP in 2025 and could widen to more than 5% of GDP in 2026 if energy prices follow the baseline path. Additional vulnerability stems from potential declines in remittances from Gulf economies, which amounted to 0.8% of GDP last year.

These pressures have contributed to the Philippine peso becoming one of the weakest-performing currencies in Asia since the conflict began. Foreign exchange reserves stood at $113bn in February, equivalent to around ten months of import cover, providing a substantial buffer. However, authorities have signalled a willingness to tolerate currency depreciation rather than deplete reserves. A weaker peso may also help offset the terms-of-trade shock by curbing import demand and boosting export competitiveness, while increasing the local currency value of remittances.

In response to these developments, the Bangko Sentral ng Pilipinas convened an off-cycle meeting and left its policy rate unchanged at 4.25%. While acknowledging that inflation may breach its target range, policymakers argued that expectations remain well anchored and that monetary policy is less effective against supply-driven shocks. The central bank indicated it would instead monitor second-round effects from higher energy costs.

At present, officials appear particularly concerned about the impact of tighter monetary policy on an economy already under strain. Growth slowed markedly last year amid a corruption scandal, with GDP expanding by just 3.0% year on year in the fourth quarter, the weakest performance outside the pandemic since 2011. Even in the absence of severe fuel supply disruptions, the squeeze on household incomes from higher inflation is likely to weigh on the recovery. As a result, the growth forecast for 2026 has been revised down from 4.5% to 3.8%.