The Philippines faces simultaneous inflation, growth, and market pressure under an energy supply shock

Overview

The report is based on Goldman Sachs' recent meetings in Manila with policymakers and local market participants, discussing how the Philippines is responding to the energy supply shock triggered by the Middle East conflict. The core tension is that fuel prices are market-driven and inflation pass-through is fast; policymakers believe investment, fiscal spending, and external demand will improve in the second half, but the report authors and local market participants are more cautious about the growth rebound, public investment recovery, and corporate capital spending.

Core views

First, inflation pressure in the Philippines remains a key issue, as the fuel-price shock has lifted CPI, and wage adjustments, transport prices, and consumer inflation expectations are the key second-round effects to watch. Second, the growth outlook is split: policymakers expect investment and spending to improve in the second half, but the report argues that administrative and execution bottlenecks stemming from anti-corruption efforts may slow the recovery in both public and private investment. Third, fiscal policy is leaning conservative, with broad fiscal stimulus and blanket subsidies seen as unlikely; support measures are more likely to be targeted and budget-neutral. Fourth, rising political uncertainty may damp short-term foreign investment and risk appetite. Fifth, monetary policy may continue to tighten, but the report expects a milder pace than the market. Sixth, PHP and Philippine local-currency bonds remain the main market transmission channels for the energy shock, inflation, and growth pressure.

Analysis framework

The report combines field research with macro-market linkage analysis: it first compares policymakers' and local market participants' views on inflation, growth, fiscal policy, external demand, and political risk, then maps the energy-price shock onto CPI, the current account, the BSP policy rate, PHP, the Philippine government bond yield curve, and equity-market sentiment.

Methodology notes

• Macroeconomic transmission frameworkTransmission from energy-price shocks to inflation, growth, and the current account

  Stagflationary energy supply shock

  The Philippines is a net energy importer with a relatively marketized fuel-pricing system, so an oil-price increase quickly lifts inflation while weighing on growth and the current account, thereby pressuring PHP and local-currency bonds.

• Policy response frameworkMonetary and fiscal policy mix analysis

  BSP hikes and conservative fiscal discipline

  The report evaluates BSP's hiking path, the pace of fiscal spending, targeted subsidies, cuts to nonessential spending, and state-owned enterprise dividends as funding sources, concluding that the policy mix is more anti-inflation and fiscally disciplined than a broad stimulus.

• Market pricing frameworkFX and yield-curve scenario analysis

  PHP bearish view and bear flattening in the local-currency bond curve

  The report compares market-implied rate-hike expectations with its own forecast, and combines oil-price scenarios, reserve declines, front-end yields, and changes in the 2/10Y spread to infer downside risk for PHP and bear-flattening risk for the bond curve.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• PHP

  A currency of a net energy-importing country, directly exposed to oil prices, the current account, and reserve pressure

  Strengths

  If oil prices fall quickly or external demand improves, PHP pressure could ease.

  Weaknesses

  High dependence on energy imports, a clear decline in reserves, and a weak growth and current-account outlook.

  Comparison

  The report says PHP has been the weakest EM Asia currency since the Middle East conflict began and expects it to underperform its NJA peers.

  Risks

  Oil prices stay above the base case, BSP tightening is insufficient to anchor inflation expectations, and foreign risk appetite declines.

• Philippine government local-currency bonds

  Affected by CPI, BSP hike expectations, and the fiscal financing plan

  Strengths

  The government does not currently plan to increase debt financing, so long-end supply pressure is relatively contained; future inclusion in the GBI-EM Global Diversified Index is also supportive.

  Weaknesses

  The front end has already priced in a substantial hike path, but if inflation continues to surprise to the upside, yields still have room to move higher.

  Comparison

  The 2/10Y spread is about 160bp, above roughly 95bp before the war; the report leans more toward bear flattening than further steepening.

  Risks

  Persistent inflation, a market repricing of the BSP hike path, and oil prices staying elevated.

• Philippine equity market

  Influenced by growth, political uncertainty, corporate capital spending, and foreign inflows

  Strengths

  If fiscal spending, investment, and electronics demand recover in the second half, they could provide some support.

  Weaknesses

  Investment and construction activity have weakened since mid-2025, and political events are further hurting short-term confidence in inbound investment.

  Comparison

  Goldman Sachs' portfolio strategy team downgraded Philippine equities to underweight in March, and the local stock market has fallen both year to date and for the week.

  Risks

  Political escalation, public investment recovering more slowly than policymakers expect, and companies delaying capital spending.

• Brent crude and energy prices

  The exogenous shock source for Philippine inflation, the current account, PHP, and the rates market

  Strengths

  The base case assumes Hormuz Strait traffic recovers before the end of June; if that happens, it could limit further shocks.

  Weaknesses

  Even Brent around USD 90/bbl by year-end is still unfavorable for the Philippines.

  Comparison

  Unlike currencies tied to the high-end technology supply chain, the Philippines does not get a meaningful cushion from high-end semiconductor demand.

  Risks

  Hormuz Strait recovery is slower than expected, permanent capacity losses deepen, and oil prices rise further in an adverse scenario.

Key data

• April CPI7.2% yoyThe rise in inflation mainly reflects higher fuel prices.
• Q1 real GDP growth2.8% yoyGrowth slowed significantly, raising market concerns about further weakness in Q2.
• Goldman Sachs 2026 GDP forecast3.5%Below the market consensus of above 4%.
• Current BSP policy rate4.50%BSP hiked by 25bp in April.
• Report's forecast for further hikesAnother 50bp of hikesExpected one hike in June and one in the third quarter, but the risk is skewed toward more rather than fewer hikes.
• Market participants' view on the peak policy rate5.50% to 6.00%Local market participants are broadly hawkish and all expect at least two hikes.
• Philippine foreign exchange reservesUSD 104bn in April 2026, USD 113bn at end-FebruaryThe decline in reserves since the Middle East conflict began has been relatively large in the region.
• Brent oil base caseAround USD 90/bbl by year-endThe commodities team assumes that Hormuz Strait traffic fully recovers before the end of June, but there is still a permanent 0.5mb/d reduction in capacity.
• Philippine 2-year government bond yieldAbout 6%Roughly 150bp above the 4.50% policy rate, showing that the front end has already priced in a fairly strong hiking path.
• Philippine government bond 2/10Y spreadAbout 160bp, versus about 95bp before the warThe report believes the curve still has room for bear flattening if inflation continues to rise.
• GBI-EM Global Diversified Index inclusion timing and weightJanuary 29, 2027; target weight 1.78%Given the current sentiment and the small weight, the report does not expect significant pre-positioning in the near term.
• Share of remittances from the Middle EastAbout 20%Policymakers believe other major channels such as the United States and Singapore remain relatively stable, which can partly cushion weaker remittances from the Middle East.

Impact & implications

For investors, the main risk in Philippine assets is not a single oil-price shock, but the combined effect of oil prices, inflation, slower growth, political uncertainty, and tighter policy. PHP may continue to underperform its EM Asia peers; local-currency bonds have already sold off materially, but if inflation data keep rising, front-end yields may remain more sensitive and the curve will likely bear-flatten; Philippine equities face pressure from corporate sentiment, capital spending, and foreign inflows.

Risks

• Second-round inflation effects become more visible toward the end of Q3 and in Q4, pushing up wages, transport costs, and household inflation expectations.
• Anti-corruption efforts and administrative reviews slow the recovery in public investment, while private-sector capital spending remains cautious.
• The Middle East conflict continues to keep oil prices above the base case, further worsening the current account and PHP pressure.
• Political uncertainty rises, weakening inbound investment and equity-market risk appetite.
• BSP is forced to hike more aggressively than the report's base case, further weighing on growth.
• If the external-demand improvement is concentrated in high-end semiconductors while the Philippines is more exposed to back-end electronics assembly, packaging, testing, and consumer electronics, the export boost may be limited.

What to watch

• The size of wage adjustments in June and their pass-through to service and transport prices.
• Whether CPI and household inflation expectations show second-round effects toward the end of Q3 and in Q4.
• BSP's June and third-quarter rate decisions, and whether the market continues to raise terminal-rate expectations.
• Whether the Philippine government's fiscal spending in the second half truly rebounds, and whether public investment execution is constrained by administrative bottlenecks.
• Brent oil prices and the pace of Hormuz Strait traffic recovery.
• Changes in PHP reserves and signs of central bank intervention.
• The impact of Philippine political events on foreign inflows, corporate sentiment, and capital spending.
• Whether electronics exports can obtain real spillover from the regional high-end semiconductor upcycle.
• Whether there is any early positioning ahead of the January 29, 2027 inclusion in the GBI-EM Global Diversified Index.