The conflict in the Middle East will profoundly affect the Philippine economy for longer than we might think. There’s no better time than to build towards a better tomorrow.
Written by Henrik Batallones
Personally, the last couple of months feels like arriving in a bizarro version of this world and not knowing what to do or where to go.
Sure, there was always the threat of geopolitical chaos arising from conflict in the Middle East. This has happened so many times before. However, in this particular instance, there’s a clear demarcation point. There was no war when I got on a plane from Tagbilaran to Manila. When I got off, American and Israeli bombs had already landed on targets in Iran, and they, in return, were preparing to respond.
But of course it goes beyond the parallel universe-like nature of my specific situation. There are many different factors at play. There’s Iran keen on avenging the death of its leader, Ayatollah Ali Khamenei, not just by attacking American and Israeli interests, but also of their neighbors in the Middle East, in a bid to put political and economic pressure on their attackers to capitulate. There’s the unpredictability of the Trump administration, perhaps the sheer chutzpah of pushing on with the fighting without a clear end goal. On a broader scale, there’s the slow-motion degradation of the old international order, a slow-motion realignment of alliances, values and interests. Scenarios like current tensions in the Middle East seem to have accelerated the pace somewhat, judging from how European allies have not been too keen to follow the Americans into war, or how the Russians reportedly provided intelligence support to the Iranians.
And when this region experiences a series of hiccups, the rest of the world reels. The Iranians, in particular, have leaned on the strait of Hormuz—a crucial maritime trade bottleneck within its territorial waters, where 20% of the world’s crude oil supply passes through. What began as ships suspending journeys through the waterway for fears of being attacked has become what is described as a “toll booth”, with Iranian authorities asking for payments from ships before allowing them through—unless you’re from one of the attackers or their allies, in which case, you absolutely cannot pass. The economic consequences over the past couple of months have been profound, especially for countries like the Philippines who import all of their oil—and it’s certain we have yet to see the worst.
Imagine all this starting when you’re in the air. No wonder it feels like a bizarro world—and yet the effects are all too real.
This all goes further back from when the first missiles struck February 28. Tensions between Iran and the United States intensified when Donald Trump first assumed power in 2017. At that point, the Joint Comprehensive Plan of Action (JCPOA)—an agreement limiting Iran’s nuclear capabilities in exchange for relief from economic sanctions—had been in place for a year. However, Trump pulled the US out of the deal in 2018, reimposing sanctions in what has been dubbed as a “maximum pressure” strategy; these remained in place when Joe Biden became president in 2021. It resulted in economic chaos for Iran, with higher food prices and a weaker currency.
The US had also asserted itself militarily in those years. In 2020, an American drone strike killed Qasem Soleimani, a commander of Iran’s Revolutionary Guards Corps, which is designated as a terrorist organization. The rationale was to prevent an “imminent attack” on their forces in the region; Iran called it “state terrorism” and responded by further reducing its commitments to the JCPOA and launching retaliatory attacks.
Tensions escalated further in the aftermath of the Hamas attack on Israel in October 2023. Iran-backed forces, such as the Hezbollah in Lebanon and the Houthi rebels in Yemen, engaged in retaliatory attacks; the latter, in particular, also staged attacks on ships in the Red Sea, affecting maritime trade in the region. In June 2025, Israel directly attacked Iran in what is now called the Twelve-Day War, further raising uncertainty across global economies, particularly with regards to energy supplies. Notably, the Americans also participated in the fighting, staging an air strike on Iranian nuclear facilities.
In the months leading up to this conflict, Trump had begun claiming that Iran had revived its nuclear program and was developing weapons capable of reaching the United States. This is despite his earlier pronouncements that their nuclear capabilities have been destroyed by American strikes. Nevertheless negotiations between the two countries continued, with both sides confident of a result being reached. However, Iran’s deadly crackdown on domestic protests—the largest demonstrations in the country since 1979—led the US to threaten direct intervention.
A build-up of military forces in the Middle East progressed in the first months of 2026, while negotiations continued. On February 28, ostensibly sensing an opportunity to eliminate Iranian leadership the US and Israel launched their attack. Trump cited continuing Iranian belligerence to the United States, and said he hoped to see the civilian population take advantage and implement regime change. For his part, Israeli prime minister Benjamin Netanyahu cited the need to “remove threats to the State of Israel”, particularly citing their alleged nuclear capabilities.
In response, Iran launched missiles and drones on its neighboring countries, stating that any country who would allow its territory to be used to stage attacks on them would be considered a legitimate target. Military and civilian targets in Bahrain, Jordan, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates were attacked, as well as a British military base in Cyprus. In addition, Hezbollah forces from Lebanon intensified its strikes on Israel, despite their leadership being killed earlier in that conflict.
The conflict’s most profound global impact, however, is in the Strait of Hormuz, a body of water that is just 39 kilometers at its narrowest point—a major chokepoint for maritime trade, particularly for oil supplies coming from the Middle East. At least 20% of the world’s total oil supply passes through this waterway, 84% of which goes to Asian markets.
As the first attacks commenced, Iran began forbidding passage through the strait, and in some cases attacked ships in the area. Over 2,000 ships found themselves stranded in the Persian Gulf. Within a week, fears of prolonged oil shortages led to global prices going as high as USD 126 per barrel. It is seen as the largest disruption the global oil market has ever seen.
It would emerge that Trump had dismissed the possibility of the strait being closed, believing that Iran would capitulate before that point was reached. It soon became his preoccupation, repeatedly claiming either that the waterway had been reopened, or threatening attacks on civilian infrastructure if it stayed closed. For its part, Iran claimed that the strait is open to all except for ships from the US, Israel or its allies; it would later charge tolls of over USD 1 million per ship. The strait continues to be a sticking point as negotiations for a ceasefire commenced, with both the US and Iran pretty much imposing blockades on each other.
The Philippines may be thousands of kilometers away, but the impact of the fighting in the Middle East is perhaps most profoundly felt here. Apart from the fact that we import all of our oil—most of which comes from the Middle East, whether in crude or processed form—the Oil Deregulation Law meant there were few safeguards in place to prevent a domestic oil price shock. March saw pump prices rise by as much as PHP 20 per liter for diesel every week. This would obviously impact the transportation sector, from PUV operators and drivers, to logistics providers, both moving people and goods across the country. Cost pressures on multimodal logistics would inevitably lead to increases in the prices of basic goods, although the government quickly earned reassurances from manufacturers that this would not happen.
There is also an impact on sectors that rely on diesel to operate machinery. The effect on our agriculture sector is perhaps underreported: apart from the higher logistics costs, compounded by farmers’ lack of leverage to negotiate lower rates, there is the higher cost of operating farm equipment, as well as of fertilizer, which was also affected by the closure of the Strait of Hormuz.
From my vantage point, the immediate fear is of an increase in food prices, which could come at a pretty bad time for the Philippine economy. In the fourth quarter of 2025, our gross domestic product slowed to just 3% growth; this was the result of weaker consumer confidence in light of a series of natural calamities, as well as a slowdown in the construction sector after revelations of corruption in government flood control projects. Not even Christmas, usually a peak period of consumption, could seemingly lift the spirits, judging from how atypically muted the celebrations were.
The government’s priority seemed to be to control inflation by ensuring the prices of goods do not go up as astronomically as oil prices. However, calls to suspend taxes on fuel—the excise tax and value-added tax, in particular—were greeted with apprehension; apart from a lack of a mechanism to do so, there were concerns about the resulting reduction in revenue, which the government argued could be invested instead in other forms of intervention. In addition, plans to provisionally increase PUV rates were jettisoned at the last minute by president Bongbong Marcos, citing the impact on commuters.
In the end, a National State of Energy Emergency was declared in the middle of March, providing the government with more leeway to intervene. Both the government and private retailers sought to secure additional oil stockpiles to prevent shortages, which would be more catastrophic for the Philippine economy. While conversations among stakeholders across the supply chain to mitigate the increase in costs—and prevent them being passed on to consumers—began, all eyes were still on the government’s top-level response. That would take the form of direct, one-time subsidies to affected PUV drivers; the suspension of excise taxes on kerosene and LPG, but not on gasoline or diesel; and belatedly, the government directly dictating rate adjustments to oil retailers. Other, more targeted interventions include the suspension of several fees relating to multimodal transport, and the exemption altogether of vehicles moving agricultural products from tolls.
All this has highlighted how weak the Philippines’ position is when it comes to global shocks like this one, relative to how dependent we are on oil from abroad. The lack of cushions has meant that while top-level effects have been limited in the past couple of months, at some point cost pressures will be reflected in both shelf prices—not just because manufacturers have had no choice but to pass down costs, but because transport capacity has been constrained by drivers feeling they will not be able to make a living considering the circumstances. The worst may be yet to come, and with that—considering how close we are to elections, the state of our information (or disinformation) ecosystem, and raging emotions among frustrated Filipinos—the potential for social and political unrest.
Are we ready for all of this?
I have been privileged to be part of several discussions in recent weeks about how supply chain stakeholders can address the current situation, prevent a ballooning of costs that would be passed down to consumers, and improve operational efficiencies in the process. One thing that’s clear is that any interventions here would not be instantaneous. At best, these are medium-term strategies that require not just stronger collaboration between involved parties, but a greater commitment, for these to bear fruit.
It also became clear that, for this particular crisis, the response of the government has been to lean on the private sector to make concessions, rather than for the government to more directly intervene.
To be fair, one of the approaches that emerged in recent weeks is something that only the private sector can lead and implement. Co-loading has been discussed as a way to lower logistics costs for as long as I have been working with the supply chain sector. It’s a no-brainer: why send multiple vehicles, not carrying a full load, to the same destinations, when you can instead consolidate them in one or two trucks doing multiple stops? This would lead to more efficient trips, better service levels and lower costs.
That said, the circumstances of at least a decade ago may not have been right for such an initiative. At the time there was less flexibility among manufacturers, citing competition and safety concerns. However, the rising cost of fuel—as well as the perennial congestion on the roads, at least here in Manila—has made co-loading a more sensible and appealing proposition. But in any case, it requires logistics providers to have a comprehensive network and capability to support this, such as crossdocking facilities and transport management systems. Also, retailers would have to be more flexible in receiving consolidated deliveries.
The ongoing crisis has also made integrating electric vehicles into logistics fleets not just a matter of demonstrating your sustainability chops, but also of implementing operational and cost efficiencies. While the investment environment for EVs has never been better—the passing of the Electric Vehicle Industry Development Act has incentivized the purchase of such vehicles, as well as the development of charging infrastructure networks, while several logistics players have democratized access to companies—it remains a reality that shifting to EVs is a long process that includes many considerations. Apart from a still nebulous charging infrastructure, and operational concerns such as range anxiety, the cost of procuring these vehicles remains relatively high, especially for logistics use. Not to mention, tensions in the Middle East has led to a global rush to buy EVs, which could impact available supply.
Despite the availability of electric trucks, the use of EVs for long-haul transport may not be feasible in the Philippine setting, at least at this time. Apart from our underdeveloped road networks, our archipelagic nature necessitates the need for land-to-sea transfers. It is worth noting that, as of this writing, EVs are not allowed to be carried on sea vessels, for fears of onboard fires; this rules them out for roll-on/roll-off transport. However, EVs can definitively fill the gap for shorter journeys, particularly middle- and last-mile deliveries.
Shifting to EVs would definitely relieve the pressures of volatile oil prices, but smaller companies would face difficulties in making this transition. It’s worth noting that the Small Business Corporation, a government financial institution, has launched a fund providing financial assistance for MSMEs to ease their transition to EVs. Government programs like these are mandated by the EVIDA law, so there should be more of these programs targeted at different parts of the transport sector, especially for PUV operators and drivers who would otherwise have extreme difficulty coping with the shift.
While the situation as I write this has somewhat settled down, there remains a lot of uncertainty on the horizon. There is still no pathway to peace—or, at least, a permanent cessation of fighting—in the region. Both Iran and the United States have hardened their positions, at least publicly. Trump, who had previously vowed to not wage any foreign “forever wars” in contrast to his political opponents, could still use the American military to project his country’s—and, therefore, his—strengths. Iran, meanwhile, has realized the full potential of its holdings on the Strait of Hormuz and can therefore use it as a trump card whenever tensions arise, providing a new, looming worry for international trade.
For the Philippines, any efforts to reduce dependency on foreign oil to power the economy will be a long-term project, regardless of how upbeat and optimistic certain proponents may be. Even if these efforts are very much underway, the fact remains that our economy has to depend now on foreign oil. Luckily, we are not fully dependent on it for electricity, but for the movement of both people and goods, we are. Any impediments to these will not just lead to empty shelves and higher prices—our headline inflation rate zoomed to 4.1% in March, very much led by the rise in the cost of fuel—but also to lower morale and higher frustration among consumers, unable to access their needs and improve their quality of life.
The government now has a responsibility to fully recognize the role of transportation in powering the economy, and to support it more fully, while also facilitating the transition away from oil—reducing the sector’s, and the economy’s, exposure to global energy shocks.
For the short term it has committed to reducing additional costs for the transport of particular goods, notably the suspension of highway toll fees for agricultural products. A good initiative, but it really only covers Luzon, where the bulk of toll highways are. There is an opportunity to go further. Can the government impose a permanent toll holiday, if not a permanent discount on toll, for all trucks traversing our highways, regardless of what products it carries?
Why not even go further? Why not impose a permanent discount on fuel for truckers, again regardless of what they are carrying, if anything? This could be supported by the continued imposition of excise taxes on diesel, which is designed as a progressive tax impacting private vehicle owners who conceivably can, and should, pay a bigger share. The returns could be seen in lower prices on a more permanent basis—and across the country, not just in certain parts of it—which would mean stronger spending and consumption.
Perhaps the government can also consider using excise tax revenue to provide further support for the transportation sector, including those in logistics, to transition towards electric vehicles. Current efforts from the Department of Trade and Industry (under whose umbrella the SB Corporation falls under) should be complemented by agencies such as the Department of Transportation, Department of Agriculture and Department of Energy, for their respective sectors. Perhaps an additional incentive can be given for truckers in this regard: a permanent, or at least a longer-term, exemption from the number coding scheme in Manila. (The current law provides for a five-year exemption for private EVs.) Alongside ongoing investment in charging infrastructure, this should speed up our EV adoption, especially in the logistics sector which contributes to emissions due to the frequency of trips.
My final concern is on the medium-term impact of the last couple of months on our key economic indicators. How will this affect our gross domestic product, which illustrates our overall economic activity? How will this affect our gross national income, considering the impact of the Middle East conflict on remittances, particularly in the area? (Could it be offset by the stronger dollar?) Add these to the current doldrums of our economy and we might find ourselves being a chronically sick economy rather than one that just had a spell of the cold.
Businesses will continue to produce and invest, but sentiments are undeniably down. The Bangko Sentral ng Pilipinas’ regular Business Expectations Survey shows a collapse in enterprise confidence, from 8.2% in February to -24.3% in March, thanks to fears of fuel price shocks. It will be once again up to the government to pick up some of the slack. It is time for the public sector to invest in infrastructure once again—and, particularly, in the invisible infrastructure that energizes our economy. Build oil depots. Perhaps build oil refineries which could lower pump prices alongside bringing jobs to the economy. Invest more in renewable energy, especially in parts of the country that are dependent on foreign oil to power their grids. When the government believes in the potential of its product and invests more for its development, the private sector is encouraged and invests more in return. We see this pattern when new highways to the provinces are constructed. It should work in other aspects, too.
And finally, it goes without saying that the government has to work on regaining the trust of the Filipino people. Battered by the still unresolved flood control corruption scandals, and the impression that it is taxing Filipinos more for programs it should be able to fund on taxes alone, it’s obvious there is a lot of work to be done here. Indeed, all this is a long-term exercise that requires everyone to join heads and work together, while also keeping a healthy discourse on what works and what doesn’t.
But who’s saying we should stay still while we’re stuck in a bottleneck? Now that we’re seemingly slowing down is the best time to think about what to do next.