THE PHILIPPINE financial system is facing mounting pressure as vulnerabilities tied to corporate debt and rising household debt amid the Middle East conflict continue to test its resilience, the Financial Stability Coordination Council (FSCC) said.
In a statement following its latest quarterly meeting held last week, the interagency council noted that the local banking sector remains strong, but risks are emerging from the prolonged war in the Middle East.
“Geopolitical risks remain a key source of uncertainty,” Bangko Sentral ng Pilipinas (BSP) Governor and FSCC Chair Eli M. Remolona, Jr. said on Monday.
The FSCC said the country may face higher oil prices, weaker market sentiment, tighter financial conditions, and slower economic growth if the Middle East conflict remains unresolved.
In its latest semestral report on the Philippine financial system, the BSP noted that the Middle East war is expected to have limited direct impact on domestic banks, with the brunt likely felt in the industry’s operating environment.
This is because the banking system ended 2025 with enough buffers to cushion the threats emerging from the energy crisis, it said.
However, the war could still push borrowing costs up and lead to higher household and corporate debt levels, the FSCC noted.
The FSCC said corporates, particularly those exposed to energy and interest rate-sensitive sectors, could face higher debt servicing costs and narrower profit margins as energy prices rise, and financial conditions tighten.
This, according to the council, could weigh on banks’ asset quality.
“The Council also noted that rising bond yields could lead to valuation losses on banks’ securities holdings,” it added. “If market pressures persist, this may affect capital buffers.”
Meanwhile, the FSCC told banks to keep watch of household borrowers’ loan repayment capacity amid the ongoing crisis.
“We see pockets of vulnerability in energy- and interest rate-sensitive sectors and in valuation pressures from higher bond yields,” Mr. Remolona said. “Nonetheless, the financial system remains on solid footing. Banks have adequate capital
and liquidity buffers to absorb shocks and keep lending to households and firms.”
WEAKER PROFITABILITY
On the other hand, Moody’s Ratings said banks in the Asia-Pacific, particularly the Philippines, could see weaker profitability due to higher credit costs if the Strait of Hormuz remains disrupted into the third quarter.
“Sustained high energy prices due to a prolonged Middle East conflict will impact Asia-Pacific (APAC) banks’ credit profiles, via their loan portfolios and financial channels,” it said in a separate report on Monday.
This is based on the credit rater’s new central scenario wherein oil trade disruptions in the Strait of Hormuz hold until the third quarter of the year, with global oil prices at an average of $90-$110 per barrel.
Moody’s Ratings noted that the Philippines heavy reliance on imported oil from the Middle East makes its banking sector more exposed to vulnerabilities.
“Banks in South and Southeast Asia — especially Bangladesh, the Philippines, Vietnam, Thailand, Indonesia and India — face heightened challenges due to either their economies’ high energy import dependence from the Middle East, or thinner external buffers and oil reserves, or both,” it said.
The Philippines sources over 90% of its oil from the Middle East, which led domestic pump prices to shoot up when the war disrupted trade in the region.
This has also fueled inflation in the country, with the April headline print at an over three-year high of 7.2%, a situation Moody’s said is squeezing household budgets and increasing debt servicing pressures for consumers and small businesses.
“This will translate into increased but gradual credit strain on such loans,” the debt watcher added. “However, given the absence of a macroeconomic hard landing, any deterioration in these portfolios is likely to be moderate.”
Moody’s also warned that Philippine banks where retail and SME loans account for a large portion of their portfolio could see a drop in their profits.
“Banks with large retail and SME (small and medium enterprises) books — such as in Thailand, Indonesia and the Philippines — could see weaker profitability due to growing impairment charges,” Moody’s Ratings added. “However, core preprovision earnings will remain broadly sufficient to absorb these costs without threatening solvency.”
Moody’s Ratings also noted that tighter labor conditions in the Middle East due to a prolonged conflict risk dampening remittances flows to the Philippines.
“Remittance flows from Gulf Cooperation Council economies are another risk channel for banks in the Philippines and Bangladesh, given the significant share of remittances originating from nationals working in the Middle East,” it said. “A prolonged conflict introduces uncertainty if labor conditions in the Middle East are significantly disrupted, leading to softer remittance flows.”
However, latest central bank data showed remittances from the region climbed by about 20% to $565.91 million in March from $471.836 million in February, which Moody’s said helped sustain bank deposits during the period.
“Nonetheless, any material slowdown in remittances would have a negative impact on banking system liquidity and local consumption,” it added.
Mr. Remolona said the FSCC, composed of the BSP, Department of Finance, Securities and Exchange Commission, Insurance Commission, and Philippine Deposit Insurance Corp., is closely monitoring developments surrounding the Middle East conflict and other external factors to identify and address potential vulnerabilities in the local financial sector.
The council is likewise enforcing stricter oversight of nonbank financial institutions including quasi-banks, investment houses, nonstock savings and loan associations, pawnshops, and trust corporations.
“The Council is also working to improve how it monitors system-wide risks and interlinkages,” FSCC added. — Katherine K. Chan
