Two of the world's biggest credit-rating agencies say the Philippines' oil-dependence makes its banks unusually vulnerable to a long Middle East war, with asset-quality strain expected to hit small borrowers first.
MANILA — Fitch Ratings has downgraded its outlook on the Philippine banking sector to "deteriorating" from "neutral," and S&P Global Ratings has warned that local lenders face mounting credit losses, as a prolonged US-Iran conflict threatens to push up inflation and choke economic growth in a country heavily dependent on imported Gulf oil, according to reports published June 11 by BusinessWorld, the Philippine Daily Inquirer and The Manila Times.
Fitch said the Philippines is among the regional economies most exposed to higher inflation and weaker growth the longer the conflict drags on, given its reliance on oil imports from the Gulf region. The agency's shift to a "deteriorating" outlook signals that it expects higher credit costs and lower operating profitability for banks, even if higher interest rates provide some cushion to lending margins, BusinessWorld reported.
S&P Global Ratings, for its part, said Philippine banks are likely to ramp up loan-loss provisioning and could absorb credit losses of roughly 1% to 1.2% of total loans over the relevant period, according to the same reports. Both agencies flagged that asset-quality pressure would surface first in the most vulnerable segments — retail borrowers, micro-enterprises and small and medium-sized enterprises (SMEs) — which are least able to absorb higher prices and tighter credit.
The warnings land against an already-softening backdrop. Nonperforming loans (NPLs) accounted for 3.37% of the banking sector's total lending portfolio as of April, the highest gross NPL ratio since August 2025, according to data cited by BusinessWorld. The Manila Times summarized Fitch's assessment bluntly, reporting that the agency now sees the Philippine banking sector outlook as "deteriorating."
Crucially, the agencies stopped short of predicting an immediate ratings hit. Fitch said it sees little ratings impact in 2026 itself — but cautioned that the longer the conflict or its economic fallout persists, the greater the potential to weaken individual banks' credit profiles. In other words, the danger is cumulative: a short flare-up is survivable, but a grinding, months-long disruption to oil supply and trade is the scenario that does the damage.
This is not the first such alarm. Fitch issued a comparable caution in April, when it said the Middle East conflict "may erode Philippine banks' asset quality," and again in May, when it warned lenders could face higher bad-loan costs amid Iran-war risks. The June downgrade marks an escalation from warning to action — the agency has now formally moved its sector view into negative territory.
Context
The Philippines' exposure runs through a single channel that the country has never managed to insulate itself from: imported fuel. With the bulk of its crude sourced from the Gulf, every spike in oil prices feeds directly into transport, electricity and food costs, lifting headline inflation — which, although it eased to 6.8% in May, remains far above the government's 2–4% target — and squeezing household and corporate balance sheets alike. When borrowers struggle to service debt, banks book more bad loans; when banks turn cautious, credit tightens for the very SMEs that drive employment.
The timing also complicates the BSP's June 18 rate decision. The central bank must weigh whether to keep tightening to tame inflation — which would further raise borrowing costs and strain loan quality, exactly the risk Fitch and S&P are flagging — or to hold, and risk letting price pressures broaden. BusinessWorld separately reported on June 11 that analysts believe the BSP "has no space to replicate" its aggressive 2022–2023 tightening cycle, underscoring how boxed-in policymakers have become. Neither Fitch nor S&P forecasts a banking crisis; the message is narrower but pointed — the system's shock absorbers are thinning, and the margin for a prolonged war is shrinking.
Sources
- BusinessWorld, "Fitch, S&P see prolonged Middle East war hurting Philippine banks' loan quality," June 11, 2026 — https://bworldonline.com/banking-finance/2026/06/11/755893/fitch-sp-see-prolonged-middle-east-war-hurting-philippine-banks-loan-quality/
- The Manila Times, "Fitch: PH banking sector outlook 'deteriorating'," June 11, 2026 — https://www.manilatimes.net/2026/06/11/business/top-business/fitch-ph-banking-sector-outlook-deteriorating/2362765
- Philippine Daily Inquirer (Inquirer Business), "PH bank profits face mounting pressure–Fitch," June 11, 2026 — https://business.inquirer.net/594742/ph-bank-profits-face-mounting-pressure-fitch
- BusinessWorld, "Middle East conflict may erode Philippine banks' asset quality — Fitch Ratings," April 13, 2026
