Developing Southeast Asia seen facing most severe risks to growth with prolonged Iran crisis

DEVELOPING Southeast Asian countries will face the most severe setbacks to their growth with a prolonged Middle East crisis, the Asian Development Bank (ADB) said, estimating the resulting damage at over two percentage points off their gross domestic product (GDP).

The ADB’s baseline scenario for the crisis assumes a two-month war, with global oil and gas prices peaking in March, then normalizing gradually to pre-conflict levels by the end of 2026.

The scenario involving a war continuing through the second quarter would be accompanied by oil prices averaging $105 a barrel before returning to baseline levels by the third quarter.

War extending to the third quarter would send oil prices to $130 a barrel in the second quarter and $120 in the third quarter before returning to baseline levels by the fourth.

A yearlong war would bring oil prices past $155 in the second quarter and $140 between the third quarter of 2026 and the first quarter of 2027, before returning to baseline levels, the ADB said.

According to the ADB, the yearlong disruption scenario would cost developing Southeast Asia a 2.3% growth setback over 2026–2027 as well as a 3 percentage-point rise in inflation.

“For Asia and the Pacific, the principal risk lies not in direct exposure to the conflict but in its dependence on imported energy, integrated trade systems, and global financial flows,” it said in a brief. “The priority should be to reinforce resilience in ways that safeguard stability and support continued growth.”

“This means addressing near-term pressures without undermining longer-term resilience — containing financial stress, managing inflation carefully, and preventing temporary external shocks from weakening confidence or domestic demand,” it added.

In particular, ADB has recommended that policies focus on stabilization rather than suppression of price signals.

“Allowing higher energy prices to pass through, at least in part, can encourage energy conservation, fuel switching, and investment in alternative energy sources. By contrast, broad price controls or generalized subsidies risk distorting incentives, delaying adjustment, and misallocating resources,” it said.

It also said that Asia-Pacific governments should implement targeted and time-bound fiscal support with priority given to vulnerable households and industries “rather than broad energy subsidies.”

It called on central banks to focus on limiting excessive market volatility while keeping a close watch on inflation expectations.

“Given that pressure on inflation originates externally, the first priority should be to provide targeted liquidity support to preserve orderly market functioning,” it said.

“Tightening policy too aggressively risks amplifying growth headwinds and exacerbating financial volatility. While some tightening may be warranted, anchoring inflation expectations with effective central bank communication will also remain key,” it added.

The ADB said the governments should curb energy demand where feasible through temperature mandates, cuts to non-essential lighting, peak-hour electricity-saving campaigns, and work-from-home or staggered schedules, among others.

Separately, Chinabank Banking Corp. said it expects the Philippine economy to expand at the same pace as a year earlier, downgrading an earlier projection of 4.9%, due to the impact of the Middle East crisis.

Chief Economist Domini S. Velasquez said in the Financial Executives Institute of the Philippines First Economic Briefing on Thursday that if the war impacts second-quarter GDP, she expects 2026 GDP growth to settle at 4.7%.

Meanwhile, she said that if the effects of the war are still felt by the third quarter, GDP growth could be 4.4%, matching the pace set in 2025.

Under both scenarios, GDP growth would be below the Development Budget Coordination Committee’s (DBCC) growth target of 5-6%.

She attributed the slower growth to supply disruption in the transport industry; higher electricity prices; COVID-like demand slowdown, including discretionary spending on non-essentials; as well as higher unemployment and underemployment rates.

She also expects inflation to exceed the government’s projection of 2-4% for 2026 if the average price of a barrel of oil stays above $90 during the period.

In particular, she said that if the average price of oil stays at $90 a barrel for three months, inflation is expected to hit 4.8%, rising to 5.3% if the price averages $95.

Her severe scenario involves oil averaging $100 over the next three months, pushing inflation to 5.9% by year’s end. Chinabank’s pre-war forecast had been 3.6%.

Meanwhile, Reyes Tacandong & Co. Senior Adviser Jonathan L. Ravelas said that he expects GDP growth of 4.7% in 2026.

However, he said that this projection could be trimmed by a percentage point if the oil price stays above $120 a barrel for three to nine months.

“In terms of inflation, I was actually looking at 2026 at an already adjusted 3.8% and probably normalizing to 3.3% (in 2027) and 3.1% by 2028,” he added. — Justine Irish D. Tabile