Developing Southeast Asia appears to be facing the biggest risks to growth with the long-running Iran crisis
DEVELOPING COUNTRIES in Southeast Asia will face the most severe setbacks to their growth as a result of the protracted crisis in the Middle East, the Asian Development Bank (ADB) has said, estimating a damage of more than two percent to its gross domestic product (GDP).
ADB’s baseline scenario for the crisis assumes a two-month war, when oil and gas prices rise in March, and then gradually adjust to pre-conflict levels by the end of 2026.
A war-torn scenario in the second quarter will see oil prices reach $105 a barrel before returning to initial levels in the third quarter.
A fight that extends into the third quarter will send oil prices to $130 a barrel in the second quarter and $120 in the third quarter before returning to initial levels in the fourth.
The year-long war will 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 initial levels, ADB said.
According to ADB, the year-round disruption scenario will cost developing Southeast Asia a 2.3% growth slowdown in 2026–2027 and a 3% inflation increase.
“In Asia and the Pacific, the main risk is not direct exposure to conflict but its dependence on foreign power, integrated trading systems, and global financial flows,” the brief said. “The priority should be to strengthen resilience in ways that protect stability and support continued growth.”
“This means dealing with near-term pressures without undermining long-term stability – containing financial stress, managing inflation carefully, and preventing short-term external shocks from reducing confidence or domestic demand,” it added.
In particular, ADB suggested that policies focus on stabilizing rather than suppressing price signals.
“Allowing higher energy prices to pass, at least in part, can encourage energy conservation, fuel switching, and investment in alternative energy sources. In contrast, extensive price controls or general subsidies risk encouraging distortions, delays in repairs, and misallocation of resources,” it said.
It also said governments in the Asia-Pacific should use targeted and time-bound financial support that prioritizes vulnerable households and industries “rather than broad energy subsidies.”
It called on central banks to focus on reducing extreme market volatility while keeping a close eye on inflation expectations.
“As the inflationary pressure comes from outside, the first priority is to provide targeted liquidity support to preserve the orderly functioning of the markets,” he said.
“Policy tightening is highly detrimental to growth and exacerbates financial volatility. While some tightening may be warranted, strengthening inflation expectations through central bank communication will also remain important,” it added.
The ADB said governments should reduce electricity demand where possible through temperature mandates, reduction of non-essential lighting, long-hour energy-saving campaigns, and work-from-home programs or schedules, among others.
Separately, Chinabank Banking Corp. said it expects the Philippine economy to grow at the same pace as last year, downgrading its previous forecast of 4.9%, due to the impact of the Middle East crisis.
Chief Economist Domini S. Velasquez said at the Financial Executives Institute of the Philippines First Economic Briefing on Thursday that if the war affects the GDP of the second quarter, he expects GDP growth for 2026 to stabilize at 4.7%.
Meanwhile, he said if the effects of the war are still felt in the third quarter, GDP growth would be 4.4%, which is in line with the pace set for 2025.
Under both scenarios, GDP growth will be under the Development Budget Coordinating Committee (DBCC) target of 5-6% growth.
He pointed out that the slow growth was caused by the disruption of the provision of basic services in the transport industry; high electricity prices; A drop in demand such as COVID, including discretionary spending; and high unemployment rates and low employment rates.
He also expects inflation to exceed the government’s forecast of 2-4% in 2026 if the average price of a barrel of oil remains above $90 at that time.
In particular, he said that if the average oil price stays at $90 per barrel for three months, inflation is expected to reach 4.8%, rising to 5.3% if the price is around $95.
His tough scenario involves oil averaging $100 over the next three months, bringing inflation to 5.9% by the end of the year. Chinabank’s pre-war forecast was 3.6%.
Meanwhile, Reyes Tacandong & Co. Senior Advisor Jonathan L. Ravelas said he expects GDP growth of 4.7% in 2026.
However, he said this projection could be reduced by a percentage if the price of oil remains above $120 a barrel for three to nine months.
“In terms of inflation, I was actually looking at 2026 at 3.8% which has already been adjusted and maybe normalized to 3.3% (in 2027) and 3.1% in 2028,” he added. – Justine Irish D. Tabile
