Philippines hit harder by high energy costs, gains less from AI boom

The Philippines is being hit harder by high energy costs and benefiting less from the global artificial intelligence (AI) boom than its Asian peers, making it an “outlier” in East Asia, the World Bank said.

In its October East Asia and Pacific Economic Update, the World Bank kept its 3.7% gross domestic product (GDP) growth projection for the Philippines unchanged, as the economy continues to struggle with the Middle East war-driven spike in fuel prices.

If realized, this would be slower than the 4.4% expansion in 2025 and near the lower end of the government’s 3.5%-4.5% target.

“The Philippines is the outlier in East Asia. It is struggling more than others with high energy prices,” World Bank Chief Economist for Asia Franziska Lieselotte Ohnsorge said at a briefing on Tuesday.

The Philippines imports at least 90% of its oil supply from the Middle East, making it extremely vulnerable to swings in global oil prices. The country is currently under a state of national energy emergency until March 2027 amid concerns over supply.

“As a net oil importer, the Philippines was among the economies most exposed to the energy supply shock caused by the closure of the Strait of Hormuz and the conflict in the Middle East,” the World Bank said in the report.

“Unlike many other countries, the Philippines did not respond with energy subsidies. This, combined with currency depreciation and limited local buffer stocks, passed the shock through to consumers,” it added.

At 3.7%, the World Bank’s 2026 GDP forecast for the Philippines was the fourth lowest among Southeast Asian economies, ahead only of Cambodia (3.5%), Myanmar (2%), and Thailand (2%).

While it kept the Philippines forecast unchanged, the World Bank raised the 2026 forecasts for Vietnam (by 1.1 percentage points [ppt] to 7.4%), Indonesia (by 0.5 ppt to 5.2%), Malaysia (by 0.7 ppt to 5.1%), Thailand (by 0.7 ppt to 2%), and Laos (by 0.6 ppt to 4.1%) due to stronger AI-related investment and exports.

“We haven’t upgraded its (the Philippines’) growth forecast as much as elsewhere in the region, because these are really the two broad global trends, these headwinds from high energy prices, and tailwinds from global AI-related activity,” Ms. Ohnsorge said.

“And where countries’ individual forecast changes lie on the spectrum really depends on how much they’re exposed to these headwinds from energy and tailwinds from AI,” she added.

The World Bank raised the growth outlook for East Asia and the Pacific by 0.3 ppt to 4.5% this year but kept the 4.4% forecast unchanged for next year.

“East Asia and the Pacific’s deep integration into global value chains and economic dynamism have positioned the region to benefit from the surge in global AI-related activity,” World Bank Vice-President for East Asia and Pacific Carlos Felipe Jaramillo said in a statement.

“The challenge now is to turn the region’s strength in producing AI-related goods into widespread AI adoption that boosts productivity and creates more and better jobs for millions of people. If countries act boldly now, AI can become a powerful engine for opportunity, rising incomes, and a more prosperous future for all.”

Ms. Ohnsorge said the Philippines is gaining less from the current global AI boom as it is less integrated into global AI-related value chains than Vietnam and Malaysia.

“So, it’s not benefiting from these global tailwinds, but it’s really being hurt by the global headwinds, and that has sort of set back growth more,” she added.

However, the multilateral lender expects the Philippine economy to recover starting next year, with GDP projected to expand by 5.2% in 2027, and by 5.5% in 2028.

These projections fall within the government’s target of 5%-6% for 2027 and 2028.

“Growth is forecast to increase to an average of 5.4% in 2027-28 contingent on the rebound of public investment and the expected normalization of inflation by 2027,” the World Bank said in the report.

It expects inflation in the Philippines to average 5.8% in 2026 and 3.9% in 2027.

The World Bank also pointed to weaker investment and pressure on the Philippines’ external position.

It noted that public construction contracted by 32% in the second quarter, while net foreign direct investment inflows fell to their lowest level since 2016.

The current account deficit also widened to 4.8% of GDP in the first quarter due to higher import prices, it said.

Meanwhile, the World Bank said the Philippines could still benefit more from the AI boom.

It noted that demand for semiconductor-related skills in the Philippines remains relatively small despite recent growth tied to the electronics sector.

“Semiconductor-related skills demand remains small notwithstanding recent growth in Malaysia, the Philippines, and Indonesia linked to electronics manufacturing assembly and testing,” the World Bank said.

Energy costs could also be a factor in attracting more AI-related investment, particularly data centers.

“Energy costs make up 65% of data center operational expenditures,” the bank said, adding that residential electricity tariffs are higher in the Philippines and Thailand than in Malaysia, Vietnam and China. — Justine Irish D. Tabile, Senior Reporter