AFTER nearly four months of war, the United States and Iran have finally confirmed that a preliminary deal to end their conflict has been agreed, and is expected to be signed in Switzerland on Friday, June 19. This is welcome news for us here in the Philippines, as we have been hit hard by skyrocketing fuel prices, supply-chain disruptions and general uncertainty reducing economic activity. It is also important to note that the peace deal signals relief for hundreds of Filipino seafarers who have been marooned on either side of the closed Strait of Hormuz for a long period, and will now be able to return home or carry on their work normally.
Business groups and government officials likewise hailed the deal, saying it would lower oil prices, strengthen the peso, reduce the cost of farm inputs, and boost investor confidence. However, most sounded a note of caution as well, characterizing the agreement as giving the Philippines “breathing room” to work on reforms that would help the country better withstand future shocks.
That is a prudent point of view, because everything about what has been agreed between the US and Iran so far is rather tentative, and there are great risks that the conflict could reignite. And even under the most optimistic scenarios, the relief to our economy will come far more slowly than the negative impacts of the war did.
To be clear, what the US and Iran have agreed is not a final peace settlement, but rather an extended ceasefire in which a number of significant concessions were made — mostly by the US — to stop the fighting and reopen the strategic Strait of Hormuz. The agreement provides a 60-day time period for further negotiations toward a final settlement that deals with some questions that have been bypassed for now, most especially the status of Iran’s nuclear program.
While both the US and Iranian governments seem to be eager to sign this deal, what happens after that is by no means a foregone conclusion. Israel has objected to the deal, and is so far refusing to stop its campaign against Hezbollah in Lebanon, nor against the Palestinian state. Iran has made it clear that a halt to Israel’s campaign and a complete withdrawal from Lebanon are required before any permanent peace agreement will be accepted.
Even if that happens, it will take months for the energy crisis and disruption of the global economy to return to normal. Oil prices declined immediately after the announcement of the ceasefire agreement, but ticked up again as traders priced in what it will take to normalize supply. Petroleum demand will remain elevated, and consequently so will prices, for a considerable period of time while strategic reserves drained by the supply constraints caused by the war are restocked.
Production has been degraded as well. For example, Qatar, one of the world’s biggest natural gas exporters and ordinarily the source of most of the imported natural gas for the Philippines, earlier announced that almost 20 percent of its processing capacity had been destroyed, and would take up to five years to replace. A loss of natural gas processing capacity also means a loss of urea fertilizer production capacity. The Philippines fortunately imports the majority of its fertilizer needs from China and elsewhere, but the reduction in supply from the Middle East means that those alternative supplies will face higher demand for a time, resulting in prices remaining higher.
The relief will be gradual and will require some patience, but so long as the current agreement holds and the other details necessary for a lasting peace deal can be resolved, the normalization of the economy will continue. Our business and government leaders who are calling on the country to use the time wisely and implement needed reforms are correct, however, because there is still a serious risk that the reprieve may be short-lived.
Some of these reforms include implementation of the long-delayed Customs programs, the pre-border technical verification and cross-border electronic invoicing programs that we discussed in Wednesday’s (June 17) editorial; swiftly addressing corruption cases and implementing anti-corruption measures; and accelerating the implementation of ease-of-doing-business measures. Similarly, although the processes are more complex and time-consuming, the government should take whatever actions are available to speed up the conclusion of free trade agreements that are currently under discussion.
