Philippine-China tensions over South China Sea may have wider implications for region — Moody’s

The dispute between the Philippines and China over the South China Sea could have more widespread effects on the Asia-Pacific region, Moody’s Investors Service said.

“Greater strains in China’s relationship with the Philippines over competing claims in the South China Sea over the past year could have more widespread implications for the region,” it said in a report dated Jan. 15.

Tensions between the Philippines and China have increased under the Marcos administration. The Philippines has cited incursions by Chinese vessels around South China Sea features closest to the Southeast Asian nation.

The situation has worsened after the Chinese Coast Guard last month fired water cannons to block Manila’s attempt to deliver food and other supplies to troops stationed at BRP Sierra Madre, a World War II-era warship intentionally grounded to stake the Philippines’ claim on the waterway.

A United Nations-backed tribunal in 2016 said China’s claim to nearly the entire South China Sea has no legal basis, but Beijing has largely ignored the ruling and continued its island-building activities.

Moody’s noted several geopolitical risks in the region such as a possible escalation of hostilities between North and South Korea, as well as the upcoming elections in Indonesia and India.

“We expect relative domestic political stability to provide some space for reform in Malaysia, the Philippines and Thailand,” it said.

Domestic consumption
Meanwhile, Moody’s noted stable domestic consumption in the Philippines would likely mitigate the impact of China’s slowdown, weak external demand and tight funding conditions globally.

It said Asia-Pacific economies would continue to face heightened liquidity strains, currency depreciation pressures and shifts in geopolitics this year. 

“Stable domestic consumption, underpinned by robust labor markets and the provision of limited targeted fiscal support, will mitigate such factors to varying degrees, particularly in large emerging markets such as India, Indonesia, the Philippines and Vietnam,” it said.

The government is targeting 6-7% gross domestic product (GDP) growth this year and 6.5-7.5% next year. The economy expanded by 5.9% in the third quarter. GDP needs to grow by 7.2% in the fourth quarter to reach the lower end of the government’s goal. 

Household consumption grew by 5% in the third quarter, slower than 8% a year ago and 5.5% in the previous quarter. It was also the weakest rise in consumption in two years.

The country’s unemployment rate fell to a fresh record low in November, easing to 3.6% from 4.2% in the previous month and in November 2022, based on the latest data from the local statistics agency.   

Meanwhile, Moody’s said GDP for 25 rated sovereigns in the Asia-Pacific region would decelerate to 3.6% in 2024 from a likely 4.2% growth in 2023. 

The debt watcher said the outlook for sovereign creditworthiness in the region is negative for 2024. This is on the back of a continued slowdown in China’s economic growth, weak external demand and tight global credit conditions. 

Moody’s said it sees China’s GDP slowing to 4% for the next two years from an average of 6% over 2014 to 2023. 

“A slew of structural factors, including an aging population and a shrinking labor force, as well as property stress and slow gains in productivity, will drive a further decline in the potential growth rate to around 3.5% by 2030,” it said. 

A slowdown in the United States in the near term and a subdued growth momentum in the Euro area would also weaken demand for Asia-Pacific (APAC) exports, it said. 

“The US and Europe are as significant as China as export destinations for many APAC economies,” the debt watcher said.

Philippine merchandise exports contracted by 13.7% to $6.13 billion in November, the third straight month of decline, though slower than the 17.5% drop in October. This was a reversal from the 13.1% growth a year ago.   

The United States was the top destination of locally made products in November with a 16% share worth USD 1.14 billion. This was followed by Japan, with a 13.2% share worth USD 938.3 million. Exports to China were valued at $876.27 million, equivalent to a 12.3% share. 

Meanwhile, Moody’s said fiscal deficits have remained wide in the region, as governments reallocated spending to infrastructure development and measures to address high inflation while balancing efforts to implement reforms that could raise revenue. 

“India and the Philippines will continue to leverage gains in digitalization from the pandemic to increase revenue through stricter tax compliance and other administrative measures, without a significant broadening of the tax base that could prove politically unpopular,” it said. 

Based on data from the Treasury department, the budget gap narrowed by 10.1% to PHP 1.11 trillion as of end-November 2023 from a year earlier. This represents 74.1% of the programmed PHP 1.499-trillion deficit for the full year.

Revenue collection rose by an annual 8.8% to PHP 3.6 trillion, representing 95.58% of the PHP 3.729-trillion target for 2023.

Borrowing costs might also remain elevated in the region, as central banks would only start easing gradually this year, the debt watcher said. 

“With the prominent exceptions of China and Japan, central banks in the region have hewed closely to the Fed’s policy stance even in the absence of significant demand-side pressures on inflation,” Moody’s said. 

“This has helped to stabilize exchange rates and dampen the pass-through from import prices, but inflation has remained above target for a number of economies and prompted further tightening in late 2023, including in Australia and the Philippines,” it added. 

The Philippine central bank raised interest rates by 450 basis points from May 2022 to October 2023, bringing the key rate to 6.5%, the highest in 16 years. — Keisha B. Ta-asan