Philippine-China tensions seen to affect Asia-Pacific trade — Moody’s

Tensions between the Philippines and China may lead to trade disruptions that could escalate across the Asia-Pacific region, according to Moody’s Investors Service.   

“While not our baseline, an escalation of tensions in the South China Sea could lead to disruptions in trade, not just between China and the Philippines, but also for the region at large given that the South China Sea is a critical trade route that delivers goods between Northeast Asia and Southeast Asia,” Moody’s Investors Service Senior Vice-President and Manager Christian de Guzman told BusinessWorld in an e-mail interview.

He said these disruptions may weigh on growth prospects in the region due to Asia-Pacific’s overall reliance on trade.

“In turn, this could accelerate the trend of gradual trade and investment diversion that has been prompted by separate geopolitical considerations, namely US-China strategic rivalry,” Mr. De Guzman said.   

“Moreover, rising geopolitical risks will constrain the ability of governments to more aggressively pursue fiscal consolidation as defense budgets remain elevated, even as other expenditures are curtailed in the aftermath of the pandemic,” he added.

Relations between the Philippines and China have soured as confrontations in the South China Sea between their coast guards have become more frequent.

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 in December 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.

Asked if the tensions between the country and China would affect the Philippines’ sovereign rating, Mr. De Guzman said Moody’s has not observed any material impact of the sea dispute.

“We consider political risk — which encompasses both domestic and geopolitical risk —under our assessment of a sovereign’s susceptibility to event risk; as such, our concern is the degree to which associated developments will affect economic, institutional and fiscal fundamentals,” he said.

“In this context, we have not yet seen a material impact from the shift in the Philippines’ foreign policy stance with regards to the South China Sea under President [Ferdinand R. Marcos, Jr.].”

In September 2022, the credit rater affirmed the country’s long-term local and foreign currency issuer and senior unsecured ratings at “Baa2.” Moody’s has kept its “Baa2” rating for the Philippines since December 2014. 

Despite the tensions, Mr. De Guzman said bilateral trade between the Philippines and China continues to be driven by supply and demand rather than the overarching political considerations.

“More broadly, we assess a low probability of an emergence of political stress that could have a moderate impact on the Philippines’ rating,” he said.   

China is the Philippines’ top trading partner. Bilateral trade in 2022 grew by 7.1% year on year to USD 87.7 billion, according to China Customs data.

Bilateral trade between the Philippines fell by 16% from a year earlier to USD 54.1 billion in January to September. China imported USD 14.36 billion worth of Philippine goods in the first nine months of this year, down by 19%.

Don McLain Gill, a geopolitical analyst and international studies lecturer at De La Salle University, said the conflict in the Indo-Pacific has not critically affected trade between the Philippines and China, Vietnam and China, or India and China.   

“Hence, Manila’s desire to stand up for its sovereignty and sovereign rights should not be simplified as directly proportional to its trade relations, especially when China has given so little in terms of ODI (outward direct investment) whereas it is gaining more than us in terms of our asymmetric trade,” he said.   

Based on central bank data, foreign direct investment inflows from China fell by 19.1% to USD 12.53 million as of October 2023 from USD 15.49 million a year ago.   

Hansley A. Juliano, a political economy researcher studying at Nagoya University’s Graduate School of International Development in Japan, said Southeast Asian economies are dependent on East Asia.

“The most direct risk of any possible economic boycotts between the Philippines and China, be it both sides or one way, is whether China would then favor one of our neighbors and relocate supply chains there instead,” Mr. Juliano said.   

This can destabilize economic community agreements in the Association of Southeast Asian Nations.   

“While China is our biggest individual trading partner, it’s not the majority. There’s either the strategy of releveraging or re-establishing our supply chains with other countries too, especially since Chinese trade with us ultimately serves transnational corporations and brands,” he added. — By Keisha B. Ta-asan, Reporter