Economies in the Association of Southeast Asian Nations (Asean) are vulnerable to a pronounced growth correction in China, but the Philippines may be the most insulated among them from such risk given its diminishing trade and investment in the region’s largest trading partner, Moody’s Investors Service said.
In the latest edition of the global ratings agency’s quarterly “Inside Asean,” Moody’s said the Philippines may even benefit from weakening Chinese demand as lower commodity prices could keep a lid on local inflation.
The report said Chinese demand is expected to soften as the mainland economy undergoes a process of rebalancing – characterized by economic restructuring, policy reform, market liberalization, and slower credit uptake—and the risk that this process could prove disorderly is rising.
“Should we see a sharper downturn in Chinese economic growth in 2014 and 2015 than factored into our 6.5 percent to 7.5 percent baseline projection, this would have a significant bearing on Asean’s macroeconomic outlook,” it said.
In 2013, exports from Asean countries comprised 12.2 percent of the region’s total outbound shipments to China, up from just 7.3 percent a decade earlier.
PH’s diminishing exposure
Despite this, the Moody’s report pointed out that headline data suggests the Philippines would be the least affected by a significant downturn in Chinese demand, due to the relatively small export footprint of the Philippines.
“[Philippine] exports to China have actually diminished in terms of economic significance over the past decade,” it said.
In 2013, Philippine exports to China were below 3 percent of its gross domestic product (GDP), compared with 3 percent in 2004, even though China remains the country’s third-largest trading partner.
Instead, the Philippines’ growth story has been driven by robust domestic demand, which Moody’s attributed to structural reforms and an upswing in the country’s credit cycle.
In fact, the Philippines could feel some positive spillover from weakening Chinese demand, the report explained, as lower commodity prices would serve to keep a lid on consumer prices despite strengthening domestic consumption.
Singapore most vulnerable
Elsewhere in the region, the Moody’s report showed that Singapore is most vulnerable to declining Chinese demand, with exports to China in 2013 accounting for 16.4 percent of GDP versus a regional average of 7.9 percent.
Indonesia, Malaysia, and Vietnam are all also at risk, as their exports to China are heavily weighted towards commodities.
Indonesia is particularly vulnerable, as commodities account for nearly two-thirds of the country’s total exports.
“[That] is a far higher proportion than the rest of the region. An abrupt drop in Chinese demand for raw materials would therefore impact Indonesia’s trade position due to the likely decline in world commodity prices,” it explained.
The report added that Malaysia and Vietnam are similarly exposed to a China slowdown with exports to China contributing 9.8 percent and 9.0 percent of GDP, respectively. A decline in Chinese demand would present a twin shock, first in terms of weaker direct demand for raw materials, and second in terms of falling global commodity prices.
Inside Asean is a quarterly publication released by Moody’s, which focuses mainly on major credit trends in the Southeast Asian region.