AFTER the ruling of the UN Permanent Court of Arbitration against the claims of China and Taiwan in the disputed South China Sea, all of the ‘big three’ credit rating agencies, Moody’s, Fitch, and Standard & Poor’s, issued encouraging statements on the matter.
Despite the significance of the issue and the UN ruling, the sovereign rating position – which is in a sense a judgment of the economy as a whole – of neither the Philippines nor China should be at risk.
In other words there should not be a noticeable economic effect unless, the agencies added, the geopolitical conflict actually leads to some significant interruption of economic activity (such as a reduction in trade that would impact government tax revenues) or direct fiscal costs to either government.
That point of view agrees with that of most concerned government officials and analysts in both countries, and so far seems to have been borne out by activity in the markets, and in trade and investment indicators, all of which have been positive in the few days since the ruling. For all the characterization of it as an historic landmark decision, economic activity in this part of the world seems to be unaffected by it, taking cues instead from the usual sources—presumptions about what the US Fed will do, commodity prices, and the broad circumstances of the European economy.
The subtext of the views of the ratings agencies is that while geopolitical issues may not have much of an effect on the wider economy despite the attention they attract, they cannot be overlooked. Moody’s Investor Services came closest to actually saying that in so many words in concluding its brief assessment: “. . . there may be actions or statements that stoke strains temporarily but these will not lead to a marked and protracted escalation of tensions. Nonetheless, the dispute does highlight emerging geopolitical issues for the two countries and for the region as a whole.”
In business, we have a tendency to view geopolitical issues in a container that is largely separated from the economy, because, just as the South China Sea issue illustrates, economic inertia tends to be very powerful. So powerful, in fact, that building political pressures are often not noticed until they become full-blown crises, and inflict a sudden shock.
At the moment there are two brewing situations that may provide those shocks, if the country’s political and economic policymakers do not have a plan to manage them.
First, the South China Sea issue with respect to China may be relatively easy to manage—despite Chinese rhetoric in the past few days, both sides seem to be taking a rather cautious approach to the next steps—but Taiwan has been completely left out of the conversation so far. The Taiwanese government and people are furious that their claims to territory in the South China Sea were rejected along with China’s, Taiwan’s government is now led by a decidedly more independent-minded president, and previous conflicts between Taiwan and the Philippines over perceived territorial encroachments have been destructive. The most recent, in 2013, in which eight Taiwanese fishermen were killed when a Philippine Coast Guard ship opened fired on their fishing boat, resulted in a short-lived but near-total embargo of trade and travel between to the two countries before the matter was resolved.
If Taiwan decides to take an aggressive attitude towards its rejected claims, it would almost certainly direct that angst toward the Philippines, which will result in at least some short-term economic turmoil. Taiwan is not the Philippines’ biggest economic partner, but it is still a significant one, and trouble on that front is something this country does not need when the situation with China is potentially so delicate.
The second is the growing violence in the Philippines because of the Duterte administration’s campaign against drug distributors and users, which is beginning to attract some critical international attention, and in that respect, is becoming a geopolitical issue. In our increasingly globalized world, countries and institutions are becoming more inclined to exert social pressure through economic means; a good recent example is the blacklisting of Aboitiz Power by Norway’s largest state pension fund, due to what the progressive Norwegians deem to be an excessive reliance on coal as a fuel for Aboitiz’s generating facilities.
Widespread, state-tolerated vigilante killings, lowering the age of criminal liability to nine years old, and apparently serious talk of restoring the death penalty—in the form of public hangings, if the President is to be believed—are human rights regressions that are generally frowned upon by the rest of the civilized world. If the concern grows serious enough, it could lead to consequences such as boycotts on investment, Philippine products, or tourism, and the withholding of various forms of government and non-government support, all of which would have quantifiable negative economic effects—not the least of which would be an increase in the country’s risk profile, exactly as the major ratings agencies have warned, with the corresponding loss of its credit strength.
The not yet a month old Duterte regime has made great strides, and accomplished more than its predecessor managed in its first whole year. But its failure so far to consider its place in the world and develop an approach to make the most of it—or at least limit potential harm—puts the economy at risk, and with it, all the social improvements the government is hoping to achieve.