Debt watcher Moody’s Investors Service has warned that any escalation in tensions between the Philippines and China as a result of the United Nations arbitral tribunal ruling on the maritime dispute in the West Philippine Sea would not only be credit negative for both economies but might also “damage” economic linkages as well as growth.
“The intergovernmental Permanent Court of Arbitration (PCA) ruling on maritime rights in the South China Sea has minimal immediate credit implications for China and the Philippines, but highlights long-simmering territorial and maritime disputes in the broader Asia region,” Moody’s said in a statement late Thursday.
Since the geopolitical risk for both countries remained “very low,” Moody’s said its assessment showed “geopolitical strains to have a very low risk of weighing on China or the Philippines’ credit quality and this view has not changed after the PCA ruling because Moody’s does not expect either China or the Philippines to deliberately escalate the situation.”
But “if there were any heightening in tensions, it would be credit negative for both sovereigns,” it added.
“While there may be actions or statements following the ruling that stoke strains temporarily, it is unlikely that there would be the sort of substantial broadening and deepening of disagreements that would materially affect either China’s or the Philippines’ economy, budget or policy effectiveness,” according to Moody’s.
But the debt watcher pointed out that in case tensions escalated, “one risk is that governments increase defense expenditure, impinging on their fiscal strength.”
Moody’s nonetheless expected the “strong” economic and financial linkages in the region to “provide a significant deterrent against a large-scale or violent escalation.”
“For instance, worsening geopolitical strains could potentially pose further headwinds to economic growth in the region. In an adverse scenario, foreign direct investment (FDI) flows into and out of China could cool. More generally, a broad-based deterioration of diplomatic relationships could hurt China’s strategies of renminbi internationalization and overseas investment such as along the Belt and Road routes,” it said.
The Philippines also stands to lose in terms of tourism and trade. “While the Philippines’ exposure to China is lower than many countries in the region, it is not negligible. China was its fourth largest source of tourists in 2015, making up 9.5 percent of arrivals. Exports of goods to China also accounted for 2.1 percent of Philippine GDP [gross domestic product], making it its fourth largest market,” Moody’s said.