China slowdown likely to send significant shock to Philippines and its peers

SLOWER GROWTH in China may send a “significant shock” to the Philippines and other Asian countries by causing a decline in investments and business confidence, according to Moody’s Investors Service.

“A growth shock originating from China would affect the region through bilateral trade and financial flows, including through foreign direct investment,” Moody’s said in a report dated Nov. 2

“In addition to affecting trade and financial channels, slower growth in China could also transmit a significant shock to regional economies by depressing confidence and investment,” it added.

Citing a World Bank working paper published in 2015, the credit rater said a contraction in China’s gross domestic product (GDP) would affect growth rates in other countries, including the Philippines. 

“The World Bank’s most recent economic update estimates that a  one percentage point decline in China’s growth rate would shave 0.4 to 0.8 percentage point off the GDP growth rates of Indonesia, Malaysia, Thailand and the Philippines,” Moody’s said. 

Moody’s expects the Philippines to expand by 6.6% this year, well within the government’s 6.5-7.5% full-year target.

Moody’s sees China growing by 3.5% this year and 4.8% next year.

In the report, Asia-Pacific economies with direct trade exposure to Chinese demand for a range of goods may bear the brunt of a sustained slowdown in China.

“Growth in Asia’s goods exports to China peaked last year and has been slowing year over year since the end of 2021,” Moody’s said.

Northeast Asian economies have the most significant direct exposure to Chinese demand for a range of goods, including electrical machinery and equipment, general machinery, chemicals and plastics, according to the report

Association of Southeast Asian Nations (ASEAN) economies also have moderately high direct exposures in certain areas. Moody’s said 68% of China’s nickel ore imports are from the Philippines.

“Slower economic growth would also translate into diminished demand for commodities such as iron ore, copper, aluminum and other base metals.”

“While we have lowered price assumptions for a number of base metals on account of slower growth in China this year, a more sustained downturn would add further pressure to metal prices over the next three to five years,” it added.

China was the Philippines’ biggest source of imports in August as it shipped $2.71 billion worth of goods into the country, government data showed.

It was the third-biggest export destination, receiving $839.18 million in goods from the Philippines.

Exporters that can diversify to other markets will be better positioned to reduce demand shocks, Moody’s said.

“The disinflationary pressure in a sustained China slowdown would be in the form of a negative aggregate demand shock, which while achieving lower inflation would also lead to lower growth,” it added.

“Therefore, central banks might tighten monetary policy less than currently envisaged to offset the effects of slower global demand. Lower expected inflation, alongside a more moderate nominal interest rate profile, would mitigate the effects on the debt-servicing ability of sovereigns and companies in a lower growth environment.” 

The Bangko Sentral ng Pilipinas (BSP) has so far raised 225 basis points (bps) since May to tame inflation.

For October, the BSP projects inflation to settle within the range of 7.1% to 7.9%, exceeding the central bank’s 2-4% target for the seventh straight month if realized. This would also be faster than the 6.9% seen in September.

A BusinessWorld poll of 14 analysts conducted last week yielded a median estimate of 7.2% for annual inflation in October. The local statistics agency will release October inflation data on Nov. 4.

“Ongoing efforts to normalize monetary policy across the region will give central banks more headroom to engage in supportive monetary policy measures and mitigate the effects on growth, should there be a sustained economic slowdown in China,” the credit rater said.

In September, Moody’s Investors Service kept the Philippines’ “Baa2” credit rating with a “stable” outlook, as economic recovery is unlikely to be hampered by “challenging global credit conditions.” — Keisha B. Ta-asan