ASKED on the possibility of another financial crisis repeating in the region—especially in the face of global volatilities and political uncertainty across the world—Standard & Poor’s (S&P) Andrew Wood said member-countries of the Association of Southeast Asian Nations have learned their lesson and strengthened themselves to better handle such a situation.
“Sovereigns in the region are generally better prepared to stave off such an event than they were in the late-1990s,” said Wood, S&P’s Financial Services (S&P Global) associate director for the Sovereign and International Public Finance Ratings. “The possibility of a financial crisis emanating directly from Southeast Asia in the near future is, therefore, limited.”
The region, however, is not without risks, the S&P expert warned.
“The interconnectivity of global markets, and the monumental rise in importance of the Chinese economy in the region, mean that linkages beyond the region have grown over the past 20 years,” Wood said. “In this sense, there is greater exposure to global economic and financial developments, meaning that extra-regional crises can also have a major impact in Southeast Asia.”
The China problem
CHINA’S role in the region and its influence to markets has raised eyebrows as to where its growing economic prominence will take Asean.
Last year the International Monetary Fund (IMF) published a study whose main finding pointed out that the impact of China’s growth shocks on the Asean has risen since the global financial crisis in mid-2000s.
The results of the report, titled “When China Sneezes Does Asean Catch a Cold?” showed that a 1-percent decline in China’s economy implies a 0.3-percent reduction in growth for Asean emerging market economies. These numbers are double to how they were at the time of the Asian financial crisis due to stronger trade and increased financial linkages.
“A slowdown in China, while having real effects, also has a financial impact via slower credit growth and lower equity prices,” the IMF said in its study published in November 2016.
“This is in line with the existence of both portfolio balance and signaling channels, in which Asean market participants absorb news on China economic activity as an indicator over domestic growth prospects.”
Several economists have also flagged China for presenting fresh risks to the region 20 years after the Asian financial crisis. They said the “danger of repeat” is in the hands of the rising economic powerhouse, making mention of China’s credit boom, high debt levels, as well as its aspiration to control its exchange rate and monetary policy simultaneously.
Economic shortcomings
S&P’s Wood acknowledged China’s economic shortcomings of late, resulting in a credit downgrade for the country recently from “A+” to “AA-”.
“The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China’s economic and financial risks,” Wood said. “Since 2009 claims by depository institutions on the resident non-governmental sector have increased rapidly. The increases have often been above the rate of income growth.”Other credit watchers also downgraded China’s ratings this year by a notch.
“Although this credit growth had contributed to strong real GDP growth and higher asset prices, we believe it has also diminished financial stability to some extent,” the S&P expert added.
The IMF also flagged the rapid loan expansion in China in their latest World Economic Outlook report, saying minimizing the risk of a sharp slowdown in China will require the Chinese authorities to intensify their efforts to rein in the credit expansion.
IMF’s projection is for China to grow by 6.8 percent in 2017 but would slow down by 6.5 percent next year. China’s strong growth is miles stronger than the average 2.2-percent projection of growth in advanced economies at 2.2 percent this year and 2 percent next year.
Local impact
EARLIER this year, the Bangko Sentral ng Pilipinas (BSP) also said China’s growth developments may pose risks to the local economy, especially in the light of the current administration’s pivot toward its alliances with China.
“The rebalancing of growth sources in China has continued but vulnerabilities in the financial system remain due to the rapid expansion of its credit. Adverse developments in China have the potential to generate negative spillovers for the Philippines given the increasing bilateral relations between the two economies in recent years,” the BSP said in a report.
While the Philippines has been expanding its economic and political linkages with China, the country’s growth portfolio is still seen to provide the country cushion from risks arising from the regional economic giant.
“The Philippines is relatively well-diversified in terms of its trading partners and, again, enjoys a strong external position. Of course, it’s not possible to fully mitigate any potential risks stemming from developments in the region’s largest economy,” Wood said.
“Nevertheless, the Philippines’s external buffers and sound fiscal position would provide the sovereign with a degree of latitude in managing such an event,” he added.
The Philippines is projected to clock in a growth rate of 6.6 percent for the year, according to the IMF, on the back of continued robust domestic demand driven by investment and consumption and fiscal policy that is supportive of growth.
With such figures, the country may have learned much from a contagion that shocked the cub from growing into an economic tiger.