Credit watcher Moody’s Investors Service said Friday an international tribunal’s ruling on South China Sea will have a minimal impact on the Philippines’ and China’s debt ratings.
Moody’s, however, warned that an escalation of the already tense situation would be credit negative for both countries.
“The intergovernmental Permanent Court of Arbitration ruling on maritime rights in the South China Sea has minimal immediate credit implications for China [Aa3 negative] and the Philippines [Baa2 stable], but highlights long-simmering territorial and maritime disputes in the broader Asia region,” Moody’s said in a report.
The International Tribunal on the Laws of the Sea based in The Netherlands ruled against China in a bitter row over territorial claims over the South China Sea or West Philippine Sea. The court concluded that there was no legal basis for China to claim historic rights within the sea areas falling within the so-called “nine-dash line.”
Moody’s assessment showed that geopolitical strains would have a very low risk of weighing on China or the Philippines’ credit quality. It said this view had not changed after the tribunal’s ruling.
“Because Moody’s does not expect either China or the Philippines to deliberately escalate the situation. However, it notes that if there were any heightening in tensions, it would be credit negative for both sovereigns,” it said.
Moody’s conclusions were contained in a recently released report titled Government of China and the Philippines – South China Sea Ruling Highlights Risk of Escalation in Geopolitical Tensions.
Moody’s said geopolitical tensions could hurt countries’ credit profiles if they risked having a negative economic impact, for instance, because of sanctions or conflict; if they entailed significant fiscal costs through defense spending; or if they hampered policymaking by undermining the effectiveness of policy decisions or implementation.
Moody’s said that while there might be actions or statements following the ruling that stoked strains temporarily, it was unlikely that “there would be the sort of substantial broadening and deepening of disagreements that would materially affect either China’s or Philippines’ economy, budget or policy effectiveness.”
It also said that while the Philippines’ exposure to China was lower than many countries in the region, it was 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 gross domestic product, making it its fourth largest market.
“Moody’s does not believe that the PCA ruling will significantly impair trade through the South China Sea. However, tensions will likely continue to simmer, given the range of issues at stake, including food and energy security concerns, as well as national interests,” the credit watchdog said.
Fitch Ratings also said that the ruling would not have direct impact on the Philippines’ credit rating.
“These risks have the potential to cause significant economic and political instability, though are not currently a direct ratings driver for sovereigns in the region,” it said.
