Singapore among those most vulnerable to growth deceleration as China demand cools: Moody’s

SINGAPORE (Mar 20): Singapore is among Asia Pacific countries that are most vulnerable to falling trade volumes globally in part due to ongoing tensions between the US and China, says ratings agency Moody’s Investors Service in a Tuesday report.

“Given the uncertain outlook for growth and trade policy, as well as generally tighter financing conditions, slower investment growth will amplify the trade slowdown, especially in Hong Kong, Singapore, Taiwan, Vietnam and Mongolia,” says Christian de Guzman, a Moody’s Vice President and Senior Credit Officer.

Hong Kong and Mongolia are most exposed given the high concentration of their exports that are absorbed by China. Singapore, Vietnam, Taiwan, Korea and Malaysia are also vulnerable. These trade-driven economies are key nodes in the manufacture of intermediate products, especially for electronics, a sector particularly exposed to the US-China trade and technology disputes.

Assuming that demand from China weakens equally for all goods types, Moody’s estimates the direct impact on trading partners' exports of a slowing in China's import growth to 5% in 2019, half the 9.9% increase in 2018.

In addition to lower demand for its own domestically-produced goods, Singapore would also be exposed to a generalised downturn in China's demand for commodities and goods sourced elsewhere in the region, such as those provided by Australia or Indonesia, given the city-state's role as a shipping, logistics and commodities trading hub.

“And, gains from trade and investment diversion away from China will depend on industrial structure, scalability and labour costs — potentially benefiting Taiwan, Thailand, Malaysia and Vietnam — although the reconfiguration of supply chains will occur only over time,” adds de Guzman.

Government spending can provide some mitigation against flagging external demand, says Moody's, depending on their fiscal positions. Among the most susceptible to slower Chinese demand, Singapore, Hong Kong, Korea and Taiwan have fiscal space to support growth if needed, as Moody’s expects they will run narrow fiscal deficits or balanced budgets at the general government level over the next two years and maintain moderate government debt levels.

Beyond the near-term cyclical impact, there is an increasing likelihood of a reconfiguration of regional supply chains over the next few years as businesses may ultimately relocate production away from China to minimise the tariff burden and/or avoid concentration risk. In addition, trade frictions may serve to accelerate a trend of manufacturing and investment being diverted away from China that was previously set in train by other factors, such as the rapid rise in Chinese wages.