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The U.S.-based ratings agency pointed out in a February 19 sector-based in-depth report that credit conditions in Asia will likely weaken throughout 2020 in tandem with a slowdown in growth momentum, continued trade policy uncertainty and simmering political tensions.
The global outbreak of the novel coronavirus, or Covid-19, has added another dent to growth prospects.
However, the trade diversion of U.S. imports toward non-Chinese suppliers will help mitigate the negative effects of the more unpredictable trade environment, according to the report.
Moody’s estimated the upside for Asian economies with close links to China’s manufacturing chain. It calculated the potential export opportunities by assuming a complete fall-off in Chinese manufacturing exports to the United States and a redistribution of this shortfall across the other Asian economies, scaled by their shares of U.S. imports.
Based on this approach, the agency projected the annual impact on Vietnam from replacement demand to be some 2% of the gross domestic product.
“While the negative effects are generally smaller than the estimated positive export replacement potential, the export replacement potential should be viewed indicatively depending on the supply elasticity of third countries’ production,” remarked Moody’s.
The agency pointed out that this potential will take time to materialize since production chains require time to reconfigure.
Meanwhile, the extent to which investments relocate toward other countries to serve the U.S. market will depend on each country’s ability to produce the same set of products.
Vietnam, Thailand, Taiwan and Malaysia stand to gain from investment diversion given their higher export similarity to China. However, Moody’s noted that the possibility remains of tariffs being introduced on these countries’ exports to the world’s largest economy at some future point.
The agency added these estimates do not take into account the broader impact of the erosion of the rules-based trading system, which would be negative for the region’s export-oriented economies, irrespective of any gains to be had from trade diversion.
Moody’s has lowered its Vietnam growth forecast to 6.4% for 2020 following the coronavirus outbreak, whose economic effects are expected to continue for a number of weeks before tailing off and allowing regular economic activity to resume.
The impact in the Asia-Pacific region will be felt primarily through trade and tourism, and for some sectors, also through supply-chain disruptions, according to the agency.
In its report, Moody’s pointed out that policy is particularly unpredictable or seems to undermine macroeconomic stability, so financing conditions may tighten. Asia’s frontier markets are particularly vulnerable to such shocks, given the limited institutional and financial buffers.
“Our share of negative outlooks across the sovereign, banking and corporate sectors has increased for 2020. Although it is still too early to assess the coronavirus impact over the remainder of the year, it undoubtedly increases the downside risks to our baseline,” stated Moody’s.
However, some economies, such as the Philippines and Thailand, have more fiscal space to respond to shocks. Taiwan, Malaysia, Thailand and Vietnam may also benefit partially from some off-shoring of Chinese industrial capacity.
The report indicated that Asia’s economic transformation over the past generation has been underpinned by two major factors: a liberal, rules-based trading environment and the geopolitical stability provided by U.S. security guarantees. Both factors are now beginning to erode.