SINGAPORE - Singapore is the third most vulnerable Asia Pacific country to a sustained trade slowdown in China after Hong Kong and Mongolia, according to a Moody's Investors Service report released on Tuesday (March 19).
The report examined 23 rated countries in the region to identify the most vulnerable to slower growth in Chinese demand, and which could gain from longer-term shifts in investment and trade connections. It found that trade-driven economies like Singapore are the most exposed to a sustained slowdown in China, given their positions as key nodes in the manufacture of intermediate products, especially electronics, which are particularly exposed to tensions between the US and China.
Moody's expects the largest deceleration in real gross domestic product (GDP) growth in 2019 in Mongolia, Singapore, Korea, Vietnam and Hong Kong, as these economies are among the most trade-oriented and most reliant on Chinese demand.
However, higher public spending could mitigate flagging external demand, especially in Singapore, Korea and Taiwan, whose strong fiscal positions provide scope for potentially greater support.
"We expect the outlook for the region's exports, and consequently economic growth, to continue to weaken, given our projection of a slowing in Chinese real GDP growth to 6.0 per cent in 2019 and 2020, from 6.6 per cent in 2018 and 6.9 per cent in 2017," the report said.
Singapore will also be exposed to a generalised downturn in China's demand for commodities and goods sourced from other countries in the region, given its role as a shipping, logistics and commodities trading hub.
Slower investment growth will amplify the trade slowdown amid the uncertain outlook for growth and trade policy and generally tighter financing conditions, an effect that was seen in the second half of 2018. Weakness in export-oriented industries was reflected in large declines in facilities investment and a fall in private gross fixed capital formation for Korea, and similar considerations are likely to drive softer private investment in Singapore and Taiwan.
But countries that produce similar products to China stand to gain from the trade frictions in the long run, as businesses may relocate production out of China to avoid tariffs and/or concentration risk. These include Vietnam, Korea, Thailand, Taiwan, Japan and Malaysia, which are among the most susceptible to the direct impact of slower trade flows but also best positioned to benefit from positive spillovers.