MANILA, Philippines — The Philippines is vulnerable to the full-blown trade war between the US and China as well as the ongoing global currency war, according to S&P Global Ratings.
S&P director Andrew Wood, in a live webcast said the heightened trade tension between Washington and Beijing could complicate things in emerging markets, including the Philippines, particularly in terms of economic growth and monetary policy settings.
“Of course things are complicated slightly by the recent developments in the global currency markets vis-à-vis China and the United States,” Wood said.
Although the Philippines is not one of the largest trade countries in the region and not an extraordinary trade oriented economy, Wood said the currency war and the trade tension would have some downward pressures on the gross domestic product (GDP) growth in emerging markets.
“We do have these downside risks to global GDP growth growing over time and we also have regional trade momentum slowing and that will have some impact on all economies in the region. So in the Philippines too there are some downside risks,” he said.
Economic managers retained the country’s GDP growth target at six to seven percent this year despite slowing down to a four-year low of 5.6 percent in the first quarter from 6.3 percent in the fourth quarter due to the delayed passage of the 2019 national budget.
Economists have penned a below six percent GDP growth in the second quarter as government spending has yet to pick up.
According to Wood, the peso has been weakening over the past few weeks as it returned back to the 51 to $1 level after momentarily breaching the 50 to $1.
“There has been some downward pressure on the peso over the past week and that will have an impact on the country’s macroeconomic outlook,” he said.
According to Wood, the peso and the Indian rupee are vulnerable to downward pressure from the ongoing currency war.
“The Philippines and India have relatively strong external profiles, stronger than Indonesia, but they have proven to be relatively vulnerable when we do have these global contagion effects in the currency markets in the past. So the peso and Indian rupee could also be somewhat vulnerable to downward pressure,” Wood said.
US President Donald Trump lashed out at China after it allowed the yuan to depreciate below the landmark seven-per-dollar level for the first time in more than a decade.
China was called a currency manipulator after Monday’s 1.4 percent drop in the yuan or days after the US imposed 10 percent tariffs on the remaining $300 billion Chinese imports starting Sept. 1.
China lets yuan drops
China decided Monday to meet President Donald Trump’s latest tariff threat with defiance, letting its currency drop to an 11-year low and halting purchases of U.S. farm products.
The moves, which came four days after Trump threatened more taxes on Chinese imports, knocked stock markets worldwide into a tailspin. On Wall Street, the Dow Jones Industrial Average was down more than 850 points by mid-afternoon.
Earlier, stocks tumbled from Shanghai to London on fears the escalation in U.S.-China trade tension will drag down a global economy that is already weakening.
Raising worries that China will wield its currency as a weapon in a trade war, Beijing let the Chinese yuan weaken to the politically sensitive level of seven to the U.S. dollar for the first time since February 2008.
After financial markets closed Monday, the U.S. Treasury Department announced that it was labeling China a currency manipulator for the first time since 1994.
Also Monday, China’s official Xinhua news agency reported that Chinese companies have stopped buying U.S. farm products — a direct shot at Trump supporters in rural America.
Together, the currency devaluation and suspension of farm purchases suggest that China has decided to stand tough, rather than cave in Trump’s threats.
“The Chinese side won’t submit to the US,” tweeted Hu Xijin, editor-in-chief of China’s hardline Global Times newspaper.
The weaker yuan makes Chinese exports less expensive in foreign markets. It also helps offset the impact of U.S. tariffs on Chinese products.
The Chinese currency hit 7.0391 to the dollar by late afternoon, making one yuan worth 14.2 cents. The level of seven to the dollar has no economic significance but carries significant symbolic weight.
“The thought of a currency war is crossing more than a few traders’ minds,” Stephen Innes of VM Markets said in a report.
Trump promptly took to Twitter to denounce the move as “currency manipulation.” He added, “This is a major violation which will greatly weaken China over time.”
China’s central bank blamed the yuan’s drop on “trade protectionism” — an apparent reference to Trump’s threat last Thursday to impose tariffs Sept. 1 on the $300 billion in Chinese imports to the United States in addition to the $250 billion he’s already targeted.
The U.S. and China are engaged in a bitter dispute over allegations that Beijing steals trade secrets and pressures foreign companies to hand over technology as part of an aggressive campaign to make Chinese companies world leaders in advanced technologies such as artificial intelligence and quantum computing.
The weakness of the yuan, also known as the renminbi, or “people’s money,” is among U.S. grievances against Beijing. American officials complain that a weak yuan gives Chinese exporters an unfair price edge in foreign markets and helps swell the massive U.S. trade deficit with China.
The U.S. Treasury Department declined in May to label China a currency manipulator but urged Beijing to take steps “to avoid a persistently weak currency” and warned that it would be watching closely.
China’s central bank sets the exchange rate each morning and allows the yuan to fluctuate by 2% against the dollar during the day. The central bank can buy or sell currency — or order commercial banks to do so — to dampen price movements.