South China Sea: APAC Geopolitical Risks Rise But Not a Ratings Driver Yet

Newsroom24x7 Desk

fitch ratingsSingapore/Hong Kong: Maritime disputes in the South China Sea underscore the growing importance of geopolitics in shaping the international policy agenda of countries in the Asia Pacific. Fitch Ratings believes shifts in the regional and global balance of power mean geopolitical risks will remain prevalent in the long term. 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.
Diminishing US geopolitical influence and strength in Asia in the past decade, concurrent with China’s efforts to expand its presence, are fundamentally changing the region’s security paradigm. Recurring frictions among states are likely to be a consequence of the changing geopolitical dynamics. Recent territorial disputes involving China, Philippines and Vietnam in the South China Sea are a case in point; a UN tribunal’s ruling regarding maritime claims on 12 July highlights ongoing tensions over control and
sovereignty in the area.
More longstanding issues, including from North Korea, territorial disputes over uninhabited islands in the East China Sea between Japan and China, and cross-strait relations between Taiwan and the mainland remain have the potential to flare up. In the case of Korea, North Korea-related issues have been a longstanding risk factor that has weighed on South Korea’s credit profile.

Terrorism and related security risks are also likely to remain pertinent for the region. Major -and repeated – terrorist attacks have the potential to affect important drivers of economic growth including tourism or sectors that rely heavily on foreign investment.

Major geopolitical risks have largely been contained in Asia in recent years, but the potential economic implications could be severe in the event of a sudden escalation. Tensions between states could lead to impaired bilateral trade and investment and, depending on the severity, could affect investor confidence. The potential risks go beyond the region as well. Recent events in Europe related to the “Brexit” referendum results demonstrate political events can have global repercussions for markets and economies.

Nonetheless, Fitch believes deepening globalisation in recent decades means incentives to maintain an orderly international environment are powerful.

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