Effects of the US Economic Condition on the Philippine Economy

              The credit downgrade of the world’s largest economy heightened global fears. Being the biggest economy, the US economic crises will surely have repercussions in the world economy. The US credit rating downgrade has sent a global tremble in Asia and also in our own country, the Philippines, where the stocks tumbled.  In September 2010, Philippine Stock Exchange (PSE) breached the 4,000 mark and was at its all time high since then. What will be the effect of the US economic crises on the stocks traded at PSE? During the Global Financial Crisis of 2008, the Philippine economy was kept afloat by the dollar remittances from the Overseas Filipino Workers (OFWs). Would the remittances now continue in keeping us afloat? The products sold in the country are possibly not that affected, but exports surely are. Bangko Sentral ng Pilipinas (BSP) has investments in US securities. Will these investments be affected by the crises?

                 Senator Francis Escudero said, “The Philippine government should strengthen its economic ties with world economic giants like China in order to absorb the shock.” He urged the government’s economic managers to take concrete steps to cushion the negative effect of the US downgrade.

            The stocks tumbled. Before the September 2010 benchmark, the highest historic figure for the Philippine Stock Exchange Index (PSEi) was recorded on October 19, 2007 which closed at 3819.75. As of posting time, the PSEi closed at 4,305.56 (August 26, 2011). But during the first few weeks of August, PSEi fell 2.4% or 106.31 points. According to Hans B. Sicat, PSE President, it was the biggest drop in over a year.

            The global debt crisis will further blunt OFW remittances. Global alliance of OFWs and Migrante International sees the recent US debt crisis as an “irreparable damage that will further blunt OFW remittances and consequently place the Philippine economy in a deeper quagmire.” Our remittance-dependent economy is in a very vulnerable and dangerous place. There are two major effects on OFWs: the massive displacement in the crisis-laden host countries and the direct effects of the peso appreciation on remittances. Fewer and fewer workers are deployed in other countries because of protectionist measures and nationalization policies as a result of the global financial crisis. The appreciation of the peso will have negative effects on the families of OFWs since the exchange rate is getting lower and lower. Ironically, the strong peso will have negative effects to OFWs and their families. Nonetheless, the OFW remittances are still expected to surge this semester mainly due to the upcoming enrollment and holiday seasons.

            Amado Tetangco, BSP governor, downplayed the effects of the credit rating downgrade on the Philippine financial market. The investment of the BSP in US securities totaling to $23.6 billion may be affected by the crisis but the BSP governor assured that the Philippines is resilient enough to survive the effects of the downgrade. He also added that the US market is not likely to experience a huge sell-off because it remains as the most liquid and the deepest market in the world.A lot of people still see that the US treasury market is a safe haven.

            Philippine exporters are sticking to their target growth of 10 percent for the year despite the US credit downgrade. According to Philexport president Sergio Ortiz-Luis Jr., our exports will likely be less affected. This is due to the fact that the US market’s share in the country’s total exports is diminishing. He said that the US used to account for 34 percent of the country’s exports. It has gone down to 12 percent. According to the June export data of the National Statistics Office (NSO), the US accounted for 14 percent of the country’s total exports with earnings of $572.28 million, a decrease of 21 percent from the $744.59 million reported a year ago. Exporters are now diversifying their products in markets other than US. And soon, the US market will be replaced by China as the biggest market for Philippine exports and other countries in Asia.
        According to Benjamin Diokno, a noted economist, the public private partnership (PPP) program, the centerpiece of the economic policy of the administration of P-Noy, would suffer from the US downgrade fallout. The United States is the country’s biggest trading partner and leading source of foreign investments. This would surely have a negative impact on investments from foreign countries.

        Low Dollar to Peso Exchange Rate. The value of our country’s currency is strong because the dollar is weak. The main reason for the dollar to have a lower value is because Federal Reserve Bank (Fed) is creating money in the hope of stimulating the US economy. This situation have different stand regarding the state and its people. Strong currency value for a state means it has a good economy and that it is sufficient and growing. As for the common people of the Republic of the Philippines, this condition is not so beneficial. Strong peso value can also lead to Americans having to import lesser Filipino products and may also reduced their vacation in our country which results to low tourism revenues.

          Finally, we are a resilient people. As a poet once said: “A Filipino is pliant like a bamboo. Neither typhoons nor monsoons could break the Filipino spirit; like the bamboo, it sways and bends with nature’s relentless onslaughts, but it refuses to yield or die.” During the global financial crisis of 2008, Malacanang boasted that the Philippines had escaped the effects of the global recession - thanks to a resilient economy and a resilient people. Everyone is hoping for the same to happen in this period of global crisis - that we remain resilient despite the adversities that come.

AAA to AA+: The Causes and Effects of USA's Credit Rating Downgrade




      Out of control national debt and spending deficit are some of the major reasons why United States is encountering the threatening crisis nowadays. It was said that the economy is slowing but not falling. The incompetent political leadership most likely triggered the current downturn to be a full blown crisis. In the past the world could look to the United States for leadership and financial stability. Unfortunately that very option is no longer applicable. The current occupant of the White House does not even have a clue except to find a way to win reelection through obfuscation and class warfare, while promoting his fiscally disastrous policies. The Federal Reserve, having essentially printed trillions of dollars to no avail, is out of options except to reprise the same policy, thereby worsen an already precarious situation.

      The President, Mr. Obama and the Congress reached an agreement to lift the so-called debt ceiling and cut the $14.3 trillion national debt. President Obama urged Congress to do the right thing by approving the agreement. This is a sign of progress and it may be a time of international economic uncertainty, whether in the United States or in the Eurozone or from commodity prices, so agreement will help build stability across the global economy.
      But the promised cuts were not enough to satisfy S&P. Credit rating agency Standard & Poor's on Friday lowered the nation's AAA rating for the first time since granting it in 1917. It's the first time in this nation's history that anyone anywhere has ever considered the creditworthiness of the United Stares anything less than iron clad. They had warned that during the budget fight that if Congress did not cut spending far enough, the country would face a downgrade. One fear in the market is that a downgrade would scare buyers away from U.S. debt. If that were to happen, the interest rate paid on U.S. bonds, notes and bills would have to rise to attract buyers. And that could lead to higher borrowing rates for consumers, since the rates on mortgages and other loans are pegged to the yield on Treasury securities.

 S&P said that in addition to the downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years. It said such a downgrade, to AA, would occur if the agency sees smaller reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period.
      The number of Americans claiming new jobless benefits fell to a four-month low, a sliver of hope for an economy battered for days by a credit rating downgrade and falling share prices. The jobless claims data released by the Labor Department eased concerns that the economy was heading back into recession as feared by investors, and buoyed U.S. stocks. Initial claims for state unemployment benefits fell 7,000 to seasonally adjusted 395,000, the Labor Department said the lowest level since April. Economists had expected a reading of 400,000.
      The US downgrade will force the reassessment of the entire concept of risk in the global economy. And while ratings for the world's safest haven for investment is downgrading, the same way that the high-powered markets like Indonesia had been rising. In other words, the downgrade will alter the way investors decide on what is safe and what is not and will allocate their money accordingly. Another implication of the S&P downgrade would be fast efforts for the replacement of the U.S. dollar as the world's number one currency. We all know that countries like Russia and China are calling for a new reserve currency several years ago, and due to the downgrading the calls might get louder.
      There are worries that a sharp sell-off in stocks and the nasty fight between Democrats and Republican over raising the government's debt ceiling could dampen employers' enthusiasm to hire new workers. The dominant effect is that, Standard and Poor's didn't downgrade the United States' financial system, but it downgraded the United States' political system.

Is the West Drifting Away from the USA?

                The era of Western domination of human history is over. The world is in a transitional phase. The West no longer drives prosperity. It is Asia that is the key mover for global economic growth.

In the series Percy Jackson and the Olympians, it was mentioned that Mt. Olympus (home of the gods) can be found in the City of Olympus (JJJ). But Olympus has steadily moved west, following the center of power of “Western Civilization” over the centuries and is now in the USA. In the series, Olympus is currently located far above the Empire State Building (600^th floor) while the original mountain remains in Greece. USA is still one of the most powerful countries in the world.

But what is the West? It roughly refers to the United States of America and Europe. Before, when we speak of the Occident (or the West as opposed to the Orient [the East]), we do so on high terms. And actually, we still hold a high regard for the Occident. The West has been very powerful and wealthy. Up to now, the countries comprising it still wield great power and influence. But something has happened that has never happened in the past in one of the countries that comprise it. And this is the first downgrade of the U.S. credit rating from AAA to AA+. A downgrade from Standard and Poors (S&P), one of the Big Three really means a lot especially for the world’s largest economy. This cut of the credit rating by one notch is due to the fact that the budget deficit reduction plan passed by U.S. Congress was not able to stabilize the situation there. Before, people believe that they can invest their money safely in US treasuries but now they think that countries like Japan and Switzerland are safer when it comes to investment opportunities.

The world’s largest economy is in trouble. The measure which raises the debt ceiling until 2013 will result to $2.4 trillion reduction in government spending. The US government will do this for the next ten years so as to ensure that its long-run fiscal trajectory is compatible with the AAA rating of the other two major credit rating agencies (Moody’s and Fitch). This involves a lot of work for the government. Further measures should be taken to maintain this course of action.

The dollars reign is coming to an end. For decades, the dollar has served as the world’s main reserve currency. But soon, it will have to share that role. The dollar is about to have rivals for the first time in 50 years – euro and China’s yuan. Fire is catching and China is getting more powerful.

USA has a lot of troops all over the world. We are wondering why the USA always intervenes in every eventuality that is happening across the globe. Maybe because it has a stake in everything that may happen. For instance, Secretary of State Hilary Clinton said in a statement that the USA will support Philippines, its ally, in the campaign for a peaceful settlement with the ongoing dispute over claims of the Spratly Islands. It also sends troops to places where there is unrest like in Libya, on the demilitarized zone between North and South Korea, in Mindanao and in many other places. Thinking of the money it spends to keep its influence in the world, that must be really big. The effort may have strained the country.

Some say that the United States of America is not really united. Before the Republicans and the Democrats agreed to raise the country’s debt ceiling, President Barack Obama called for unity between the two political parties. “What’s clear now is that any solution to avoid default must be bipartisan. It must have the support of both parties that were sent here to represent the American people – not just one faction,” he said. Good thing, they were able to beat the August 2 deadline.

Perhaps the West is moving to China and to other Asian nations. Last February, China overtook Japan’s position of being the second world’s largest economy. This speaks of something – that finally, Asia is starting to rise and come up to match with America and Europe. And India is in rank #4 (EconomyWatch, 2011). The power is starting to get distributed to other nations. After being a superpower for so long, America is starting to slow down. It may not be too late but we can’t be so sure of anything in this world.