Impact of the U.S Economic Crisis on the Philippines

The 2008 global financial and economic crisis produced a synchronized recession among industrialized countries leading to a retrenchment in world trade. the recent shocking US credit rating downgrade is just a proof that the 2008 global crisis has not been resolved. It is just a start for a deeper severe problem that is expected to last for years.

The cause of the deceleration in the Philippine economy was the surge in inflation triggered by the sharp rise in food and fuel prices. The slowdown of the Philippine economy in 2008 is not primarily a result of the current global financial. This implies there is a huge downside risk for the economy which is reflected in the sharp deceleration in the first two quarters of 2009.

The worsening economic condition of the US has a great negative on the Philippines in terms of weaker remittances, lower exports, and more problematic investments. Financially, it will affect the interest rates, the foreign exchange rate, Philippine debt and the stock market.

The negative effect of high inflation came through various channels: households postponed consumption expenditures, particularly durable goods; the high cost of fuel scaled back services in the transportation sector; and higher prices caused an increase in the cost of production. Since the Philippines is in an unenviable position, from the very first, of having to deal with both the short-term issues brought about by the 2008 crisis and unresolved structural problems. One area that can be explored is whether the present crisis can be an impetus for more fundamental reforms. However, there is also the possibility that the crisis will simply expose the fragile nature of the Philippine economy and worsen the poverty situation.

Impact on Asset Markets

As a result from the declaration of the bankruptcy of Lehman Brothers and other big financial firms around the world the capital flows reversed to emerging and developing countries. It mirrored the sales of debt and equity securities by the nonresidents, the selective withdrawals of bank deposits held wit domestic banks and a decline in inflows of foreign direct investments. This resulted to sudden drop to the prices of equity securities, it depreciated by 3 percent.

Investment inflow to the country will be affected. Foreign direct investments to the Philippines in 2010 decline by 13% compared to the previous year. The same downward trend has continued during the first quarter of 2011. These latest figures were given by the Bangko Sentral ng Pilipinas.The Philippine government already admitted that the US debt crisis will be causing some uncertainties among investors and may slow down the global economy.

Impact on the Financial Sector

In year 2008, the ratio of NPLs (nonperforming loans) continued to decline, and was slightly increased in year 2009. Also in year 2008 most banks continued to report simultaneous high rates of returns on assets an equity, and didn’t experiences increases in impaired assets. This exposed the Philippine banks to the toxic structured mortgage products that were extensively sold internationally. Given largely domestically-focused business and relatively strong economic activities in 2007, profitability of Philippine banks has generally remained high in 2008. Why? Because, policies implemented in the aftermath of the 1997 crisis did play a role in limiting the impact of the 2008 global liquidity crunch. The BSP, however, must remain vigilant and implement measures to maintain stability of the financial sectors.

The exposure of Philippine banks to this weakening US condition may lead to contraction of local businesses and job losses. The local banking system will be prudent in lending to small enterprises. Those enterprises that do not have an access to lending would result to business slowdown and establishment closures would be apparent. Business slowdown will worsen the country’s condition. Unemployment will continue to rise. Business owners will be forced to lay off their employees. It would be more likely felt in all trade and investment enclaves in the country, both manufacturing and business process outsourcing (BPOs), and then by the few Filipino firms exporting to the US and related markets.

Unfortunately, U.S crisis may possibly hit the exporters since about 20 percent of the country’s exports go directly to the U.S. The growth in exports for the first quarter of 2011 slowed down.

Impact on the Real Sector

Another important factor that affects Philippine economy was the pronounced deceleration in construction activity following a surge related to the 2007 elections and the initial implementation of President Macapagal-Arroyo’s ambitious infrastructure program.

On the production side, significant slowdowns occurred in manufacturing, electricity, gas, and water, trade, and finance services.The manufacturing sector was buffeted by the 29.2 percent contraction in exports during this period. The food manufacturing sector was able to offset the contraction in other sub-sectors, particularly electronics and furniture, in the first 3 quarters of 2008. This is the reason that value added in manufacturing actually grew slightly faster in 2008 compared to 2007.

The 2009 first half performance does not predict well for the Philippine economy. Both value added in the manufacturing sector and private investment plunged during this period. Hence, the Philippines have to contend simultaneously with both short-term demand management issues and medium-term structural issues. It should be noted that even before the crisis, the Philippines had one of the worst records in terms of poverty alleviation in East Asia and one major reason is that it has not yet hurdled the low-equilibrium growth trap.

In 2008, remittances—as reported in the balance-of payments account— amounted to $16.4 billion or 13 percent of GDP.

The Department of Labor and Employment (DOLE) identified the following OFWs who are vulnerable to displacement due to the global economic and financial crisis:

• OFWs who work in the US under temporary working visas (129,000)
• Seafarers in cruise ships (130,000)
• Factory workers in Korea, Taiwan, and Macau (268,000)
• Household service workers in Singapore, Macau, and Hong Kong (48,000)

These groups comprise only about 15 percent of the roughly 4 million OFWs. Data from the Philippine Overseas Employment Administration (POEA) indicates that during the first ten months of 2008, the number of Filipinos deployed abroad rose considerably by 18.1 percent to 1,049,077 compared to 888,339 in the same period in 2007. For the entire year, 2008 deployment rose by 14.7 percent to 1,236,013 from 1,077,623 in 2007.

During the first quarter of 2009, the flow of returning OFWs did not increase significantly. However, there is concern that the slump in global shipping will adversely affect Filipino maritime workers. On the other hand, some shipping lines are replacing highly-paid Western nationals with lower-paid Filipinos. Data indicate a slowdown in the growth of remittances to only 3.8 percent in the first 7 months of 2009 compared to 18.2 percent in the same period last year. Employment in the domestic economy has been adversely affected by the economic slowdown. While the unemployment rate in 2008 increased as expected, it rose only to 6.8 percent from 6.3 percent in 2007. This is still much lower than the unemployment rates recorded during the past 20 years (Table 12). However, the unemployment rate jumped to 7.7 percent in the first quarter of 2009 although it recovered slightly to 7.5 percent based on the April 2009 survey and 7.6 percent in the July 2009 survey. The April survey also showed that while 2.4 million part time jobs were created, nearly a million full-time jobs were lost.

On overall impact, the inflation causes a lot of OFW to lose their jobs and forced to go home in the Philippines.

Impact on Macroeconomic Balance: Fiscal Deficit and External Accounts

The crisis is expected to affect the macroeconomic balances in the Philippines. The national government supposed to have fiscal deficit of 3.2 percent in the GDP in the year 2009.

Reasons why deficit is expected to widen

1. The Government is reluctant to cut expenditures at a time when the economy is slowing down considerably.

2. The Government has been buffeted by weak revenues.

The tax to GDP ratio has stalled in the range of 12-13 percent of GDP compared to 14 percent in 2008 and a peak of 17 percent in 1997.

Global crisis will further worsen the Philippines’s own economic crisis. However, the economy would have been less vulnerable if the domestic economy were not overly dependent on trade, foreign loans and capital, and if nationalist economic policies were in place.--BAN.^^

The U.S Economic Crisis

After US experienced Great Depression in year 1929, today US is experiencing another huge economic crisis started year 2007 according to National Bureau of Economic Research, a private group of leading economists charged with dating the start and end of economic downturns. Typically it takes a longer period of time to determine when was the recession began because the group need to consider the final reading associated with the economic crisis. The NBER said that the decline in the labor market throughout 2008 was one key reason why it decided to state that the recession began at year 2007. As a result US economy gradually declines; big financial company declares bankruptcy. Bank losses result in a reduction in bank capital, which in turn requires a reduction in bank lending (a credit crunch), in order to maintain acceptable loan to capital ratios.

Also as a result rate of profit in US declines. Government policies have affected the particular combination of unemployment and inflation at particular times, but nevertheless the fundamental cause of both of these “twin evils” has been the decline in the rate of profit.

Estimates of losses on mortgages keep increasing, and many are now predicting losses of $1 trillion or more, because since 2006, housing stops to increase and decline starting year 2007. Other than mortgages, other loans such as consumer loans (credit cards, etc.), commercial real estate, corporate junk bonds, and other types of loans (e.g. credit default swaps) also occurring losses.

Moreover, consumer spending will depresses due to following factors: decreasing household wealth; the end of mortgage equity withdrawals (which were very significant in the recent boom); and declining jobs and incomes. As a result, all in all, this period shapes a very severe recession.

The following are some effects caused by the recession:

Trade Deficit

The trade deficit that America experiencing for the last 3 years have rose to the highest level this June. It has risen to 4.4 pent as exports fell to their lowest level in more than two years. Exports dropped to 2.3 percent as well as imports which dropped to 0.8 percent. The cause of the decline in imposts was due to the falling cost of crude oil products. American manufactures have been alarmed by the decline in exports since they have been one of the responsible for the economic growth in months past. The 12.2 percent increase in trade deficit with the European Union is the largest trade imbalance America has held with the EU since 2008 while trade deficit with Japan rose to 53 percent. The 6.8 percent increase in trade deficit in China has made a negative impact on America. The deficit has lead to massive jobs losses and the offshoring of entire manufacturing operations. Overall, America’s trade deficit on the year is 15.3 percent to $576.6 billion.

The downgrade of US creditworthiness

China’s official news agency had stated that the U.S government’s good old days are finally gone. China, being America’s largest foreign creditor, seemed dismayed at the current America’s credit worthiness rating. The America’s new credit rating is a history. Standard & Poor’s, one of three main credit rating agencies, decided to downgrade America’s credit worthiness from AAA to AA+. It was the first time that the country has faced a downgrade. According to S & P the cause of the downgrade is the Gridlock in Washington. They have mentioned that the America’s governance and policymaking is becoming less stable, less effective, and less predictable than what everyone previously believed. Democrats put the blame for the downgrade on the tea party. Many Tea Party Republicans in the house rejected the deal of the Congressional leaders and the White House about the $4 trillion cut in spending and institution of entitlement reform. They have rejected that deal because it included revenue increases, a position that did not sit well with the credit rating agency. Meanwhile, Republicans sought to blame the president.

Return of the Double-Dip Recession

The rose in GDP has been driven by financial institutions and the consumption of imported goods and services. Another factor that contributed to the growth of GDP is the consumer economy wherein Americans are consuming nearly as many imports today as they have been consuming every year for the last decade. Despite the pretty impressive current GDP figure, the growth has not created job opportunities and somehow increase the income of those currently employed which makes the GDP meaningless in the entire economy. Recession still continues and its indicators are very visible: Unemployment is still above 9 percent, underemployment still hovers at 20 percent, wages are still declining, inflation is still a problem and living costs continue to rise above the inflation rate.

Report Shows Middle Class Hurt Most by Recession

The recession has created a negative impact to the Americans especially those who belong to the middle class. Based on the recent report released by the National Employment Law Project, all groups suffered during the great recession but the mid wage workers suffered the most. The most striking part of the report has to do with where the jobs that are being created fall on the wage scale. While the job losses are being absorbed by the mid wage group, the job growth has been focused to the lower wage category. Low paying positions are growing whereas good paying jobs continue to suffer. The report has also mentioned the acceleration of the decline in the average wages of lower wage workers. It is said that the failed trade policies and broken tax structure were the reasons of the presence of these phenomena.

The following are possible solutions for the U.S economic crisis:

The strategy of inflation, i.e., of increasing prices at a faster rate, which reduced real wages, or at least avoided increases in real wages, so that all the benefits of increasing productivity in recent decades have gone to higher profit.

Another widespread strategy has been to cut back on health insurance and retirement pension benefits.
Another very common strategy to increase the rate of profit has been to make workers work harder and faster on the job; in other words, enforcing a “speedup.” One common business strategy has been “downsizing,” i.e., lay off 10–20 percent of a firm’s employees and then require the remaining workers to do the work of the laid-off workers.

A more recent strategy has been to use bankruptcy as a way to cut wages and benefits drastically. Another increasingly important strategy used by capitalists to reduce wage costs has been to move their production operations to low-wage areas around the world.

The strategies used by capitalist enterprises to increase their rates of profit in recent decades have in general caused great suffering for many workers—higher unemployment and higher inflation, lower living standards, and increased insecurity and stress and exhaustion on the job.