US in Crisis! Philippines in....

“PNoy economic team looks at how US debt crisis will impact PHILIPPINE ECONOMY”

President Aquino’s economic team studied the possible impact of the United States debt problem on the Philippine economy. The President wanted to know the possible effects of the US debt crisis and expressed concern about the rising peso and its impact on exporters.

“A lower dollar means that we pay less in terms of our foreign debt. If we were paying P42 to one dollar and the exchange goes down to, say, 40 then we’re actually saving P2 per dollar," he said.

The negative effect, on the other hand, is that Filipino workers in North America may think twice before sending money to the Philippines. If the economy of US weakens and the dollars goes down, the result is that our fellow citizens who reside at North America will be careful. Meaning, they will remit, they could remit less or if they don’t remit less, what they remit will be worth also less. So it will have an impact on consumption.LYN

“Exporters not threatened by US crisis but fear impact on other markets”

It was stated that CEBU, Philippines - The Philippine export industry is not threatened by another economic crisis faced by the United States, unless the financial instability will spread to other major markets such as Europe, China, and Japan.

PhilExport president and chief executive officer (CEO) Sergio Ortiz-Luiz Jr. said that after the recession, the Philippine exports have developed strong connection with other major markets; in fact latest figure showed that the country’s exports to US went down from 34 percent to 12 percent. Surprisingly, Japan is now the number one export market of the Philippines, followed by US and China.

In the year-on-year comparison that Philippine export sector only grew by three percent, a slight shortage of the industry’s projection of growing 10 percent this year. Nevertheless, Ortiz-Luiz said the sector is not downgrading its target of growing 10 percent this year, as the projection in the next few months is seen to be promising.

The PhilExport head said that aside from China, Japan, and Europe, the Philippine export is also getting its confidence from the growing market in Asia. Moreover, the Philippines is now growing its business within the Asian market, and this may offset the decline of orders coming from the US.

Last year, because exporters considered it as “recovery year”, the industry grew by 25 percent, and exceeded the target of 20 percent growth set by the industry players in 2010. Despite the slow pace of growth seen in the first six months this year, Ortiz-Luiz is confident that the 10 percent target growth is achievable, if the positive trend will continue. LYN

“NEDA sees no reasons to be alarmed with US crisis, downplays critics”

“With regards to the impact to the Philippine economy of the US credit rating downgrade , NEDA estimates that it will be minimal, around .11% of the GDP (gross domestic products). And that is too small,”
                                                      - Ruperto Majuca(NEDA Assistant Director General)                                         

The National Economic and Development Authority (NEDA) sees no enough reason to be alarmed despite the prevailing economic crisis in Western countries, particularly the United States. NEDA Assistant Director General Ruperto Majuca reiterated the government’s stand amidst continuous speculations that the US’ downgrade and economic crisis will greatly affect the local economy.

However, Majuca said that the government must do necessary measures “to calm the market so that the indirect effects will not happen”, also referring to future effects of the crisis.

Lower exports in trade channels, slower flows in remittance channel as well as in foreign direct investments are among the most likely effects of the US credit downgrade to the Philippines. But he noted that the people should not be alarmed with these.

“Our people should not be alarmed because this (US crisis) has only small effects. The (US) economy has already experienced the slow down before, and there we’re just additional points on the slow down today. So, it would just possibly hit through the trade channel and the remittance channel,” Majuca said during the media briefing.

Among other economic issues, which confronted the Philippine economy this year included the slowdown of the economies of US and other European countries, political turmoil in the Middle East countries, and supply-chain destruction brought by disasters in countries like Japan.

However, Majuca emphasized that despite of all the recent events affecting the local market, the economy showed remarkable resiliency.

“The 2011 1st quarter was buffeted by so many shocks… but despite of all these things, with the many shocks, the economy shows remarkable resiliency…. We can expect brighter numbers, rosier numbers for Q3 and Q4,” he ended. CHA

“PESO is strengthening despite the US Crisis”

The Philippine peso on Monday closed at a three-year high at 41. 925 pesos against U.S. dollar, its strongest finish since April 30, 2008 when it closed at 42.17 pesos against U.S. dollar.

The Philippine Stock Exchange (PSE) also hit a new all-time high of 4,550.53, surpassing the previous peak hit on July 20.

Finance Secretary Cesar Purisima said in an interview that the Philippines is glad that the unthinkable did not happen. "We are breathing a sigh of relief that they (U.S.) had finally resolved it."

According to Governor Amando Tetangco of the Bangko Sentral ng Pilipinas (BSP), the country's central bank, while there is no guarantee that the United States would not lose its triple-A rating, the Philippine economy would be able to sustain its growth although "the loss of its (U.S.) credit rating would temporarily heighten local market volatility."

International financial institutions have forecast the Philippine economy to grow by 5-6 percent this year. The Philippine government, however, said that it is aiming for a 7-8 percent growth in 2011.

Tetangco said that the peso would continue to strengthen as foreign investors would opt to keep flocking to emerging economies like the Philippines as the United States and some industrialized countries in Europe are plagued by worsening debt problems.

He also assured the public that the domestic banking sector is prepared to weather any short-term shocks in the financial market, adding that while a downgrade would undermine the assets of banks, particularly those that hold U.S. debts, local banks remained “well capitalized."

The Philippines' GIR, considered healthy under international standards, was beefed up by remittances and foreign investments in business process outsourcing and portfolio instruments. CHA

“Value of investments in this country will not change despite the US Crisis”

The U.S economy is experiencing financial crisis since 2008 which can be evidenced by the decline of its rate profit and the downgraded of its credit rating from AAA to AA+ by the Credit Rating Agency Standard and Poor’s. According to Former Secretary of State Otto Reich,  U.S debt crisis have indescribable global economic consequences since United States produces and consumes almost a quarter of all products sold globally and if this crisis continues, its global effects could deepen. It can lead to a recession, higher interest rate and higher rate of unemployment.

        In the Philippines, President Aquino declared that the weakening economy of U.S will not have a negative impact on the Philippines Investment Sector. “The value of investments in this country will not change with what is transpiring in America and if foreign investors continues to see it profitable to continue doing business in the Philippines, then they will remain in the Philippines” he said.

        In contrast to what President Aquino has said, “the US’ debt crisis will inevitably affect the economy of the Philippines and the outlook is not good” Bayan secretary general Renato Reyes Jr. said. According to him, Aquino administration should change and reverse some of the economic policies that make Philippine economic growth dependent on US investments.

       On the other hand, the Philippine export industry is not threatened by the crisis faced by US but since its economy is large enough to affect other countries like China, Japan and Europe, they must continue monitoring the impact of US Crisis. JAM

“US Crisis will cause low remittances of OFWs”

OFWs are the major contributors to the country's economy. The largest number of OFWs can be found in the United States, United Kingdom and Middle East. Remittances from these overseas workers help drive the Philippine economy and account for at least 10% of the country's GDP.

However, with the US recession bringing down the global economy, the jobs of overseas Filipino workers have also become at risk resulting to a decrease in remittances. Low remittances had caused the families of some OFWs to suffer because of less money they receive. There was also less help for economic growth and aid to sustain the development of the country. Another effect of US crisis is the decline in exports as a result of weak demand in the US and other parts of the world. AMA

US in crisis???

“Major Economic Problems Facing the United States”

The United States is facing economic disaster on a scale few nations have ever experienced.

--They have quietly become a second-class country in many respects.--

They can no longer produce what they need to sustain theirselves.

--They import much more than they export, and they are selling off their assets and taking on massive debts to sustain a standard of living they can no longer afford.--

They are failing even to acknowledge predatory foreign trade practices.

--They encourage U.S. manufacturers to design, engineer, and produce in third world markets like Mexico and China.—

“Trade Deficit Widens to Three-Year High”

It was reported that America’s trade deficit in June rose to the highest level since October 2008, according to the U.S. Commerce Department. The deficit rose 4.4 percent during the month, to $53.1 billion as exports fell to their lowest level in more than two years. Economists had expected the trade deficit to be around $48 billion for the month.

Exports fell 2.3 percent to $170.9 billion. Imports fell 0.8 percent to $223.9 billion, largely due to the falling cost of crude oil products.

The drop in exports is a major concern for American manufacturers who were driving much of the economic growth in months past. “The real weakness was in exports and that’s consistent with slower growth in the rest of the world,” Jay Bryson, a global economist at Wells Fargo Securities, told Bloomberg News. “The contribution of exports is going to be a little shakier.” Now, however, global markets are grinding to a standstill, which could endanger any economic recovery in America.

America’s trade deficit with the European Union rose 12.2 percent to $9.8 billion. That is the largest trade imbalance America has held with the EU since 2008.

America’s most politically sensitive trade deficit, the one it holds with China, rose 6.8 percent to $26.7 billion. Since China entered the World Trade Organization in 2001, it has consistently been able to game the system through mercantilist practices and gain an unfair advantage against American competitors. That not only leads to trade deficits, but 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. LYN (email sent for the error in her code)

"The market's already been shaken out," -Harvey Neiman, a portfolio manager of the Neiman Large Cap Value Fund "The United States deserves to have this happen,because of its clumsy handling of fiscal policy.” - Peter Morici, a University of Maryland business economist.

The credit rating agency Standard & Poor’s, lowered the US AAA rating for the first time since granting it in 1917. The move came less than a week after a gridlocked Congress finally agreed to spending cuts that would reduce the debt by more than $2 trillion -- a turbulent process that contributed to convulsions in financial markets. The agreed cuts were not enough to satisfy Standard & Poor.

The drop in the rating by one notch to AA-plus was telegraphed as a possibility back in April. The three main credit agencies, which also include Moody's Investor Service and Fitch, had warned during the budget fight that if Congress did not cut spending far enough, the country faced a downgrade. Moody's said it was keeping its AAA rating on the nation's debt, but that it might still lower it. But any losses might be short-lived. The threat of a downgrade is likely already reflected in the plunge in stocks said.

One fear in the market has been 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. However, even without an AAA rating from S&P, U.S. debt is seen as one of the safest investments in the world. And investors clearly weren't scared away this week. While stocks were plunging, investors were buying Treasuries and driving up their prices.

A study by JPMorgan Chase found that there has been a slight rise in rates when countries lost an AAA rating. The government fought the downgrade. Administration sources familiar with the discussions said the S&P analysis was fundamentally flawed. 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. CHA

The U.S. economy is currently experiencing its worst crisis since the Great Depression. One of the underlying causes of the current crisis can be traced to the decline of the rate of profit.

The most important cause of the subpar performance of the U.S. economy in recent decades is a very significant decline in the rate of profit for the economy as a whole. This significant decline in the rate of profit appears to have been part of a general worldwide trend during this period, affecting all capitalist nations. According to Marxist theory, this very significant decline in the rate of profit was the main cause of the “twin evils” of higher unemployment and higher inflation and also of lower real wages, experienced in recent decades. As in past periods of depression, the decline in the rate of profit reduced business investment, which in turn resulted in slower growth and higher rates of unemployment. An important factor in the postwar period was that many governments in the 1970s attempted to reduce unemployment by adopting expansionary fiscal and monetary policies (more government spending, lower taxes, and lower interest rates). However, these policies generally resulted in higher rates of inflation, as capitalist firms responded to the government stimulation of demand by rapidly raising prices in order to restore the rate of profit, rather than by increasing output and employment.

Financial capitalists revolted against these higher rates of inflation, and generally forced governments to adopt restrictive policies, especially tight monetary policy. The result was less inflation and a return to higher unemployment. These facts demonstrate that 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. AMA

The Current Crisis

The housing bubble started to burst in 2006, and the decline accelerated in 2007 and 2008. Housing prices stopped increasing in 2006, started to decrease in 2007, and have fallen about 25 percent from the peak so far. The decline in prices meant that homeowners could no longer refinance when their mortgage rates were reset, which caused delinquencies and defaults of mortgages to increase sharply. The American dream of owning your own home is turning into an American nightmare for millions of families.  A total of about 6 million mortgages either have already been foreclosed, are in foreclosure, or are close to foreclosure. Six million mortgages are about 12 percent of all the mortgages in the United States. The situation could get a lot worse in the months ahead, due to the worsening recession and lost jobs and income, unless the government adopts stronger policies to reduce foreclosures. Defaults and foreclosures on mortgages mean losses for lenders. Estimates of losses on mortgages keep increasing and there will also be losses on other types of loans, due to the weakness of the economy. Therefore, total losses for the financial sector as a whole could be as high as $2 trillion. The losses for the banking sector could be as high as $1 trillion and losses of this magnitude would wipe out two-thirds of the total capital in U.S. banks. This would obviously be a severe blow, not just to the banks, but also to the U.S. economy as a whole.

The blow to the rest of the economy would happen because the rest of the economy is dependent on banks for loans. 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. According to this rule of thumb, even the low estimate of bank losses of $1 trillion would result in a reduction of bank lending of $10 trillion! This would be a severe blow to the economy and would cause a severe recession. In addition to the credit crunch, consumer spending will be further depressed in the months ahead due to the following factors: decreasing household wealth; the end of mortgage equity withdrawals and declining jobs and incomes. All in all, it is shaping up to be a very severe recession.

Bank losses may be offset to some extent by “recapitalization,” i.e., by new capital being invested in banks from other sources. However, it is becoming more difficult for banks to raise new capital from foreign investors, because their prior investments have already suffered significant losses. PEY

August 2011- Credit Rating agency Standard & Poor’s downgraded the US Credit rating from AAA to AA+ which took place because of the negative outlook on the long term rating. First, let’s define what credit rating is. Credit Rating assess the credit worthiness of a business enterprise such as a corporation or a government who is an issuer of a particular debt. Credit rating agencies like S&P use this to measure the ability of a particular entity to pay its short and long term maturing obligations. A weak credit rating denotes that the company has a high tendency of non-payments of its maturing debts.

        The demote of the US credit rating indicates the lack of trust of other firms in the government of US to pay its maturing obligation. Since this can lead to an increase in interest rate of Treasury debts, US government may tend to borrow more money and increase its taxes. The rates for credit cards, car loans, student and other debt may also increase. In addition, the downgraded of credit rating of US will result to a higher mortgage rate.

        Since it can affect the economy of United States, the government must stabilize its loans and debts by controlling its expenditures and meeting all its obligations on time. JAM