us downgrade thesis

8/4/2019 Us Downgrade Thesis

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ACKNOWLEDEMENT

This dissertation would not have been possible without the guidance

and the help of several individuals who in one way or another contributed

and extended their valuable assistance in the preparation and completion

of this study.

First and foremost, my utmost gratitude to Professor Marcial

Bermudo for letting us have the chance to discover what really had

happened in the 2011 US credit downgrade and its effect on the Philippine

economy.

Professor Patrick De Leon who had been really kind to answer my

questions regarding the US economic downgrade.

Ms. Pia Almira Miranda whose sincerity and encouragement I will

never forget. As well as for the insights she had shared.

Ms. Pamela Cahayon, for her patience and steadfast

encouragement.

To all those have been my inspiration as I hurdle all the obstacles in

the completion this research work.

Last but not the least, my family especially my mother and father

who constantly give me strength to continue and provided me with

financial support and love to be able to finish this.

To the one above all of us, the omnipresent God, for answering my

prayers for giving me the strength to plod on despite my attitude of

almost give up thank you so much Dear Lord.


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INTRODUCTION

The Philippines and the United States have been entangled in love-

hate relationship for a very long time. The Philippines and the United

States have a long standing alliance. The Philippines was also a US colony

from 1902-1946. The Philippines is also the oldest and one of the closest

US allies in Asia. The Philippines and the United States still maintain close,

friendly, diplomatic, political and military relations with 100,000+ US

citizens and nationals living in the Philippines and more than 2 million

Filipinos living in the United States. Both countries actively cooperate in

the trade, investment and financial sectors. The US is also the largest

investor in the Philippine economy with an estimated total worth of $63

billion. This proves how large the influence US has in the Philippines

especially on its economy.

On August 5, 2011 Standard & Poors (S&P) a credit rating agency

decided to downgrade its credit rating for the U.S Federal Government

from AAA to AA+. A credit rating is a complete credit or financial sheet

that shows credit history of a person, organization or a country. In order to

evaluate and determine if a person, corporation or country are up to the

mark to extending cash lending service or any other financial service to

him. Four days after the 112th united States Congress decided to increase

the debt ceiling of the federal government through the Budget Control Act

of 2011 in August 2,2011 the downgrade has occur causing a stir not just

inside the U.S but in whole world especially in Asia where a developing


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country like the Philippines might be affected. S&P had announced a

negative outlook on the AAA rating in April 2011.

STATEMENT OF THE PROBLEM

This aims to explain the negative and positive effects of the US

credit downgrade to the businesses and economy of a developing country

such as the Philippines. The researcher would particularly want to know

the impact of the credit downgrade to the interest rates, stock market,

investments, peso, purchasing power, and the economy as a whole.

Furthermore, the researcher want to know how great is the effect of the

event whether the effect is positive or negative and lastly between those

two which is greater, does the US credit downgrade beneficial or harmful

to the Philippines.

STATEMENT OF THE OBJECTIVE

The primary objective of this thesis is to serve as a record and

reference for the effects of a credit downgrade on a powerful country like

the United States of America. In addition to this, this also aims to

distinguish and explain how the US credit downgrade affected developing

companies particularly the Philippines.


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RATIONALE

This is to see how the Philippines was influenced by the recent

happenings in the US and how it can faced such circumstances. Ideally, a

country aims to have AAA credit rating because it gives positive outlook

not just for the local investors but also those who are outside the country.

There are seven countries in the world that used to enjoy this status and

they are known as the G-7 which consists of Australia, Japan, England,

France, Italy, Singapore and the United States of America. Unfortunately,

USA was given a credit downgrade by the credit agency; Standard and

Poors from AAA to AA+ which created a negative outlook for the

strongest country in the world.

The Philippines and US has been in good terms way back the 18th

century thus established great influences in each other not just in political

stands but as well as the economic parts. In fact, US are one of the major

trading partners of the Philippines proving how close their economic

relationship is with each other. The United States of America is one of the

most powerful country in the world and with the financial crisis that it is

suffering to developing countries like the especially the Philippines which

is particularly involve with the US economy might be affected by the

credit downgrade. The question is how great the outcome is.

Government officials here both from the present and past

administrations have expressed grave concern over the impact of the

credit rating downgrade in the United States on the Philippine economy.

Standard and Poors (S&P) downgraded the US credit rating from triple A


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to double A-plus, a move that economic analysts described as an

unprecedented blow to the worlds largest economy and could trigger

another world recession worse than the one in 2008-2009.

SCOPE AND LIMITATION

The findings of this study will be limited to the effect of the US credit

downgrade to the Philippine economy. It will only discuss about the

outcomes in the economic part of the country and those that is related to

it. Note that politics, morals and other countries might be seen in the

paper but they will be only used to support claims and is very relevant to

the Philippines.

The study also shared not that much information regarding the US

credit down grade due to limitations in the length of time the research

was done. Another is that there is lack of sources of information mainly

due to the phenomena being a recent happening that you cannot find it

discussed and explained in books.


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CONCEPTUAL FRAMEWORK


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This diagram shows the outcomes that the Philippines experiences

due to US credit downgrade. The researcher started by stating the

problem then discussed one by one in detail first, the positive outcomes of

the 2011 US credit downgrade. This was followed by the discussion of the

negative impacts that brought the country small problems.

Massive lay-offabroad

resulted tounemployment

for OFWs

Decrease inremittances

Exportsdeclined in

thePhilippines

The Philippines

attracts foreigninvestments

Doing businessin thePhilippines isgood.

US dollardepreciates

makingPhilippine pesoto increase in

value

Interest ratesdecrease in the

Philippines

Effect in thePhilippine

StockExchange

Reaction of thePhilippines tothe US creditdowngrade

The cause ofUS credit down

grade inAugust 2011

Statement ofthe Problem:

What are theimpacts thePhilippines hadexperienced inline with 2011


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REVIEW OF RELATED LITERATURE

A credit rating is a formal assessment of a corporation, autonomous

governments, individuals, conglomerates or even a country. Credit rating

is evaluated on the basis of financial transactions carried in the past and

assets and liabilities at present. Credit rating allows a lender or a credit

granter to evaluate the ability of the borrower top repay a loan.

Credit ratings: how Fitch, Moody's and S&P rate each country

Credit rating is concerned with an act of assigning values (In terms

of symbols) to fund raising Instrument by estimating worth, reputation,

solvency and honesty o f the borrowing person so as to repose trust In

person's ability and to repay The credit range 1s an assessment, by an

independent agency, of the capacity of an issuer of debt security to

service the debt and

repay the principal as per the terms of Issue of debt The ratings g

given are based on an objective judgement of a team of experts from the

rating agency involved In the credit rating

Credit rating is a process by which risk associated with a

credit instrument s evaluated The risk evaluation is only one factor

among various other factors such as price of security, maturity period

yield, and tax considerations, which also counts In taking investment

decisions It evaluates only a specific Instrument and indicates risks

associated with Instruments only

So, who are the ratings agencies? The big three agencies are Fitch,

Moodys and Standard & Poors. What they do is assess how likely a


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borrower is to be able to repay its debts and help those trading debt

contracts in the secondary market. That means for those trading debt

contracts such as treasury gilts after they've been issued, ratings

agencies help assess a fair price to charge. Ratings agencies have been

criticised for having too much clout in jittery markets during the financial

crisis. They were widely attacked for failing to warn of the risks posed by

certain securities, in particular mortgage-backed securities. Losing your

rating or being downgraded can have a fatal effect on your country's

ability to borrow money on the markets.

The Ratings

Fitch introduced an AAA through to D credit rating system in 1924.

Standard & Poors has since adopted the same system. The AAA grade

represents the highest credit score, followed by AA and A through to D.

Moodys uses a different system which starts with Aaa as the highest

rating. The Aa1, Aa2 and Aa3 and A1, A2, A3 are grades given to

companies with low credit risks in the immediate future, but susceptible to

long-term risks. The Baa1, Baa2 and Baa3 ratings are for institutions

deemed relatively risky. All these categories under Moodys system are

considered investment grades. Non-investment grades start from, Ba1,

Ba2, Ba3, then B1, B2, B3. The C grades are assigned to institutions

already in default. All three agencies also give an intermediate between

AA and B. For example, a country with a fairly troubled financial history

seeking to issue international bonds could be assigned a B+.

Credit and Country Risk


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Credit risk is defined as the risk of loss arising from any failure by a

borrower or a counterparty to fulfil its financial obligations as and when

they fall due. Country risk is defined as the risk in cross-border lending

resulting from events in the country. These events include political and

social unrests, exchange control, moratoria, currency devaluation,

nationalisation and expropriation of assets.

Country risk is managed within an established framework that

includes setting of limits for each country based on the countrys risk

rating, economic potential as measured by its GDP, as well as the Groups

business strategy. Country exposures are analysed and significant trends

are reported to the Credit Committee.

Philippine Economy

The Philippine economy proved comparatively well-equipped to

weather the recent global financial crisis, partly as a result of the efforts

over the past few years to control the fiscal deficit, bring down debt ratios,

and adopt internationally-accepted banking sector capital adequacy

standards. The Philippine banking sector--which makes up 80% of total

financial system resources--had limited direct exposure to distressed

financial institutions overseas, while conservative regulatory policies,

including the prohibition of investments in structured products, shielded

the insurance sector.

The Relationship of the Philippines and United States of America

U.S.-Philippine relations are based on shared history and

commitment to democratic principles, as well as on economic ties. The


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historical and cultural links between the Philippines and the United States

remain strong. The Philippines modelled its governmental institutions on

those of the United States and continues to share a commitment to

democracy and human rights. At the most fundamental level of bilateral

relations, human links continue to form a strong bridge between the two

countries. There are an estimated four million Americans of Philippine

ancestry in the United States, and more than 300,000 American citizens in

the Philippines.

In FY 2010, the U.S. Government--working closely with the Philippine

Government, civil society, the private sector, and other donors--provided

$176.5 million in grant funds to foster inclusive economic growth and

alleviate poverty; strengthen democratic institutions and governance; and

counter transnational terrorism and insurgency in Mindanao. To achieve

inclusive economic growth and alleviate poverty, the U.S. Government is

supporting a broad range of socio-economic efforts, including activities to

promote fiscal and trade policy reforms; infrastructure development;

business climate improvement; enterprise development; natural resources

management; improved health and education services; and increased

access to clean and affordable energy, water, and sanitation services. An

estimated 600,000 Americans visit the Philippines each year, while an

estimated 300,000 reside in-country. Providing government services to

U.S. and other citizens, therefore, constitutes an important aspect of the

bilateral relationship.

Trade and Investment of US and the Philippines


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The United States competes closely as one of the Philippines top

two trading partners. Two-way U.S. merchandise trade with the

Philippines--which declined from $17 billion in 2008 to $12.6 billion in

2009 following declines in global trade flows--increased to $15.4 billion in

2010 (U.S. Department of Commerce data). According to Philippine

Government data, about 11% of the Philippines' imports in 2010 came

from the United States, and about 15% of its exports were bound for

America. In 2010, the Philippines was our 30th-largest export market and

our 36th-largest supplier. Key exports to the United States are

semiconductor devices and computer peripherals, automobile parts,

electric machinery, textiles and garments, wheat and animal feeds, and

coconut oil. In addition to other goods, the Philippines imports raw and

semi-processed materials for the manufacture of semiconductors,

electronics and electrical machinery, transport equipment, and cereals

and cereal preparations.

The Philippines has ranked among the largest beneficiaries of the

Generalized System of Preferences (GSP) program for developing

countries, which provides preferential duty-free access to the U.S. market.

In 2010, the Philippines were the eighth-largest exporter under the GSP

program with nearly $913 million in duty-free exports to the United

States.

The United States traditionally has been the Philippines' largest

foreign investor, with close to $6 billion in total foreign direct investment


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as of end-2009. The United States has a bilateral Trade and Investment

Framework Agreement with the Philippines.

RESEARCH DESIGN

This study about the effect of the US credit downgrade in the

Philippines is a qualitative research that attempts to accumulate existing

information and data regarding the cause and effect of the 2011 credit

downgrade. The key reason for doing a qualitative research is to

investigate and become more experienced with a particular phenomenon

of the researchers interest in order to produce a detailed outcome of the

event which in this case is the impact of the US credit downgrade in the

Philippines.

This research aims to depict the influence US has on the Philippines

particularly in its economy. Do they have an inverse relationship or the

Philippines is entirely dependent on America? The researcher decides to

use the qualitative approach in order to verify observations and readings

that are currently circulating in the world.

The research would utilize both descriptive and exploratory research

method to conduct the study. Descriptive research is a method used to

obtain information relating to the current status of an issue or a

phenomenon that exists. The researcher would make use of her

observations through the use of media and tracking the recent happening

in the Philippines by reading newspaper, watching news on TV and on-line.

Exploratory research on the other hand, is often utilized in order to yield

information to explain problems which are not yet clearly and thoroughly


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explained. This study will use exploratory research since it aims to find

out how in the present time, a developing country like the Philippines

received the impacts of what is happening in the US.

PRESENTATION AND ANALYSIS

On August 5, 2011 one of the worlds most reliable credit rating

agencies decided to downgrade US credit rating from a prestigious triple A

to a double A plus which is still a good rating. The US credit downgrade

still caused a stir since it is one of the most powerful countries in the

world and having been shaken like that gave the country a negative

outlook which cause great disturbance among the investors. It finally

happened, Over the weekend, Standard and Poors (S&P) downgraded the

US credit rating from triple A to double A-plus, a move that economic

analysts described as an unprecedented blow to the worlds largest

economy and could trigger another world recession worse than the one in

2008-2009. S&P cut the AAA rating that it has given to the United States

since l941 over concerns about the US governments budget deficit and

rising debt problem. According to S&P, the downgrade was mainly a result

of problematic policy-making in Washington: The political brinksmanship

of recent months highlights what we see as Americas governance and

policymaking becoming less stable, less effective, and less predictable

than what we previously believed, S&P explains.

The downgrade reflects our view that the effectiveness, stability,

and predictability of American policymaking and political institutions have

weakened at a time of ongoing fiscal and economic challenges to a


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degree more than we envisioned when we assigned a negative outlook to

the rating on April 18, 2011. Since then, we have changed our view of the

difficulties in bridging the gulf between the political parties over fiscal

policy, which makes us pessimistic about the capacity of Congress and the

Administration to be able to leverage their agreement this week into a

broader fiscal consolidation plan that stabilizes the government's debt

dynamics any time soon this what S&P said.

In reaction to the said event, In the Philippine settings many of their

government officials here both from the present and past administrations

have expressed grave concern over the impact of the credit rating

downgrade in the United States on the Philippine economy. The

Philippines is closely monitoring the US debt crisis after Washington lost

its triple A rating but added it was too early to tell what the effect would

be on Manila.

People had expressed their opinions regarding the crisis for instance

is an economist Mr. Benjamin Diokno, currently an economics professor at

the University of the Philippines, served as budget secretary during the

administration of former President Joseph Estrada said that the impact of

the downgrade on the local and global economy as serious, adding that

in the Philippines, it would result in lower exports, slower inflow of

remittances from overseas Filipino workers, and reduced foreign direct

investments (FDIs).

In addition to this, a lot of Asian stock markets plunged on Monday

morning following an unprecedented downgrade of the US government's


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AAA credit rating to AA-plus by Standard & Poors and growing worries

over the euro zone debt crisis. The impact of the credit downgrade by the

Standard and poors to the US credit rating is similar to what would

happen if your own credit score declined: The cost of borrowing money is

likely to go up. Asian stocks nose-dived Monday as the first-ever

downgrade of the U.S. governments credit rating jolted the global

financial system, reinforcing fears of a rapid slowdown in economic

growth. Oil prices extended recent sharp losses, trading below $84 a

barrel on expectations that weaker global growth will crimp demand for

crude. The dollar was lower against the yen and the euro.

One of the expected outcomes of the US credit downgrade to the

Philippines is for its interest rates to go down. Since S&P is one of three

major rating agencies that assess the riskiness of large institutions such

as corporations and governments? The downgrade reflects a lack of

confidence in the U.S. government to pay its debts over time. Riskier

countries have to pay higher interest rates, just as riskier consumers do.

S&Ps decision rocked the United States and the world because the

nation has generally been considered one of the safest investments

around. The

Philippines being a developing country has a high chance of being the

subject of investments. The country might experience an inverse effect on

interest as compared to what happened on the US.

The interest rate the United States pays on its short-term loans is

determined by the market for Treasury bills. The downgrade could


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increase the yields on those bonds, forcing the government to spend more

to borrow the same amount of money. Many consumer loans, such as

credit cards and mortgages, are linked to the yield on Treasuries and

therefore would also rise. So if the government pay more surely the

people will pay more. This is good for the Philippines since it will create an

opportunity for the investors to take their interests in the said country.

Philippines can decrease their interest rate offerings as to attract local and

foreign investors.

Although, the Philippines is deemed to be a country that is not that

risk-free n comparison to the US today will be attractive to the investors

and this will make them a choice for putting up investments. US have

been seen as a riskier country as compared to prior the US credit

downgrade. Higher risk means it has to raise interest rates on the debt

papers it issues in order to attract lenders. It was estimated that the

downgrade could add up to 0.7 of a percentage point to the yields of

Treasuries over time, costing the US an additional $100 billion in

borrowing costs. To cover for these, the US might resort to more

borrowings that could sink the country further to a deeper debt quagmire.

In addition, with more money being spent for debt servicing, less money

could be allocated to social services and infrastructure which could lead to

lower GDP growth.

Analysts are split on the issue with some believing that the

increased risk in the US would cause foreign investors to look for other

investments in other markets. Some, however, believe that capital flight is


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possible but only in the short-term, with foreign investors returning to the

US since US Treasuries remain to be one of the safest and most liquid in

the world despite the downgrade. Still this chance is good for the

Philippines, Having more investors in the country will be leading to

creation of jobs that will help Filipinos to uplift their standard of leaving.

Employment is going to be addressed by new ventures in the country.

The downgrade of US credit rating would not affect much the

investments inflow into the country as they mostly cater to the domestic

market although new investments and exports of electronics are expected

to suffer a bit from the impact in the Philippines.

The managing head of the Board of Investments said that there are

three factors that will protect the Philippine investments from the US

credit downgrade. First, There are three factors for the First, most of

the American investments in the country are mostly into food

manufacturing like Purina, Cargill and P & G and they cater to the

domestic market not exports.American investments cater to the

domestic market, which is driven by a strong consumer spending. Their

costing would show there is strong demand here, so they will continue

here because their operation is driven by domestic market demand,

Panlilio said. But in return, the American firms might rethink their

investment plans thus lowering the chance of having new ventures in the

country.


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Second, there are still many countries other than US that is still very

active in investing in the Philippines because of cheap labour and raw

materials the country is offering. Labour cost in the U.S. for BPO

operation is not cheap, it is unlikely that they can compete with what the

Philippines can offer, Panlilio said.

Third, since electronics composed 45 percent of total Philippine

exports, while non-electronics accounted for 55 percent for the May

exports. At least 60 percent of the countrys electronics exports go to the

US market. It is clear here that the countrys number one dollar earner is

the electronics industry, is expected to be affected a bit it could find other

markets to compensate for the slack in the U.S. market.

Since the US dollars are tied to the US economy there will be

depreciation in dollars that it in effect will increase the value of Philippine

peso. The downgrade could make foreign investors rethink their

investment holdings in the United States. China, for instance, owns billions

of dollars worth of Treasury holdings and any major action by China to

reduce its investment would dump more dollars into the financial system

leading to a weaker US dollar. Other investors might also start unloading

their US portfolios as they look for alternative investments in foreign

markets like the Philippines.

Strengthening the value of Philippine peso will mean a greater

purchasing power for it. The Bangko Sentral ng Pilipinas (BSP) traces the

continued rise of the local currency from the strong foreign inflows. The
http://www.maribojocbohol.com/newstoday/bangko-sentral-ng-pilipinas/http://www.maribojocbohol.com/newstoday/bangko-sentral-ng-pilipinas/


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peso registered an eight-month high Thursday after closing at 42.62

against a US dollar. BSP Governor Amando Tetangco Jr. said push and

pull factors of the domestic economy were what attract investors towards

emerging economies like the Philippines, vis--vis negative developments

overseas. They (dollar inflows) are still affecting the movement not only

of the peso but also the other currencies in the region, he said, citing

that the stock market continues to go up. As of last July 8, foreign

portfolio investments, otherwise known as hot money due to the speed it

comes in and out of the country, posted a net inflow of US$ 2.54 billion,

an expansion of almost fourfold against year-agos US$ 638 million.

Although the credit downgrade of US had opened a lot of

opportunities for the Philippines still there are negative effects that the

country will suffer to. There are clearly 3 major disadvantages that the

Philippines experienced due to the unfortunate event in the US. One is the

effect on Philippine exports and the other is there is a possibility of major

lay-offs outside the Philippines that will result to a decline in remittances.

It is true that a weakened dollar would be good for US exporters

since they can be more price-competitive due to the exchange rate. But

Americans wishing to import or buy foreign products would find that

prices have become more expensive because of the depreciated value of

the dollar versus the other foreign currency. On the other hand,

Philippines will be negatively affected by it since our exports will be

considered more expensive and as result will decrease our buyers from
http://www.maribojocbohol.com/newstoday/bsp-governor-amando-tetangco-jr/http://www.maribojocbohol.com/newstoday/bsp-governor-amando-tetangco-jr/


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other countries. This might lead to a major surplus that can affect even

small businesses.

The Philippine government is closely monitoring the possible effect

of the credit rating downgrade by Standard & Poor's of the United States

on the deployment of overseas Filipino workers (OFWs). It was assured by

the Department of Labour and Employment Secretary Rosalinda Baldoz

that there would be no massive layoff of OFWs in the US despite the

economic crisis there.

Noting that central bank governor Amado Tetangco has downplayed

the effects of the credit rating downgrade on the Philippine financial

market, Baldoz said it is too early to tell how the downgrade will play up

on the employment of Filipinos in the US where the Philippines'

deployment of new hires and rehires stood at only 3,705 OFWs as of the

end of 2010.

The US credit downgrade has negative effect on the Philippines

remittance from the Overseas Filipino Workers. The exchange rate of

money that comes from abroad will result to a smaller value. This will

make the recipients of the remittances to spend less. In addition to this,

those businesses owned by Fiipinos abroad will suffer from it. Actually,

members of the Filipino American Chamber of Commerce of Orange

County said that the recent downgrade of Americas credit rating from

AAA to AA+ will negatively impact their businesses. The credit downgrade

could tighten overnight lending standards, and could make it difficult for


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businesses to borrow money to meet operating costs. Another is that the

fear of losing ones job will make the person afraid to spend his or her

money. Inside the country, the business is good.

Although a lot has been happening it was pointed out that the US is

expected to begin to seriously address its economic issues and will

eventually get over the downgrade. Capital flight is possible but only in

the short-term, with foreign investors returning to the US since US

Treasuries remain to be one of the safest and most liquid in the world

despite the downgrade.

SUMMARY

The United States of America had suffered from a credit downgrade

by Standard and Poors which gave them a grade of AA+ from its very

stable grade of AAA followed by other credit agencies like Moodys that

also gave them AA+ a negative outlook on August 5, 2011. This affected

not just America itself but as well as all the countries around the world

including the Philippines. According to S&P, the downgrade was mainly a

result of problematic policy-making in Washington which made them see

Americas governance and policymaking becoming less stable, less

effective, and less predictable than what we previously believed is due to

the political brinksmanship of recent months.

In the Philippine settings, many people especially the government

officials had expressed their concern to the event. The Philippines is


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closely monitoring the US debt crisis after Washington lost its triple A

rating but added it was too early to tell what the effect would be on

Manila. An economist and professor from the University of the Philippines

Mr. Benjamin Diokno said that the impact of the downgrade on the local

and global economy as serious, adding that in the Philippines, it would

result in lower exports, slower inflow of remittances from overseas Filipino

workers, and reduced foreign direct investments (FDIs).

Analysts are split on the issue with some believing that the

increased risk in the US would cause foreign investors to look for other

investments in other markets. Some, however, believe that capital flight is

possible but only in the short-term, with foreign investors returning to the

US since US Treasuries remain to be one of the safest and most liquid in

the world despite the downgrade. Still this chance is good for the

Philippines, Having more investors in the country will be leading to

creation of jobs that will help Filipinos to uplift their standard of leaving.

Employment is going to be addressed by new ventures in the country.

Since the US dollars are tied to the US economy there will be

depreciation in dollars that it in effect will increase the value of Philippine

peso. The downgrade could make foreign investors rethink their

investment holdings in the United States. The US credit downgrade has

negative effect on the Philippines remittance from the Overseas Filipino

Workers. The exchange rate of money that comes from abroad will result

to a smaller value. This will make the recipients of the remittances to

spend less. In addition to this, those businesses owned by Filipinos abroad


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will suffer from it. Another bad outcome is that the Philippines will be

negatively affected by it since our exports will be considered more

expensive and as result will decrease our buyers from other countries.

This might lead to a major surplus that can affect even small businesses.

It was pointed out that the US is expected to begin to seriously address its

economic issues and will eventually get over the downgrade.

Conclusion

United States of America is one of the Philippines top two trading

partners. They are deeply related to each other that it has a major

influence in each other. If the market economy in the USA freezes, exports

of the Philippines would be certainly affected. Even if our exports to

America are already half of what it was in 2000, our other trading partners

are dependent on the USA. Our exports therefore will also be affected,

alas and alack. Unfortunately for the US it had been given a credit

downgrade on August 5, 2011 by Standard and Poors which is followed by

another credit agency Moodys. From the prized AAA rating the US has

enjoyed since 1917 to a still-good AA+ level. In addition, S&P gave the

US a negative outlook which means another downgrade might be

possible within 1-2 years. Although the AA+ rating means the US is still

within investment grade, the credit rating downgrade which happens to

be the very first for the United States that could cause further anxiety in

financial markets still reeling from the effects of a continuing recession,

rising unemployment, and declining home prices.


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In the Philippine settings, A lot of people particularly the

government officials and investors had been closely monitoring the US

debt crisis after Washington lost its triple A rating. They claimed that it

was still too early to predict the impact it had in the country.

Nevertheless, there are still visible signs of US credit downgrade

outcomes in the Philippines. These effects are divided into two the

positive side which consists of increase in investments, low interest rates,

appreciation of Philippine peso, and increase in peoples purchasing

power, attractive stock market, and creation of jobs. On the other hand,

there are 3 major negative results brought by the credit downgrade the

first one are the decrease in the remittances that enters the country.

Another is the decline in Philippine exports since foreign buyers deemed

Philippine products to be more expensive as compared before the US

credit downgrade had happened. Lastly it reduced foreign direct

investments (FDIs).

The Philippines is one of the developing countries in Asia that can

greatly benefit from the unfortunate event that happened in the US.

Although it was reported that the Asian stock market including the

Philippine Stock Exchange (PSE) had suffered from the credit downgrade

the first time the downgrade was given it was just for a short-term period

and eventually regained its stable position. US stocks suffered the worst

one-day sell-off in two years, with the Dow Jones Industrial Average (DJIA)

falling 4.31% and the Nasdaq Composite Index losing 5.08% of its value in

August 04, 2011. The dollar inflows are still affecting the movement not


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only of the peso but also the other currencies in the region making

the stock market to continue going up. It was reported that as of last July

8, foreign portfolio investments, otherwise known as hot money due to the

speed it comes in and out of the country, posted a net inflow of US$ 2.54

billion, an expansion of almost fourfold against year-agos US$ 638

million.

The above event resulted to a sharp decline in the oil prices in the

world market. Now, the Philippines has been buying oil which is an

important input for almost all production processes for a lower price as

compared before. The reason behind it is due to the US dollar being

closely-tied to the US economy, after the credit downgrade the US dollar

had immediately depreciates making the value of foreign currencies such

as the Philippine peso to increase. It is now amounting to 42.45 PHP a

great increase in value in comparison to the recent years. Strengthening

the value of Philippine peso will mean a greater purchasing power for it.

The Bangko Sentral ng Pilipinas (BSP) traces the continued rise of the

local currency from the strong foreign inflows.

Another good point for the Philippines is that its investments wont

be greatly affected by the said credit downgrade this is mainly due to

three factors; first, most of the American investments in the country are

mostly into food manufacturing like Purina, Cargill and P & G and they

cater to the domestic market not exports. Second, there are still many

countries other than US that are still very active in investing in the

Philippines because of cheap labour and raw materials the country is
http://www.maribojocbohol.com/newstoday/bangko-sentral-ng-pilipinas/http://www.maribojocbohol.com/newstoday/bangko-sentral-ng-pilipinas/


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offering. One of it is Japan which is reportedly to be its major trading

partner. Last, although the electronic industry is one the major players

that brings the country great income the US credit downgrade will have

but a small affect to it mainly because the Philippine is also heavily

supplied by other countries like South Korea and Japan.

Due to the credit downgrade, US have been seen as a riskier

country as compared to prior the event. Higher risk means it has to raise

interest rates on the debt papers it issues in order to attract lenders. This

is where the Philippines will seek the opportunity to take these lenders,

and this is going to be done through lowering the interest rates that it will

offer the local and foreign investors. Having more investors in the country

will lead to creation of jobs that will help Filipinos to uplift their standard

of leaving. Employment is going to be addressed by new ventures in the

country since more investments mean more jobs for people. It is expected

that a lot ofother investors might also start unloading their US portfolios

as they look for alternative investments in foreign markets like the

Philippines.

The businesses inside the country will benefit from it since people

will more money to spend that as a whole increases the aggregate output

of the country. In addition, with less money being spent for debt servicing,

more money could be allocated to social services and infrastructure which

could lead to higher GDP growth.


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Unfortunately, the US credit downgrade also brought the Philippines

three major negative outcomes. It would result in lower exports, slower

inflow of remittances from overseas Filipino workers, and reduced foreign

direct investments (FDIs).

The appreciation of Philippine peso meant that the products the

country sells will be more expensive for the foreign customers. In return,

they are going to look for other countries that can offer them cheaper

products like China making the export activities in the Philippines to

decline heavily. Another is that due to a negative image created by the US

credit downgrade investors who unload their investment portfolios in the

US will make businesses in the country including those Filipino owned to

greatly suffer. In order to cope up with the currency crisis, companies

resorted to massive lay-offs that directly affect Overseas Filipino Workers.

Without jobs or lower pay, Americans cannot afford maids and caregivers.

With business down, the outsourcing job which translates into "call

centres" opportunities in the country can spiral down (except the medical

transcriptionists). Not having a job means that they wont have enough

money to spend. The remittances that will enter the country will decrease

significantly. Lastly there will be reduction in direct foreign investments

from America which wont be that of a major problem since the Philippines

still have a lot of trading partners that is outside the US like Japan and

South Korea.

Capital flight is possible but only in the short-term, with foreign

investors returning to the US since US Treasuries remain to be one of the


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safest and most liquid in the world despite the downgrade. Actually, Last

week, the companies said they still believe the United States deserves the

highest credit rating but they warned that could change.

RECOMMENDATIONS

Although a lot has been happening in the US still it is believed that

they are still the most powerful country in the world. The US dollar is still a

stable currency that people should look up to. So it is recommended for

the Philippines to continue its deep relationship with the US. To hold on to

its credit rating, the country must reduce its debt and stabilize the

economy.

It is also suggested for the Government to continue monitoring the

countrys reaction the US events as to secure that it can immediately take

the necessary steps to address the possible effects on the Philippines.

Unless the United States addresses the fundamental issues, the world

may have entered an era of less predictable and less stable global

financial markets. The Philippines should look for alternative global

currencies and benchmarks, aside from the U.S. dollar and treasury notes

that are more stable and as liquid and convertible to make it more flexible

in case of another unexpected financial crisis to happen.

The government's economic managers should take concrete steps

to cushion the possible negative effect of the U.S. downgrade like

strengthen its economic ties with world economic giants like China in

order to absorb the shock. The researcher agreed to Senator Chiz


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Escudero when he said that "We just have to ride this through and learn

from it, remain resilient and strengthen economic ties with other countries

to absorb the shock and hopefully make us less affected by similar

occurrences in the future." Bing not tied up to one country means a larger

chance of coping up in case major problems arise. The BSP should

decrease interest rates offerings in the country as to attract investors that

will create offer more jobs for Filipinos.

Bibliography

24 Frances (August 8, 2011) Asian markets fall on historic UScredit downgrade, http://www.france24.com/en/category/tags-pour-les-articles/usa.

Angeles, Steve (August 10, 2011), US credit downgrade worries Pinoy bizowners, Retrieved from http://www.abs-cbnnews.com/global-filipino/08/10/11/us-credit-downgrade-worries-pinoy-biz-owners.

Leonard, Andrew (August 25, 2011), S&P to the U.S: Your credit is nogood, Retrieved fromhttp://www.salon.com/technology/how_the_world_works/2011/08/05/standard_and_poors_downgrade/index.html

Mendez, Robert (January 1, 2006) A Look at the Importance of CreditRatings Retrieved from http://EzineArticles.com/?expert=Robert_Mendez.

Mui, Ylan Q. (August 8, 2011), Five Ways the Downgrade in U.S. CreditRating Affects You, Retrieved fromhttp://www.washingtonpost.com/ylan-q-mui/2011/03/09/ABTPHIQ_page.html.

August 8, 2011, Impact of the US Credit Rating downgrade byS&P,Retrieved from http://www.pinoymoneytalk.com/stocks/.
http://www.france24.com/en/category/tags-pour-les-articles/usahttp://www.france24.com/en/category/tags-pour-les-articles/usahttp://www.abs-cbnnews.com/global-filipino/08/10/11/us-credit-downgrade-worries-pinoy-biz-ownershttp://www.abs-cbnnews.com/global-filipino/08/10/11/us-credit-downgrade-worries-pinoy-biz-ownershttp://www.abs-cbnnews.com/global-filipino/08/10/11/us-credit-downgrade-worries-pinoy-biz-ownershttp://www.salon.com/technology/how_the_world_works/2011/08/05/standard_and_poors_downgrade/index.htmlhttp://www.salon.com/technology/how_the_world_works/2011/08/05/standard_and_poors_downgrade/index.htmlhttp://www.salon.com/technology/how_the_world_works/2011/08/05/standard_and_poors_downgrade/index.htmlhttp://www.salon.com/technology/how_the_world_works/2011/08/05/standard_and_poors_downgrade/index.htmlhttp://ezinearticles.com/?expert=Robert_Mendezhttp://ezinearticles.com/?expert=Robert_Mendezhttp://www.washingtonpost.com/ylan-q-mui/2011/03/09/ABTPHIQ_page.htmlhttp://www.washingtonpost.com/ylan-q-mui/2011/03/09/ABTPHIQ_page.htmlhttp://www.pinoymoneytalk.com/stocks/http://www.france24.com/en/category/tags-pour-les-articles/usahttp://www.france24.com/en/category/tags-pour-les-articles/usahttp://www.abs-cbnnews.com/global-filipino/08/10/11/us-credit-downgrade-worries-pinoy-biz-ownershttp://www.abs-cbnnews.com/global-filipino/08/10/11/us-credit-downgrade-worries-pinoy-biz-ownershttp://www.abs-cbnnews.com/global-filipino/08/10/11/us-credit-downgrade-worries-pinoy-biz-ownershttp://www.salon.com/technology/how_the_world_works/2011/08/05/standard_and_poors_downgrade/index.htmlhttp://www.salon.com/technology/how_the_world_works/2011/08/05/standard_and_poors_downgrade/index.htmlhttp://www.salon.com/technology/how_the_world_works/2011/08/05/standard_and_poors_downgrade/index.htmlhttp://www.salon.com/technology/how_the_world_works/2011/08/05/standard_and_poors_downgrade/index.htmlhttp://ezinearticles.com/?expert=Robert_Mendezhttp://ezinearticles.com/?expert=Robert_Mendezhttp://www.washingtonpost.com/ylan-q-mui/2011/03/09/ABTPHIQ_page.htmlhttp://www.washingtonpost.com/ylan-q-mui/2011/03/09/ABTPHIQ_page.htmlhttp://www.pinoymoneytalk.com/stocks/


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