Impact of US credit downgrade on PHL

MANILA: 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.

Noted economist Benjamin Diokno described 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).

Diokno, currently an economics professor at the University of the Philippines, served as budget secretary during the administration of former President Joseph Estrada.

Over the weekend, Standard and Poor’s (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 world’s 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 government’s budget deficit and rising debt problem.

According to Diokno, in a “volatile and uncertain world economy,” even the public private partnership (PPP) program, the centerpiece of the economic policy of the administration of President Benigno Aquino III, would suffer from the US downgrade fallout.

The United States is the country’s biggest trading partner and leading source of foreign investments.

Diokno aired his comments after Aquino government officials remarked that the downgrade was a “wake-up call” for US policy makers.

Earlier in Malacañang Palace, the seat of the Philippine government, Communications Secretary Ricky Carandang said that the US government must now seriously address the economic issues it is facing.

Carandang said 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.

But Finance Secretary Cesar Purisima was more forthright in saying that the downgrade would slow down the global economy as he raised the need for a new framework to facilitate coordination among global regulators.

Purisima said the US government needs to address its fundamental issues to prevent world investors to become jittery. “Unless the United States addresses the fundamental issues, I think we may have entered an era of less predictable and less stable global financial markets,” Purisima said.

According to Purisima, developments in the United States stressed the need for alternative global currencies and benchmarks, aside from the US dollar and treasury notes that are more stable and as liquid and convertible.

US Treasury data showed that the Philippines holds 23.6 billion dollars in US securities.

China, now the world’s second largest economy, has an exposure of 1.15 trillion dollars in US debts as of end of April this year.

Senator Francis “Chiz” Escudero, urged the government’s economic managers to take concrete steps to cushion the possible negative effect of the US downgrade.

Escudero said the Philippine government should strengthen its economic ties with world economic giants like China in order to absorb the shock. “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,” he said.

In explaining his apprehensions, Diokno said that the weakening political institution in Washington and the inability of US political leaders to act in a non-partisan way to increase the debt ceiling have negative repercussions around the world.

Diokno said that while one may blame the setback on right-wing Republicans, US President Barack Obama should share the blame “for agreeing to an agreement that would mean deep spending cuts, with no corresponding tax increases, at a time when the US economy is still struggling.”

On Aug. 2, President Obama signed a law that would reduce the US fiscal deficit by US$2.1 trillion over 10 years. But it fell short of the 4 trillion dollars in savings that S&P has urged the United States to work out.

Diokno noted that the US “jobs market remains weak while the housing crisis remains (largely) unaddressed.”

He said a “slow-growing, possibly stagnating, US economy will mean weaker dollar—conversely strong peso—which will have serious negative effects on overseas remittances, exports and overall aggregate demand.”

Diokno also warned that the problem “will not go away in a few months or a few quarters.”

“This new development—a US credit downgrade on top of an already weak world economy— requires serious, strategic thinking on the part of the Aquino administration,” Diokno said. –ALITO L. MALINAO, XINHUA NEWS AGENCY