United States of America is one of the largest powerful economies globally. And because of the current condition of US it greatly affects the other economies. Before we tackle the adverse effects of us economic crisis in RP let’s examine first the failure or the minimal success of traditional monetary policy measures against economic imbalances.
What is monetary policy?
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values.
With the apparent success at delivering relatively low inflation globally, many central banks have turned their attention to the possibility of ensuring financial system stability. In spite of the benign inflationary environment, the regular occurrence of financial crises has created stresses in a wide variety of countries. The US sub-prime problem, so-called, is the latest such crisis while the Asian crisis of 1997-98 remains fresh in the minds of all policymakers. Not surprisingly, central banks have turned their attention to the dangers that lurk behind ‘financial imbalances’ world wide, and how monetary policy can contribute to mitigating these. Although seemingly a logical extension to the inflation control problem, efforts at containing financial crises must acknowledge the dearth of analytical approaches to the problem. We simply do not have anything approaching a consensus theory of financial system stability. Therefore, attempts to increase emphasis on financial system stability as an additional goal of central banks must not only face the question whether the existing toolkit of monetary policy is capable of delivering the desired outcome, even if we can agree on a theoretical framework, but whether the relationship between the central bank and the supervisory authorities is sufficiently well structured or defined to prevent crises from erupting in the future. For the time being at least, and until the analytical apparatus is capable of delivering useful predictions, central banks ought to “stick to their knitting.” (http://www.icrier.org/pdf/Issuespaper_Siklos.pdf)
Economic conditions in the United States have a significant impact on the rest of the world. Furthermore, the U.S. can influence economic conditions in other countries.
Like many other emerging markets, the Philippine economy slowed down considerably in 2008. Latest data show that GDP growth rate for the first three quarters of 2008 fell to 4.6 percent, compared to 7.5 percent in the same period in 2007. However, also like many other emerging markets, the slowdown was not a result of the global financial crisis. Rather, the deceleration in the Philippine economy was largely brought about by a surge in inflation triggered by the sharp rise in food and fuel prices and to a lesser extent the US recession.
Impact on Asset Markets
The financial turmoil that emerged in the aftermath of the Lehman Brothers debacle magnified tensions in the global interbank and credit markets. As a result there was a virtual freeze in liquidity in US and European financial markets which stopped and, in many cases, reversed capital flows to emerging and developing countries. In large part, the latter reflected sales of debt and equity securities by nonresidents, selective withdrawals of bank deposits held with domestic banks and a decline in inflows of foreign direct investment. (World Bank, 2008)
The immediate impact of the liquidity squeeze in international capital markets was a rise in the price of risk—as measured by bond spreads—a sharp drop in equity prices, and exchange rate volatility.
Stock market and exchange rate volatility do affect macroeconomic stability and this has implications for private investment. However, the investment rate in the Philippines have been sluggish for the past decade and there is not much room for further deterioration. In terms of international trade, prices of traded commodities are mostly set in the global market. Exchange rate movements, therefore, affect profitability of exporters rather than demand for their products. Profitability of exporters, however, has an impact on their investment and employment decisions. Exchange rate movements affect the propensity to import, the degree of protection of import-substituting industries, and the peso value of remittances from abroad.
Impact on the Financial Sector
The onset of the global financial crisis raised fears that many emerging markets will face a debacle similar to the 1997 financial crisis that hit East Asia. The initial impact on asset markets did put pressure on financial markets especially in economies with high foreign participation in local equity markets, banking systems that depend heavily on short-term foreign currency funding, and those running external current account deficits (ADB, 2008). In East Asia, Korea and Indonesia experienced severe foreign currency liquidity shortages but the situation has improved considerably in December, 2008.
Impact on the Real Sector
The critical issue is whether the economic slowdown will persist in the wake of the global financial crisis. This largely depends on the strength of various contending factors. On the one hand, food and fuel prices have come down sharply from their peaks earlier this year. The price of Brent Crude Oil, for example, has already fallen to US$44 per barrel5 from its peak of US$145. Inflation is therefore expected to be
much lower in 2009.
On the other hand, the synchronized recession in major economies and the global credit squeeze will adversely affect exports, foreign direct investment and domestic private investment. Ironically, resilience of the Philippine economy would be partly due to factors that limited its economic expansion during the past 3-4 decades. One, Philippine exports generally have low value added in terms of their contribution to GDP.6 Moreover, the share of Philippine exports to the US has fallen from a peak of 34 percent in 1998 to only 16 percent in 2008.
Impact on Employment
Critical to the prognosis in 2009 is the impact of the recession in major economies on employment of overseas Filipinos (OFWs). Remittances have been the lifeblood of the economy during the past decade. In 2007 alone, remittances—as reported in the balance-of-payments account— amounted to $13.3 billion or 9.4 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. One of which are the OFWs who work in US under temporary working visas.
These groups comprise only about 15 percent of the roughly 4 million OFWs. Preliminary data from the Philippine Overseas Employment Administration (POEA) indicate that during the first ten months of 2008 the number of Filipinos deployed abroad rose considerably by 25.5 percent to 1,115,199, from 888,339 a year ago. Data, however, indicate a slowdown in the growth of remittances to only 3.3 percent in October. This brought the cumulative ten-month growth to 15.5 percent, lower than the 16.2 percent average in the first half of 2008. For 2009, the BSP sees a sustained growth in overseas remittances, although at a slower pace of 6-10 percent. This will definitely have a negative impact on the real sector, particularly on personal consumption expenditures. The impact will likely be muted, however, given that a 10 percent growth rate for an item that is 10 percent of GDP would still be substantial. Employment in the domestic economy has been fairly steady. While the unemployment rate in 2008 increased as expected, it rose only to 6.8 percent from 6.3 percent in 2007. (Impact of the Global Financial and Economic Crisis on the Philippines: A Rapid Assessment, Josef T. Yap, January 12, 2009)
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