IMPACT OF U.S. CREDIT RATING DOWNGRADE ON 2012 BUDGET SOUGHT
[PHOTO - P-Noy with Budget Secretary Florencio Abad]
MANILA, AUGUST 9, 2011 (STAR) By Christina Mendez - Senate finance committee chairman Sen. Franklin Drilon yesterday directed the government's finance and economic managers to provide the committee with possible impacts on budget assumptions of the decision of Standard and Poor's (S&P) to cut the triple A rating of the United States.
Speaking before the committee during the Department Budget Coordinating Committee (DBCC) on the 2012 National Expenditure Program yesterday, Bangko Sentral ng Pilipinas (BSP) Governor Armando Tetangco and Budget Secretary Florencio Abad admitted that they have not yet taken into account the possible impacts of the US credit rating downgrade on the 2012 national budget.
"Mr. Chairman, this has not been discussed by the DBCC yet because the downgrade happened only last Saturday. I think we need some time to assess the potential impact," Tetangco said.
Drilon stressed the need for the finance and economic managers to look into how the downgrade will affect the Philippine economy in a bid to plug possible leaks during discussions on the 2012 national budget.
"This is very critical, we are talking here about the budget. I mean what happened over the weekend could change our assumptions and projections," Drilon said.
He gave the country's finance and economic managers 60 days to come up with a position on the issue.
"From the discussions earlier, we are confident that we can cope with the downgrading. I want a definite answer, are we going to revise our projections? How will it affect our assumptions?" Drilon said.
Abad said they didn't have enough basis to revise the assumptions "at this point."
Finance Secretary Cesar Purisima asked for more time to be able to determine what markets will react to the US downgrade, and how it will impact on the Philippine economy.
Drilon said the issue of the downgrade is "most challenging" because it might affect unemployment and underemployment in the country.
Short-lived
But the BSP believes that the impact of the decision of S&P to downgrade the triple A credit rating of the US – the first time since 1917 – over the weekend on emerging markets including the Philippines would be short-lived.
Tetangco told reporters that the downgrade would reflect in the greater volatility in foreign exchange markets.
Tetangco said monetary authorities would speed up the review of possible refinements in the non-deliverable forwards market to impose prudential limits in order to stem excessive volatilities in the foreign exchange market.
According to him, the BSP would continue to be watchful of developments in aggregate global demand, particularly on international commodity prices that form a critical factor in the country's domestic inflation processes.
The BSP chief reiterated that the central bank would continue to review the composition of the country's assets, the bulk of which are in US treasuries.
For his part, BSP Deputy Governor Diwa Guinigundo said the impact of the US credit rating downgrade on global markets will be short-lived.
"What happened last week was a knee-jerk reaction of the risk aversion but what we are hoping for is that the market will be more discriminating, more discerning and the market will realize that some emerging markets continue to be very resilient, that their macro economic fundamentals continue to be sound and stable," Guinigundo said.
No immediate impact
Meanwhile, S&P yesterday clarified that there is no immediate impact on Asia-Pacific sovereign ratings resulting from the lowering of the issuer credit ratings on the US as well as the weakening sovereign creditworthiness in Europe.
"Uncertainties in the global financial market and weakened prospects in the developed economies have further undermined confidence. The potential longer-term consequences of a weaker financing environment, slower growth, and higher risk aversion are negative factors for Asia-Pacific sovereign ratings," S&P said.
S&P said the Philippines together with Thailand, Taiwan, Korea, Malaysia, Japan, Australia, and New Zealand are likely to experience export-driven slowdowns either through weaker demand or lower export prices, or both.
Same target
Abad said the government is keeping the budget deficit target for the year at roughly P300 billion or 3.2 percent of gross domestic product while Purisima said balancing the budget is not a priority of the government.
The finance chief said the government is also assessing the effect of the downgrade on the country's dollar debts.
He said that as a trading partner, the US accounts for 17 percent of the country's exports. Nevertheless, he said that China has also been driving global growth in recent years.
The finance chief believes that the dollar will weaken against most currencies in the world.
As such, investors are expected to move to safer currencies.
Purisima added that in light of the recent developments in the US, the administration will continue to increase the competitiveness of local industries for the economy to thrive.
Yesterday, the Department of Labor and Employment, for its part, said all American-owned firms and export establishments nationwide are now under tight watch for possible temporary closure and retrenchment of workers.
'Review trade dealings'
Sen. Sergio Osmeña said the impact on the Philippines of the ratings downgrade will be based on its impact to the US and European economies as well as China, while Sen. Francis Escudero said the government should review its trade dealings with the US.
Aurora Rep. Juan Edgardo Angara said, "We should be prepared for the worst case scenario which is recession in the US and Europe."
Ang Kasangga sa Kaunlaran party-list Rep. Teodorico Haresco, vice chairman of the House committee on small business and entrepreneurship development, said one possible measure is for the government to start imposing capital control as he noted the Philippine peso is "artificially appreciating versus the US dollar."
Foreign Secretary Albert del Rosario, meantime, is optimistic that the country is prepared to survive the effects of the rating downgrade. – With Iris Gonzales, Mayen Jaymalin, Paolo Romero, Pia Lee-Brago, Lawrence Agcaoili
FROM REUTERS PHILIPPINES
U.S. downgrade hits stocks as investors flee
Analysis & Opinion
[PHOTO - A panel displays stock indexes of Asian markets at an exhibition hall of the Hong Kong Stock Exchange August 8, 2011. REUTERS/Bobby Yip]
NEW YORK | Mon Aug 8, 2011 12:54pm EDT By Leah Schnurr (Reuters) - The fallout from Standard & Poor's downgrade of the United States pushed world stocks to their lowest level in nearly a year on Monday and drove investors to the safety of gold and bonds.
Strange as it may be, investors sought shelter in the asset that was downgraded -- choosing U.S. government bonds for their liquidity and perception of the high quality of U.S. credit.
Investors shunned stocks and commodities, struggling to discern the effects of the downgrade, which could hit various components of the financial sector, from mortgage lenders to municipal issuers and insurers.
U.S. stocks lost more than 3 percent by midday and European stocks hit a 2-year low. Wall Street's favored gauge of investor anxiety briefly spiked above 40, a sign investors are afraid of more declines to come. The CBOE Volatility Index .VIX was up 21.1 percent at 38.76.
MSCI's all-country world stock index .MIWD00000PUS dropped 3.6 percent. The index was at its lowest level since September 2010. The sell-off since July 29 has wiped $3.4 trillion off the value of global stocks, the equivalent of Germany's gross domestic product.
"Everyone's hair is on fire," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.
The sell-off crowded out any relief from news that the European Central Bank was buying Italian and Spanish government bonds in the latest move to staunch the euro zone debt crisis.
The downgrade -- and the threats of subsequent moves by S&P or the other ratings agencies -- raise uncertainty as to the credibility of the United States in the global economy as investors increasingly worry about another recession.
Central to S&P's argument was that the political paralysis in Washington has reached a point where it would be unable to deal with worsening deficits and sagging economic growth. This burdens a stock market already skittish after last week's outbreak of fear.
"In many ways this is not about the downgrade. I think it's about the underlying fundamentals and issues that are embodied in the downgrade itself," said Jonathan Golub, chief U.S. equity strategist at UBS in New York.
"Now the market is really focusing on long-term sustainable growth issues and that is why you have the market taking it on the chin."
SEARCH FOR SAFETY
Several major brokerages have in recent days lowered their expectations for economic growth and share appreciation for 2011 and 2012.
Moody's repeated a warning that it could downgrade the United States before 2013 if the fiscal or economic outlook weakened significantly. But it said it saw the potential for a new deal in Washington to cut the budget deficit before then.
Investors looking for a safe place to park their money pushed gold to a record high above $1,700 an ounce. The dollar dropped against the Swiss franc and yen, while the euro fell.
The euro last traded at $1.4174, near a session low of $1.4150 on trading platform EBS and well off a session peak of $1.44320. The euro hit a record low against the Swiss franc, falling as low as 1.0640 Swiss francs.
The dollar fell 0.8 percent to 77.79 yen and was down 0.5 percent at 0.7635 Swiss franc.
The 30-year U.S. Treasury bond was last up 3-3/32 in price and yielding 3.69 percent, down from 3.85 percent late on Friday. The 10-year Treasury note was last up 52/32 in price and yielding 2.38 percent, down from 2.57 percent late on Friday.
The Dow Jones industrial average .DJI dropped 309.62 points, or 2.71 percent, at 11,134.99. The Standard & Poor's 500 Index .SPX was down 42.52 points, or 3.55 percent, at 1,156.86. The Nasdaq Composite Index .IXIC was down 94.29 points, or 3.72 percent, at 2,438.12.
European shares .FTEU3 closed down 4 percent after earlier registering gains on the ECB action.
"The sell-off is mainly due to the fear that we will relapse into recession. Many investors have finally realized that the U.S. economy will not grow at 3 percent," said Klaus Wiener, chief economist at Generali Investments, which manages 330 billion euros ($468 billion).
"I will attach a one-third probability to a renewed recession, not so much because it is fundamentally inherent in the system, but because the political risk has gone up."
(Additional reporting by Chuck Mikolajczak and Edward Krudy in New York, Atul Prakash and Jeremy Gaunt in London; Editing by Dan Grebler)
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