Author: Gloria O. Pasadilla, PIDS

September 2008 might well be considered the most traumatic period in recent financial history, with shocking unfolding one after the other. The US government-sponsored enterprises, Fannie Mae and Freddie Mac, went into conservatorship. AIG appealed to the US Federal Reserve Bank for a bailout. Wall Street stock prices plummeted. Financial titans like Merrill Lynch and Bear Stearns sought cover from the white knights, Bank of America and JP Morgan Chase, to avoid bankruptcy. Lehman Brothers disappeared from the financial map. And the US government committed approximately $1.4 trillion (so far) to bail out the financial sector. Although there is a greater measure of confidence now, economic conditions remain moribund and uncertain, at least until next year.

What can the Philippines learn from the global financial crisis? How does all this affect the Philippines?

So far, the Philippines has not felt the effect of the financial mayhem in the US in any major way. The Philippine banking system has minimal exposure to structured financial products: news accounts of Philippine banks’ exposure to the Lehman Brothers’ collapse put it at approximately 0.11 percent of total banking assets, or PhP5.5 billion.Individual banks with market losses from the derivatives securities have already allocated increased loss provisions in their capital.

But the United States is a large economy with major effects on the global economy, so the Philippines will eventually also feel the pinch. There are several ways through which this is going to take place.

One is through a potential decrease in investment. The US is the major source of investments in the Philippines. In 2007, it accounted for 33 per cent of new foreign direct investment (FDI). Another channel is through a decrease in remittances. With the US recession bringing down the global economy, the jobs of overseas Filipino workers (OFWs) may also be at risk. A third channel is through a decrease in tourism receipts.Finally, the most predictable channel is a decline in exports as a result of weak demand in the US and other parts of the world.

Crises are opportunities for policy reforms that can be useful in the long term. As intellectual capacities are more and more focused on inancial maelstrom in the US, ideas for the greater stability of securities market are likey to emerge down the track.

Notwithstanding  the potential downward spiral which the US crisis is likely to cause in the Philippine economy, there are lessons to learn from the experience. weak demand in the US and other parts of the world.

For the full PIDS Policy Notes article, see here.

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2. Financial reforms after crisis
3. China’s response to the global financial crisis
4. The financial crisis and what’s in store for Southeast Asia

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