The US recession and its Impact on US

Arroyo has just called an emergency energy summit. She needs to. The threat of high oil prices will impact greatly on the country's economy. One of the things which this summit achieved is lower the tariffs imposed on oil prices. It was a decision which sectors have been wanting for Arroyo to do since last year when oil players jacked up petrol prices.

But what Arroyo must actually do instead of calling for an energy summit is an economic summit. Why? There is a strong possibility that the slide of the US economy into recession will affect Philippine economic growth this year. The high 5% unemployment rate and the sluggish pace of the economy will surely affect the flow of net foreign portfolio and foreign direct investments. Investors, both local and foreign, have shown nervousness and apprehension, not because of political talks, as what "eminent" stock analyst Astro del Castillo said yesterday. The Philippine stock market will perform poorly in the next couple of weeks or even months until this US recession boils over.

Surely, those companies involved in the call center, export and those closely linked with retail or consumer goods will find it extremely hard to compete in the US due to this recession. There will be less demand for locally-based call centers because companies in the US will surely slash their customer service budget. When things turn worse, companies look at their books and erase those which they consider to be dispensable expenses.

What I fear is the fate of fellow Filipinos in the US. Surely, with unemployment high, the first sector to be affected by it would be the minorities. There will be less jobs available for them. When this happens, some or many of them would be unable to send dollars into the country or worst, entertain thoughts of going back. The exodus of incoming expats would surely strain our own economy.

This early, questions about the resiliency of our economy are animating every boardroom and every coffee shops. People are edgy. And when people are uncertain about things, they are bound to do the inevitable--strategic retreat. I, myself, am thinking of pulling out certain investments linked with the stock market, for fears that the value of my money will be diluted due to this impending recession. I am not encouraging others to do so. But, if they assess the situation, they would empathize with me when I say this: When the sky is littered with dark clouds, it's time to rush to the nearest shelter for rain.

Danger signals

Reports say that the Philippine gross international reserves (GIR) remained high at 32.4 billion US dollars at the end of October. Central Bank governor Amando Tetangco Jr. attributed this high GIR to the central bank’s dollar purchases amid strong inflows from OFW remittances. BSP expects about US$ 14.7 billion in OFW remittances by the end of 2007. The monies being sent by over 8 million OFWs is one of the contributory factors of the strong performance of the peso against the US dollar. Currently trading at 43.60 against the weak dollar, the peso is the second best performing Asian currency.

BSP intervention: keeping the peso at bay

The BSP’s intervention in the forex market is the second or third time the monetary authority intervened. For the 5th straight month, Philippine money supply flowed to 11.4 percent due to BSP dipping its hands into the cookie jar. Government hopes that a strong peso would slow down inflation. Reports indicate a reverse. Inflation remains high at 2.86 percent, higher than the 2.8 expected inflation rate.

Balance of Trade

Government figures place the balance at a negative US$ 867 million due to a slowdown in export earnings (US$ 4.10 billion) compared with the entry of imports (US$ 4.97b). Ths is the sixth or seventh straight time that trade imbalances nearly near a billion dollars.

Slowdown of FDI’s

Analysts are worried on the continuing drop of net foreign direct investment (FDI) dipped to US$77 million last August, down by 80 percent from a year ago and nearly 82 percent from July. Net FDI’s amounted to US$ 387 million in August and just US$ 419 million in July of this year. Aside from fears of a further slowdown of the US economy, investors are worried about the high power costs and decrepit infrastructure in the Philippines. The country lags behind Indonesia, China and Singapore in attracting foreign investments.

The slowdown of FDI has reflected in the performance of the stock market. Today, the stock market fell 0.3% over fears of continued US economic slowdown. This is not unusual considering that the regional markets reacted the same way.

Danger signals

The implications of a strong peso must not be glossed over. This early, government is concerned over the impact of the strong peso in the lives of OFW families. More on this later.