PH gov’t on cautious mode as US loses AAA credit rating
The United States’ loss of its sterling credit rating for the first time in history can be expected to dampen the overall appetite of fund owners to invest in the US, thereby affecting even developing countries like the Philippines, according to Finance Secretary Cesar Purisima.
“The resulting unease may, in the short term, make investors more tentative and may slow down the global economy,” Purisima said in a statement.
“Unless the US addresses its fundamental issues, I think we may have entered an era of less predictable and less stable global financial markets,” he said.
Purisima’s opinion is not shared by everyone in government, however.
The Bangko Sentral ng Pilipinas, the central bank, said that the one-notch downgrade of the US credit rating would not necessarily cause a sell-off of US Treasuries around the globe.
The BSP said that at AA-plus, the US rating with Standard & Poor’s was still investment grade.
“While it is prudent to somehow diversify investments of the country’s foreign exchange reserves, the fact remains that the US dollar and US Treasuries are still the most liquid assets,” BSP Governor Amando Tetangco Jr. said.
Standard & Poor’s removed the US government from its list of risk-free borrowers late Friday, lowering the country’s top-notch AAA rating for the first time since granting it in 1917.
The credit rating agency’s move to lower the US rating by one notch to AA-plus came less than a week after a gridlocked US Congress finally agreed to spending cuts that would reduce the debt by more than $2 trillion—a tumultuous process that contributed to convulsions in financial markets.
The promised cuts were not enough to satisfy S&P which described the decision as a judgment about the nation’s leaders, writing that “the gulf between the political parties had reduced its confidence in the US government’s ability to manage its finances.”
Emerging markets affected
Purisima said the downgrade should prompt policymakers around the globe to coordinate in instituting actions that would somehow shield their economies from the ill-effects of the United States’ fiscal and economic problems.
Given the links of emerging markets to the US, any unfavorable event in the world’s biggest economy is expected to somehow dampen even their performance, according to economists.
Purisima said the Philippines will also be affected by the downgrade because the country’s foreign exchange reserves are denominated in US dollars and are mostly invested in US Treasuries.
The United States’ lower credit rating could reduce the value of US Treasuries in the international bond market, thus adversely affecting the Philippines’ reserves of foreign currencies.
The Philippines’ gross international reserves (GIR)—the reserves of foreign currencies that determine the country’s ability to purchase imports, pay debts to foreigners, and engage in other commercial transactions with the rest of the world—stand at about $69 billion and the bulk of these are invested in US Treasuries.
According to US Treasury data, the Philippines holds $23.6 billion in US securities, now rated AA+ by S&P with a negative outlook.
The US is also its top export market, main provider of foreign military aid, and a key host for the Philippines’ nine million-strong overseas workers whose remittances help fuel household consumption in the Philippines.
Purisima said the US credit rating downgrade should encourage policymakers to talk about considering other “more stable” reserve currencies as alternatives to the US dollar and US Treasuries.
Wake-up call
“This development highlights the need for alternative global reserve currencies and benchmarks that are more stable and as liquid and convertible,” he said.
In Malacañang, Communications Secretary Ricky Carandang said the downgrade of the United States’ credit rating was a wake-up call for the US to seriously address its economic problems which he said he was confident it would be able to do.
Deputy presidential spokesperson Abigail Valte said President Aquino’s top economic advisers were closely watching the potential fallout and would be discussing it in the next few days.
Indignation
The Obama administration reacted with indignation to the S&P downgrade, noting that the company had made a significant mathematical mistake in a document that it provided to the Treasury Department on Friday afternoon, overstating the federal debt by about $2 trillion.
“A judgment flawed by a $2-trillion error speaks for itself,” a Treasury spokesperson said.
No surprise
The downgrade could lead investors to demand higher interest rates from the US federal government and other borrowers, raising costs for governments, businesses and home buyers. But many analysts say the impact could be modest, in part because the other ratings agencies, Moody’s and Fitch, have decided not to downgrade the government at this time.
One of the biggest questions after the downgrade was what impact it would have on already nervous investors. While the downgrade was not a surprise, some selling is expected when stock trading resumes Monday morning. The Dow Jones industrial average fell 699 points this week, the biggest weekly point drop since October 2008.
“I think we will have a knee-jerk reaction on Monday,” said Jack Ablin, chief investment officer at Harris Private Bank.
But any losses might be short-lived. The threat of a downgrade is likely already reflected in the plunge in stocks this week, said Harvey Neiman, a portfolio manager of the Neiman Large Cap Value Fund.
“The market’s already been shaken out,” Neiman said. “It knew it was coming.”
One fear in the market has been that a downgrade would scare buyers away from US debt. If that were to happen, the interest rate paid on US bonds, notes and bills would have to rise to attract buyers. And that could lead to higher borrowing rates for consumers, since the rates on mortgages and other loans are pegged to the yield on Treasury securities.
However, even without an AAA rating from S&P, US debt is seen as one of the safest investments in the world. And investors clearly weren’t scared away this week. While stocks were plunging, investors were buying Treasuries and driving up their prices. The yield on the 10-year Treasury note, which falls when the price rises, fell to a low of 2.39 percent on Thursday from 2.75 percent Monday.
A study by JPMorgan Chase found that there has been a slight rise in rates when countries lost an AAA rating. In 1998, S&P lowered ratings for Belgium, Italy and Spain. A week later, their 10-year rates had barely moved.
Further downgrades
S&P said that in addition to the downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years.
One analyst suggested the downgrade might move Congress to take concrete steps to fix the nation’s budget problems.
“It’s a downgrade and it’s bad, but if it spurs more conversation about bringing down spending and maybe more intelligent tax policy, it could be a good thing in the long run,” said Frank Barbera, a portfolio manager of the Sierra Core Retirement Fund.
The downgrade announcement came after markets closed for the weekend, but there was no evidence of any immediate disruption.
A spokesperson for the Federal Reserve said the decision would not affect the ability of banks to borrow money by pledging government debt as collateral, a statement that could set the tone for the reaction of the broader market.
The statement was issued to make sure banks did not feel that the downgrade would affect the amount of capital that regulators require the banks to hold against possible losses.
The downgrade is likely to have little to no impact on how the US finances its borrowing, through the sale of Treasury bonds, bills and notes. This week’s buying proves that.
“Investors have voted and are saying the US is going to pay them,” said Mark Zandi, chief economist of Moody’s Analytics. “US Treasuries are still the gold standard.”
He noted that neither his parent organization, Moody’s, nor Fitch, the other of the three major rating agencies, have downgraded US debt.
The ratings agencies were sharply criticized after the financial crisis in 2008 for not warning investors about the risks of subprime mortgages. Those mortgages were packaged as securities and sold to investors who lost billions of dollars when the loans went bad.
Japan had its ratings cut a decade ago to AA, and it didn’t have much lasting impact. The credit ratings of both Canada and Australia have also been downgraded over time, without much lasting damage.
“I don’t think it’s going to amount to a lot,” said Peter Morici, a University of Maryland business economist.
Still, he said, “The United States deserves to have this happen,” because of its clumsy handling of fiscal policy. With reports from AP, AFP, New York Times News Service and Norman Bordadora
