by Alex Roldan
Real or imaginary, recent figures from the US Federal government and economic analysts show a not so good and, to some extent, presented a chilling scenario.
Board of Investment 11 director Gil Dureza raised this depressing development during a lull in a meeting last week at the University of Southeastern Philippines as member of the panel to assess the academic equivalency of the skills of an applicant who wanted to pursue a master’s degree. He showed a printed statement of the 2010 financial condition of USA. As I tried to make sense of the numbers in the document, with its wide-ranging implications, I just could not avoid worrying over what could be its implications to our country’s economy and to the world?
The Philippine economy is deeply tied to the US and if anything bad happens over there it has profound repercussions to us. We should not forget that a large portion of our financial reserve is in US dollars. The value of our country’s reserve and dollar-denominated investments could easily melt if the US federal government cannot find an immediate solution to this problem. It would have a domino effect on every aspect of our economy – from government expenditures, investments and export earnings and even on retirees whose pension funds such as the GSIS are invested in Wall Street.
The US federal government’s efforts to rescue the reeling effect of the 2007 financial crisis have officially flopped and now they are on the verge of a crisis that many believe could even be worse. Figures from the Whitehouse Office of Management and Budget show a 1.3 trillion dollars income deficit for 2010 alone that is pushed further by the burgeoning debt interest payments and a contracting revenue source. The trend has been rising since the financial crisis in 2007.
It has all been clear that America’s recovery sagged worrisomely on the first half of 2011. Washington Post in its report last week warned that unless a solution can be found the country could be in peril. The report lashed out at the unrealistic assessment of the economy’s strength and revisions made to past figures reveal a recession that was substantially worse than previously understood. The Bureau of Economic Analysis (BEA) for example, pegged the first-quarter growth of 2011 at 1.9%, only to revise the figure to 0.4%.
Previously, BEA had estimated a 1% growth after the 2007crisis. In reality, the US economy had shrunk 0.3% in 2008, in 2009 it dipped to 3.5%, which is worse than the earlier projection of 2.6%.
The detail of the 2010 income statement is not a remarkable sight. Individual income tax and social insurance tax comprise 81% of the total $2.2 trillion revenue. A measly 9% are from corporate tax and 10% from other sources. On the expense side, the Entitlement Programs (unemployment insurance, Medicare and social security) eat up 58% of the $3.5 trillion government expenses. Defense gets 20% while 6% is for interest expense.
The above figures aside from the glaring mismatch, the revenue source is too fragile. Individual income tax and social insurance, which is the biggest revenue source, is dependent on the ability of citizens to have good jobs. However, job generation is the natural casualty of any financial crisis. In fact, the expense side of the income statement explains this effect – the increasing costs of the government to fund the Entitlement Programs. Meaning, more and more Americans are dependent on these programs to survive. Furthermore, reducing government expenditures on these programs could have adverse effect on the already declining American consumer spending. Exports have been falling continually, “these factors have played a significant role in the sordid economic conditions in the US.” (Economic Watch, August 2, 2011).
The balance sheet and other figures show the extent of the US government finances dreaded by all bankers with the use of simple debt-to-equity ratio analysis. Moreover, investments in the business sector of the American economy have gone down by 21.1% in 2008, and the trend continues.
There is no other option for the US government but to borrow more money to keep their economy moving despite the threat of a downgraded credit rating. However, the US Congress is deeply divided on the issue of either continue borrowing or put a debt-cap. The impasse over the debt issue has caused anxieties among the observers. They fear that this is a signal that the US economy is already in a down spin.
The world is feeling the crunch, and the dangers that the world would be in if the US economy fails again. Calls for reform in the US economy are becoming louder. Foremost is the Russian Prime Minister Vlademir Putin, who even went to the point of calling the US a “parasite on the global economy.” He demanded that the US face reality and stop spending beyond its means because of its effect on other countries. Putin should be worried, as a large chunk of his country’s reserve is dollar denominated.
Japan on the other hand is facing a problem of a stronger yen that could affect their exports despite intervention by the government. Evidently, the effects of investors that are steering clear away from weak dollars.
The threat, in my opinion, is real. Nevertheless, is the Philippines prepared for another financial crisis?
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