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How did the US financial crisis start?
Years before the financial meltdown in the US, I began to see the gradual collapse of its economy during my frequent visits. From my first-hand experience, I noticed the deficit-spending in the government, heavy reliance on credit, threats form China and India on commerce and trade, and over-concentration on the subprime housing industry.
While ?prime loans? are the highly bankable loans passing all five C?s of credit rating (i.e. Character, Capacity, Condition, Capital, and Collateral); ?subprime loans?, on the other hand, are those financing NINJAS (No Income, No Job/Assets).
In the US, subprime loans amount to $10 Trillion per year which is about 14% of US Gross Domestic Product. About 40% of monthly consumer-spending is housing related.
The financial packages of liberally regulated US financial services institutions are specifically targeted for a global market. The government backed financial institutions are specifically targeted for a global market. The government backed financial institutions Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) provided liquidity especially to the lower income sector by guaranteeing housing loans.
US investment banks and financial institutions liberally issued CDOs (collateralized debt obligations) which are also called ?toxic assets?. You know why? It?s because these CDOs are backed up by securities such as home mortgages, car loans, credit cards, and student loans which have little or no value.
US investment banks, because of liberal banking reforms, had over leveraged themselves. In banking parlance, the leverage of risk assets ratio is 10:1 which means for every $1 capita, you can borrow $10. But in the case of the US, it is normal to have a leverage ratio of $40:$1. In good times, you can expect rapid growth and increase in income. But the reverse is also true. In crisis, the faster you rise, the faster you fall.
How will these contagions affect the Philippines?
There will be little effect or slowdown in economic activities mainly because of the following reasons:
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1. Housing Is not the economic driver here, unlike in the US;
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2. Housing is not mortgage based. We build houses based on savings or remittances from overseas Filipino workers;
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3.Our secondary market is small and very few investors in the Philippines invested in derivatives or CDOs;
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4. Our financial system is highly regulated compared to liberal obligations in the US.
Global Impact
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1. There is global recession especially USA, Japan, Germany and other European countries and the Middle East. The effect is increasing unemployment, decrease demand for products and services, decreased tourism and decreased BPOs (business process outsourcing).
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2. There is de-leveraging or a conscious effort to decrease lending. Banks and investors will slowdown in lending or investing in high-risk developing market.
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3. There is drying up of capital and infrastructure financing. This means there will be less available funds from major funders and trading partners and governments will have to finance own infrastructure development. It is possible that deflation will follow. Deflation is where demand decreases and global prices will fall. A case in point is the price of oil which decreased from $150 to $39 per barrel due to weak demand and over-production.
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4. Foreign inward remittances will possibly slow down because of retrenchment.
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5. Small players BPOs will be more affected than the big ones.
What do we do?
Filipinos, in general, are resilient by nature and have the ability to face adversity, aware that crisis is a two edged sword?danger and opportunity. Behind the danger hide opportunities.
Government
This is the time to re-channel surplus tax collection towards skills training, family income augmentation, job creation and development of micro, small and medium enterprises an identifying new export markets.
BPOs
Focus on less-affected BPOs like date encryption, medical transcription, software design and animation.
Banks
Continue expansion plans but with caution. We will be guided by prudence and give more focus on liquidity over profitability. Continue investing in safe instruments like TDs, fully secured loans and government bonds.
With all these in place, we are optimistic that we will hurdle 2009 and beyond | 
