US shutdown on PH economy: best, worst case scenarios

MANILA, Philippines – The local economy will be greatly affected by the US government’s shutdown only if the situation is prolonged.

This was the common sentiment among local economists, including the Department of Finance, after Washington announced a government shutdown, a first in 17 years, on Tuesday, October 1.

University of Asia and the Pacific (UA&P) economics professor Victor Abola and Bank of the Philippine Islands (BPI) Chief Economist Jun Neri told Rappler that the Philippine economy is unlikely to feel immediate negative effect from the temporary shutdown.

“[In the] short-term [there is] little effect. We will not feel anything assuming it lasts only for 3 weeks,” Abola said.

“The shut down is temporary and will have little effects,” Neri noted.

READ: US shutdown prompts global trepidation, bemusement

A temporary closure of government agencies in the US forced some 800,000 federal workers to go on leave and and left national museums and national parks closed.

No taper

According to Abola, the US shutdown has a short term favorable impact on the Philippines: the US cannot afford to implement to taper its $85 billion-a-month stimulus program.

“In the short-term, there is a positive side [for us]. Interest rate will remain low. US in this mode cannot afford to taper,” Abola added.

READ: Fed leaves stimulus unchanged at $85-B, no taper

The Fed’s decision on its massive bond-buying program has triggered sell-offs in the stock exchanges of emerging markets, including the Philippines, as foreign funds returned to the US.  

Impact on exports 

The country may remain unaffected by the temporary closure of the US government, but a prolonged shutdown could spell trouble for the Philippines economy.

The US economy contributes 20% to 25% to the world’s gross domestic product (GDP), and a prolonged shutdown will cause global uncertainty, dampening both investor and consumer confidence, Abola said.

READ: US gov’t shutdown puts global economy at risk – British

He stressed that Philippine exports, a potential growth driver, will be hurt should the US government fails to settle its issue on the national budget quickly.

“Our exports will not grow as expected. Exports to  China and US will slow down. Exports will not contribute to 4^th quarter GDP,” Abola emphasized.

Cause for alarm: Debt limit

What is very alarming is if the US government prolongs its temporary closure and if it fails to raise its debt ceiling, BPI’s Neri said.

“The shutdown is temporary but if it drags until such time the debt ceiling deadline comes, that can potentially be negative,” Neri noted.

The US government has until October 17 to increase its debt limit, otherwise, it will hit its statutory debt ceiling, making it difficult for the government to meet all of its obligations.

A debt ceiling is the legal limit a government is allowed to borrow. A raise in the US debt ceiling will allow its  governmment to pay for obligations already incurred.

In a statement following the announcement of US government’s shut down Finance Secretary  Cesar Purisima expressed  concerns if US fails to increase its debt ceiling.

“What is more worrisome to the Philippines is if the US political stalemate causes America to default on its debt by failing to pass a measure on the debt ceiling,” Purisima stressed.

Dangerous scenario

Failure of the US to pass a measure to increase its debt limit, both Neri and Purissima agreed, is a dangerous scenario as it would weaken the global economy.

“The US government will not be able to borrow. US treasury will not be able to issue new papers and that will be problematic in funding the economic stimulus program. That will weaken global economy,” Neri said.

“A US default, unimaginable for most of history yet now in the realm of the possible because of current political circumstances, can only lead to unprecedented chaos in the global financial markets,” Purisima has noted in his statement.

Most analysts, Neri noted, are optimistic that the US will be able to pass a measure to increase its debt ceiling before the October 17 deadline.

“Most are  hopeful they can meet the deadline. There’s a low probability that the US won’t ( meet the deadline),” Neri said. – Rappler.com