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2008 Global Financial Crisis began in the USA with the collapse of the housing
market and financial sector. The crisis was primarily caused by deregulation in
the financial industry which allowed banks to engage hedge fund trading with
derivatives. The demand for mortgages increased in the financial sector where
they were being used to support the sale of derivatives. The collapse in the
finance sector caused a domino effect in other industries in the US causing
stock prices to collapse and the market to crash in September 29, 2008. The
crash sent ripples in markets around the word. The worst day of trading in the
Philippines at the time came on October 27, 2008 when share prices dropped by
12.3%, triggered by fear of a global recession.

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Causes: Deregulation

in the USA were able to engage in this trading because of the
Gramm-Leach-Bliley Act of 1999 which repealed the Glass-Steagall Act of 1933
and allowed banks to use deposits to invest in derivatives. Lobbyists of banks
claimed that this was needed to compete with foreign firms and promised that
the banks would only invest in low risk securities. In 2000, the Commodities
Futures Modernization Act exempted credit default swaps and other derivatives
from regulations. Before the Act was passed and overruled state laws, this was
prohibited and was classified as gambling. The CFM Act of 2000 also
specifically exempted trading in energy derivatives.

Causes: Securitization­­­

funds and other investors buy and sell mortgage-backed-securities,
collateralized debt obligations, and other derivatives. A
mortgage-backed-security is a financial product, its price is based on the
value of a mortgage that is used for collateral. Once a mortgage is taken from
a bank, it is then sold to a hedge fund or a third party who can resell it to
their investors or other parties. Hedge funds then bundle up similar mortgages
and use computer programs to assess their value based on factors such as
monthly payments, amount owed, interest rates, likelihood of paying, and future
home prices. The bank can then offer more mortgages or loans as it has gotten
its money back by selling mortgage-backed-securities and other derivatives.
Mortgages were even given to owners of subprime properties with high risks of

bank can act as a middleman in receiving the payments but the hedge funds still
received a bulk of the payment. The hedge funds and investors assume the risk
of default but are secured by insurance called “credit default swaps”. This
insurance was sold by insurance companies like AIG. This emboldened investors
and firms to engage in risky derivatives trading, some of the largest traders
were Bear Stearns, Citibank, and the Lehman Brothers.

Spread to other countries

crisis became global as a result of five key factors. First, foreign banks had
been buying collateralized US debt, mainly in the form of rebundled mortgages.
Second is something called “Global Credit Crunch” and occurs when banks start
losing money and other institutions are reluctant to lend to it. This is made
worse by the interconnectedness of international financial institutions and led
to a global decline in the financial sector. The third reason is global trade.
As the US fell into a recession, demand for foreign goods decreased and caused
problems in the export markets of its trade partners such as the Philippines.
Fourth, the lack of confidence in the housing and finance markets as a result
of the housing crisis of 2007 caused consumers and firms to be wary of banking
institutions. The lack of trust in the US markets spread around the world with
speculation of a global financial crisis. Fifth, the problems in American and
English banks started to hit the local stock markets which reduced economic
growth and public confidence.


Impact and Challenges Faced by the
Philippine Economy (2008-2009)

Gross Domestic Product, Exports, and

Philippine GDP reached 7.1% in 2007, the highest in three decades. This was in
large part the result of public construction which grew by 29.2% in real terms
in response to the incumbent President’s (Gloria Arroyo) ambitious
infrastructure program but contracted by 0.4% in 2008 and is part of the
slowdown in GDP growth. Consumption and production were also constrained by a
jump in inflation from 2.8% in 2007 to 9.3% in 2008 following a jump in fuel
and food prices. This an overall decline in productivity due to structural
problems related to sluggish private investment, poor physical infrastructure,
and weak institutions. The 2008 Crisis is therefore not the sole factor in the
slowdown of the Philippine economy. The effects of the crisis on the
Philippines was actually less severe than that of other economies in the region
like Japan’s which contracted by 8.9%, Malaysia’s by 6.3%, and Thailand’s by 7.1%
in the 1st Quarter of 2009 as seen in the table below.


can also be seen by the stable unemployment rate through the crisis until the 3rd
Quarter of 2009(in the table below). The crisis did however cause a decline in
exports but still saw a growing GDP, albeit slowed.


the recession, overseas remittances still saw steady growth and allayed fears
that the job market would take a huge hit as a result of the global crisis. One
concern was the job security of Filipino maritime workers in the wake of the
recession. There is anecdotal evidence that supports the contrary, that
shipping lines were actually replacing Western workers with low-paid Filipino
workers. That being said, data still shows that there was an increase in
unemployment in certain sectors as a result of the crisis and slowdown.

Equities Market

Philippine stock/equities market received considerable stress in 2008 amid a
deteriorating global outlook. Concerns of the issues of global financial
turmoil and the subsequent slowdown of the global economy. This resulted in
high risk aversion and uncertainty and saw investors, both foreign and
domestic, either dump their stocks or stay in the sidelines awaiting better
news. Subsequently, the ability of the stock market to raise new capital
declined over the year.

the collapse of Lehman Brothers, the benchmark Philippine Stock Exchange Index
(PSEi) dropped, on 16 September 2008, by 9.3% or 224.3 index points to 2,421.7
from the 12 September level of 2,646.1. The market index had been on the
decline since early September of 2008 with reports of the FED bailing out
Freddie Mac and Fannie Mae. The decline continued and by October 28 the PSEi
had fallen to a record low of 1,704.41 points, the lowest since January 2007.By
the end of 2008, the PSEi had declined by 48.3%, year-on-year, to close at
1,872.85 index points.

Financial Sector

Global Financial Crisis raised fears of problems similar to that caused by the
1997 Asian Financial Crisis. Initially, the crisis put pressure on the region’s
financial markets especially those with high foreign participation in local
stock markets, banking systems that are dependent on short-term-currency
funding, and those running external account deficits. In 2008 most banks
continued to report relatively high rates of return on assets and equity, and
did not experience increases in impaired assets. This performance reflects the
insignificant exposure of Philippine banks to the toxic structured mortgage
products that were extensively sold globally. Given largely
domestically-focused business and relatively strong economic activities in
2007, profitability of Philippine banks has generally remained high in 2008.(Yap,
Reyes, Cuenca* 2009)

there has not been a significant meltdown in the country’s financial and banking
institutions since 1997. This is due to the resilient systems put into place by
policy made in the aftermath of the 1997 crisis to limit the effects of a
global crisis such as this.

Government Responses and Solutions

response to the crisis, the Department of Finance (DOF) and the National
Economic Development Authority (NEDA) crafted a PHP 330 billion fiscal package,
officially known as the Economic Resiliency Plan (ERP). The plan emphasized
infrastructure in job generation and involved two waves of infrastructure, the
first one coming in 2009 with the first increment of PHP 160 billion. It was
used to fund 4000-5000 small projects in the budget of expenditures and sources
of financing (BESF) which were geared towards quick job creation. The
government intended to front-load infrastructure spending in the first half of
the year. Many government agencies indicated commitments to spend at least 60
up to 80 percent of their infrastructure budgets in the first semester. In 2010
and beyond, PhP100 billion will fund big-ticket items under Public-Private
Partnerships. Output and employment data indicate that the macroeconomic
programs of the government had moderate success. After the mild contraction in
2008, value added from public construction recovered to 22.5 percent in the
first three quarters of 2009. One reason for this jump is the acceleration of the
implementation of various infrastructure projects under the Comprehensive
Integrated Infrastructure Program (CIIP) which focuses on upgrading road
networks and air and water transport facilities. The private investors have not
responded favorably to the looser monetary conditions and fiscal stimulus.
Private construction even shrank by 6.5 percent in the second quarter of 2009.

programs were initiated by the government to address both the lack of
mechanisms to combat crisis situations and the deteriorating poverty situation.
Majority of the programs were initiated under the Accelerated Hunger Mitigation
Plan (AHMP), a strategy under the Medium-Term Philippine Development Plan
2004–2010. The ERP
includes the strengthening and expansion of selected social protection programs
to help vulnerable sectors cope with the 2008 crisis. It should be noted that
the budget allocation for “Social Security, Welfare, and Employment” increased
from 4.5 percent in 2007 to 5.7 percent in 2008 and to 6.1 percent in 2009. The
relevant programs are: i) Conditional Cash Transfers (CCTs) program for the
poorest of the poor which is dubbed as the 4Ps: “Pantawid Pamilyang Pilipino
Program”; ii) PhilHealth Indigent Program; iii) Training for Work Scholarship
Program; iv) Department of Health (DOH) program for primary and secondary
hospitals; and v) other programs and interventions that include a) Nurses
Assigned for Rural Services (NARS) program where nurses are deployed in
underserved areas in pursuit of the Millennium Development Goals (MDGs); b)
matching grants to local government units; and c) student loans. In addition to
these programs, the government has scaled up the implementation of the
Food-for-School Program (FSP) to help the chronic poor.


Political Factors

legislation backed by lobbyists from major banking firms and energy giant Enron
(which had stakes in the derivatives market) were pushed through in the late
1990s to early 2000s which deregulated the sale of derivatives among US banks
and hedge funds. This system was exploited with derivatives being sold without
regard to the potential risk of defaulting. International business institutions
allowed this practice to be widespread in the international financial sector.

Philippines, having suffered the Asian Financial Crisis only a decade previous
(2007) had some experience and measures in place to counter a global recession
such as the “circuit breaker rule” which pauses trading for 15 minutes once the
stock index dips by at least 10%. The government was also able to put through
economic stimulus packages with little friction and were able to implement
them, creating jobs. Several projects were also launched to address the
subsequent social concerns of a financial crisis.

Economic Factors

abuse of the deregulation of derivatives trading resulted in credit being
issued to subprime borrowers without regard to the risk of default. The
widespread trading in derivatives created a housing bubble when loans began to
exceed the actual value of subprime properties and were even given to people
with low credit scores. The US banks also traded these derivatives with foreign
banks, mainly English and other European banks. The Philippine financial sector
was also involved in this sort of trading.

trade also factored into the spread of the crisis. There was a domino effect
from the US, to G7 countries, to the rest of the world. The decline of the US
economy reduced demand for imported goods and hurt the export markets of its
trading partners. Lack of confidence in the US market also fueled speculation
around the world regarding a potential global financial crisis causing panic
and investors to dump stocks.

Social Factors

economic crisis could’ve become a humanitarian issue had it been worse.
Luckily, the government had countermeasures in place and launched programs to
address social issues like unemployment stemming from the crisis. The crisis
also set back the country’s progress toward achieving the Millennium
Development Goals set by the United Nations. That being said, surveys still
showed that households in urban areas like Metro Manila, Cebu, and Davao were
moderately or severely affected by the financial crisis ass seen in the table

Technological Factors

and new algorithms have allowed mortgages and other derivatives with similar
characteristics to be quickly bundled and traded creating a large demand for
high risk loans such as mortgages for subprime properties. The use of the
internet in transactions and global trading also allowed firms and individuals
to conduct trading with these derivatives overseas with relative ease. This
coupled with international financial institutions and free markets allowed this
sort of trading to be loosely regulated and to run smoothly until the housing
bubble burst in 2007 and the Wall Street crash of 2008.

internet also allowed news of the Wall Street crash to spread globally in a
matter of hours. News of the failure of many banking US banking institutions,
bailouts, and falling stock prices fueled speculation of an impending global
crisis. Panic soon followed and investors began dumping stock leading markets
around the world to plummet.

Conclusion and Recommendations

2008 Global Financial crisis could’ve been avoided if US lawmakers had been
more vigilant and stricter regulations imposed. Financial institutions like the
Lehman Brothers began to abuse the system lobbied by their fellow bankers and
business partners. The inordinate amount of loans being given were still left
unchecked by the US Federal Reserve and failed to intervene to prevent the
crisis. It was a failing of both the private and public sector, where the
private sector overstepped and the public sector was negligent.

the same cannot be said about the Philippines at the time of the crisis. The
country had just been through a financial crisis a decade prior and had learned
from it, implementing programs and putting forward legislation to act as
countermeasures. The government was also right in issuing a stimulus package
along with social programs in the time of crisis. The country, however, was not
spared the effects of the crisis. Once panic set in, investors were also quick
to jump ship but that is nearly unavoidable, such reactions are natural when
faced with adversity. The country’s economy was reliant on exports and suffered
when demand in the US and Europe declined.

Philippines should shift from being an export reliant country and increase
domestic trade as well as local manufacturing. This can be done by promoting
Small to Medium Enterprises (SMEs) by reducing taxes and incentivizing
employers. By promoting homegrown industries that cater to local demand for
goods otherwise imported, the losses incurred from the export-import market can
be offset by reducing reliance on foreign goods and relying on local partners
and promoting internal development. It also has the added bonus of increasing
local employment.



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