The Effect of Global Financial Crisis on the Philippines' Export Sector: A Vector Auto-Regression Analysis

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ABSTRACT

The 2008 Global Financial Crisis (GFC) caused the collapse of large financial institutions around the world; and contributed to the failure of various businesses that led to significant downturns in economic activities. This study assesses the impact of the financial crisis on the Philippine export sector. Using vector auto-regression analysis, we analyze the effect on the Philippine export sector with respect to the changes on the Philippine Gross Domestic Product (GDP), Philippine currency movement in terms of exchange rate from Philippine Peso (PHP) to US Dollar (USD), and change in US GDP and US imports, being US as the major trading partner of the Philippines. This study further determines the performance of Philippine exporters linked with the GFC. Hence, this study derives policy implications on the development of the Philippines ' export sector given the external shocks associated with a financial crisis.

Keywords: Global Financial Crisis, Philippine exporters, exchange rate, US GDP, US imports

INTRODUCTION

Participation in international trade is inevitably considered to be a necessity in the aspect of expanding open markets for final and intermediate goods, increasing profits, and achieving economies of scale which all sum up to the increase in economic growth. For instance, China is boosting its exports that paved its transition from being known as a Sleeping Giant to its emergence as the second biggest economy in the world. Likewise, the neighboring countries of the Philippines such as Singapore, Taiwan, South Korea, and Hong Kong became the East Asian tiger economies due to their efforts of promoting export-led growth. In the case of the Philippines, export activities, which account to approximately thirty percent of GDP (World Bank Report, 2010), are geared towards tapping the markets of developed countries such as Japan, Netherlands, Hong Kong, South Korea, Singapore, and the United States of America (USA).

The USA has been consistently the major trading partner of the Philippines which marked as the market of about 1 8 percent of total exports of the country. Semiconductors and other electronic products are considered to be the top products exported by the Philippines to the USA. Furthermore, the Association of Southeast Asian Nations (ASEAN) countries, collectively, are also fortifying its trading relationship with the USA by consistently being one of the top suppliers of its imports and engaging in trading agreement, specifically the US -ASEAN Trade and Investment Arrangement. Thus, ASEAN countries are able to realize significant economic growth by heavily depending on the market of developed countries, such as the USA.

The adverse effect of the 2008 Global Financial Crisis (GFC) proved to be unconfmed within the USA due to interdependence of economies and reliance of other countries, especially of developing ones, to the largest economy of the world. The implication of the collapse of the economy of the USA had also translated the same direction of other countries, merely varying as to the extent of the decline in output or GDP. According to Diokno (2009), "The world economic crisis has affected the Philippine economy in three ways: exports have declined, remittances of Filipino overseas workers have slowed, and foreign direct investments have declined."

Since the Philippines is one of the developing countries that are dependent on import and export commodities, this study measures the impact of the GFC on the Philippine export sector. This study analyzes the effect on the Philippine export sector with respect to the changes on the Philippine Gross Domestic Product (GDP), Philippine currency movement in terms of exchange rate of Philippine Peso (PHP) to US Dollar (USD), and change in US GDP and US imports.

Furthermore, this study determines the performance of Philippine exporters linked with the GFC. Hence, this study aims to derive policy implications on the development of the Philippines export sector given the external shocks associated with a financial crisis. …