IMUS INSTITUTE OF SCIENCE AND TECHNOLOGY

FINANCIAL MARKET – BSA 2A

MAYUGA, MYCHIE LYNNE M.

ASSIGNMENT#4

1. Distinguish between Foreign Direct Investment (FDI) and Foreign Portfolio

Investment? Briefly discuss its importance in the Philippine Financial market?

-Foreign portfolio investment is the purchase of securities of foreign countries, such as stocks and bonds,
on an exchange. Foreign direct investment is building or purchasing businesses and their associated
infrastructure in a foreign country. Direct investment is seen as a long-term investment in the country's
economy, while portfolio investment can be viewed as a short-term move to make money. Portfolio
investments typically have a shorter time frame for investment return than direct investments. Portfolio
investments are more accessible for the average investor than direct investments because they require
much less investment capital and research. These two are important because foreign investment is
generally seen as catalyst for economic growth and can be undertaken by institutions, corporations, and
individuals. Foreign portfolio investment gives investors an opportunity to engage in international
diversification of portfolio assets, which in turn helps achieve a higher risk-adjusted return. Creation of
jobs is the most obvious advantage of FDI. It is also one of the most important reasons why a nation,
especially a developing one, looks to attract FDI. That is why FDI and foreign portfolio are important in
Philippine Financial Market because it increases economic growth.

2. What is Securitization? Briefly discuss its advantages and disadvantages in creating securities?

-Securitization is the procedure where an issuer designs a marketable financial instrument by merging or
pooling various financial assets into one group. The issuer then sells this group of repackaged assets to
investors. Securitization offers opportunities for investors and frees up capital for originators, both of
which promote liquidity in the marketplace.

Pros

 Turns illiquid assets into liquid ones

Cons

 Investor assumes creditor role

a. The 1997 Asian Financial Crisis. (What causes & What Action made)

The 1997–98 Asian financial crisis began in Thailand and then quickly spread to neighboring economies.
It began as a currency crisis when Bangkok unpegged the Thai baht from the U.S. dollar, setting off a
series of currency devaluations and massive flights of capital. In the first six months, the value of the
Indonesian rupiah was down by 80 percent, the Thai baht by more than 50 percent, the South Korean won
by nearly 50 percent, and the Malaysian ringgit by 45 percent. Collectively, the economies most affected
saw a drop in capital inflows of more than $100 billion in the first year of the crisis. Significant in terms
of both its magnitude and its scope, the Asian financial crisis became a global crisis when it spread to the
Russian and Brazilian economies.

The significance of the Asian financial crisis is multifaceted. Though the crisis is generally characterized
as a financial crisis or economic crisis, what happened in 1997 and 1998 can also be seen as a crisis of
governance at all major levels of politics: national, global, and regional. In particular, the Asian financial
crisis revealed the state to be most inadequate at performing its historical regulatory functions and unable
to regulate the forces of globalization or the pressures from international actors. Although Malaysia’s
controls on short-term capital were relatively effective at stemming the crisis in Malaysia and attracted
much attention for Prime Minister Mahathir bin Mohamad’s ability to resist International Monetary Fund
(IMF)-style reforms, most states’ inability to resist IMF pressures and reforms drew attention to the loss
of government control and general erosion of state authority. Most illustrative was the case of Indonesia,
where the failures of the state helped to transform an economic crisis into a political one, resulting in the
downfall of Suharto, who had dominated Indonesian politics for more than 30 years.

Debates about the causes of the financial crisis involved competing and often polarized interpretations
between those who saw the roots of the crisis as domestic and those who saw the crisis as an international
affair. The economic crisis focused much attention on the role of the developmental state in East Asian
development. Proponents of neoliberalism, who saw the crisis as homegrown, were quick to blame
interventionist state practices, national governance arrangements, and crony capitalism for the crisis.
Assistance from the IMF all came with conditions aimed at eliminating the close government-business
relationships that had defined East Asian development and replacing Asian capitalism with what
neoliberalists saw to be an apolitical and thus more efficient neoliberal model of development.

The early neoliberal triumphalist rhetoric, however, also gave way to a more profound reflection about
neoliberal models of development. Perhaps most of all, the 1997–98 financial crisis revealed the dangers
of premature financial liberalization in the absence of established regulatory regimes, the inadequacy of
exchange rate regimes, the problems with IMF prescriptions, and the general absence of social safety nets
in East Asia.

Echoing these concerns were those who saw the crisis as a function of systemic factors. In contrast with
neoliberal theorists who focused on technical questions, however, critics of neoliberalism focused on
political and power structures underlying the international political economy. Mahathir’s characterization
of the financial crisis as a global conspiracy designed to bring down Asian economies represented the far
extreme of these views, though his views did have some popular appeal in East Asia.
Mostly, the widely held perception that IMF prescriptions did more harm than good focused particular
attention on the IMF and other global governance arrangements. The IMF was criticized for a “one size
fits all” approach that uncritically reapplied prescriptions designed for Latin America to East Asia, as well
as its intrusive and uncompromising conditionality. Fiscal austerity measures were criticized as especially
inappropriate for the East Asian case and for prolonging and intensifying both economic and political
crises. In addition to the criticism leveled at the technical merits of IMF policies, the politics of the IMF
and the general lack of transparency of its decision making were also challenged. Limited East Asian
representation in the IMF and World Bank underscored the powerlessness of affected economies, as well
as their lack of recourse within existing global governance arrangements. Combined, the criticisms of the
IMF diminished the prestige, if not the authority, of the IMF, resulting in heightened calls for a new
international architecture to regulate the global economy.

The Asian financial crisis also revealed the inadequacies of regional organizations, especially the Asia-
Pacific Economic Cooperation (APEC) and the Association of Southeast Asian Nations (ASEAN),
generating much debate about the future of both organizations. Criticism focused especially on the
informal, nonlegalistic institutionalism of both organizations. However, though ASEAN displayed greater
receptiveness to institutional reform, informal institutionalism remains the norm with respect to regional
forums in East Asia.

b. The 2008 Global Financial Crisis. (What causes & What Action made)

Financial crisis of 2007–08, also called subprime mortgage crisis, severe contraction of liquidity in global
financial markets that originated in the United States as a result of the collapse of the U.S. housing
market. It threatened to destroy the international financial system; caused the failure (or near-failure) of
several major investment and commercial banks, mortgage lenders, insurance companies, and savings and
loan associations; and precipitated the Great Recession (2007–09), the worst economic downturn since
the Great Depression (1929–c. 1939).

Although the exact causes of the financial crisis are a matter of dispute among economists, there is
general agreement regarding the factors that played a role (experts disagree about their relative
importance).

First, the Federal Reserve (Fed), the central bank of the United States, having anticipated a mild recession
that began in 2001, reduced the federal funds rate (the interest rate that banks charge each other for
overnight loans of federal funds—i.e., balances held at a Federal Reserve bank) 11 times between May
2000 and December 2001, from 6.5 percent to 1.75 percent. That significant decrease enabled banks to
extend consumer credit at a lower prime rate (the interest rate that banks charge to their “prime,” or low-
risk, customers, generally three percentage points above the federal funds rate) and encouraged them to
lend even to “subprime,” or high-risk, customers, though at higher interest rates (see subprime lending).
Consumers took advantage of the cheap credit to purchase durable goods such as appliances, automobiles,
and especially houses. The result was the creation in the late 1990s of a “housing bubble” (a rapid
increase in home prices to levels well beyond their fundamental, or intrinsic, value, driven by excessive
speculation).

Second, owing to changes in banking laws beginning in the 1980s, banks were able to offer to subprime
customers mortgage loans that were structured with balloon payments (unusually large payments that are
due at or near the end of a loan period) or adjustable interest rates (rates that remain fixed at relatively
low levels for an initial period and float, generally with the federal funds rate, thereafter). As long as
home prices continued to increase, subprime borrowers could protect themselves against high mortgage
payments by refinancing, borrowing against the increased value of their homes, or selling their homes at a
profit and paying off their mortgages. In the case of default, banks could repossess the property and sell it
for more than the amount of the original loan. Subprime lending thus represented a lucrative investment
for many banks. Accordingly, many banks aggressively marketed subprime loans to customers with poor
credit or few assets, knowing that those borrowers could not afford to repay the loans and often
misleading them about the risks involved. As a result, the share of subprime mortgages among all home
loans increased from about 2.5 percent to nearly 15 percent per year from the late 1990s to 2004–07.

Third, contributing to the growth of subprime lending was the widespread practice of securitization,
whereby banks bundled together hundreds or even thousands of subprime mortgages and other, less-risky
forms of consumer debt and sold them (or pieces of them) in capital markets as securities (bonds) to other
banks and investors, including hedge funds and pension funds. Bonds consisting primarily of mortgages
became known as mortgage-backed securities, or MBSs, which entitled their purchasers to a share of the
interest and principal payments on the underlying loans. Selling subprime mortgages as MBSs was
considered a good way for banks to increase their liquidity and reduce their exposure to risky loans, while
purchasing MBSs was viewed as a good way for banks and investors to diversify their portfolios and earn
money. As home prices continued their meteoric rise through the early 2000s, MBSs became widely
popular, and their prices in capital markets increased accordingly.

Fourth, in 1999 the Depression-era Glass-Steagall Act (1933) was partially repealed, allowing banks,
securities firms, and insurance companies to enter each other’s markets and to merge, resulting in the
formation of banks that were “too big to fail” (i.e., so big that their failure would threaten to undermine
the entire financial system). In addition, in 2004 the Securities and Exchange Commission (SEC)
weakened the net-capital requirement (the ratio of capital, or assets, to debt, or liabilities, that banks are
required to maintain as a safeguard against insolvency), which encouraged banks to invest even more
money into MBSs. Although the SEC’s decision resulted in enormous profits for banks, it also exposed
their portfolios to significant risk, because the asset value of MBSs was implicitly premised on the
continuation of the housing bubble.

Fifth, and finally, the long period of global economic stability and growth that immediately preceded the
crisis, beginning in the mid- to late 1980s and since known as the “Great Moderation,” had convinced
many U.S. banking executives, government officials, and economists that extreme economic volatility
was a thing of the past. That confident attitude—together with an ideological climate emphasizing
deregulation and the ability of financial firms to police themselves—led almost all of them to ignore or
discount clear signs of an impending crisis and, in the case of bankers, to continue reckless lending,
borrowing, and securitization practices.

In 2012 the St. Louis Federal Reserve Bank estimated that during the financial crisis the net worth of
American households had declined by about $17 trillion in inflation-adjusted terms, a loss of 26 percent.
In a 2018 study, the Federal Reserve Bank of San Francisco found that, 10 years after the start of the
financial crisis, the country’s gross domestic product was approximately 7 percent lower than it would
have been had the crisis not occurred, representing a loss of $70,000 in lifetime income for every
American. Approximately 7.5 million jobs were lost between 2007 and 2009, representing a doubling of
the unemployment rate, which stood at nearly 10 percent in 2010. Although the economy slowly added
jobs after the start of the recovery in 2009, reducing the unemployment rate to 3.9 percent in 2018, many
of the added jobs were lower paying and less secure than the ones that had been lost.

For most Americans, recovery from the financial crisis and the Great Recession was exceedingly slow.
Those who had suffered the most—the millions of families who lost their homes, businesses, or savings;
the millions of workers who lost their jobs and faced long-term unemployment; the millions of people
who fell into poverty—continued to struggle years after the worst of the turmoil had passed. Their
situation contrasted markedly with that of the bankers who had helped to create the crisis. Some of those
executives lost their jobs when the extent of their mismanagement had become apparent to shareholders
and the public, but those who resigned often did so with lavish bonuses (“golden parachutes”). Moreover,
no American CEO or other senior executive went to jail or was even prosecuted on criminal charges—in
stark contrast with earlier financial scandals, such as the savings and loan crisis of the 1980s and the
bankruptcy of Enron in 2001. In general, the key leaders of financial firms, as well as other very wealthy
Americans, had not lost as much in proportional terms as members of the lower and middle classes had,
and by 2010 they had largely recovered their losses, while many ordinary Americans never did.

That visible disparity naturally engendered a great deal of public resentment, which coalesced in 2011 in
the Occupy Wall Street movement. Taking aim at economic elites and at a political and economic system
that seemed designed to serve the interests of the very wealthy—the “1 percent,” as opposed to the “99
percent”—the movement raised awareness of economic inequality in the United States, a potent issue that
soon became a theme of Democratic political rhetoric at both the federal and the state levels. However, in
part because the movement had no organized leadership or any concrete goals, it did not result in any
specific reforms, much less in the complete transformation of “the system” that some of its members had
hoped for.

c. What was the impact in the Philippine Financial market of the above-mentioned financial crisis?

These crisis affect the Philippine Financial Market, it impact our economic growth and the Philippine
equity market came under considerable stress in 2008 amid a deteriorating global economic outlook.
Concerns over the global financial turmoil and the related slowdown of the global economy resulted in
heightened risk aversion and uncertainty, which saw investors, both foreign and domestic, either unload
their holdings of stocks or stay in the sidelines awaiting better news. Subsequently, the ability of the stock
market to raise fresh capital declined during the year.