Credit ratings agency Fitch Ratings cut its rating on U.S. debt from AAA to AA+, citing a steady deterioration in standards of governance over the last 20 years and concerns over the nation\u2019s fiscal trajectory over the next three years.<\/p>\n\n\n\n
The background<\/strong><\/p>\n\n\n\n Fitch put the U.S. on negative watch in late-May as Democrats and Republicans butt heads over raising the debt ceiling. The two sides eventually reached an agreement on June 2 and passed a bipartisan deal to suspend the debt ceiling for two years and put a 1% growth limit on nondefense discretionary spending. However, the deal came only 3 days before the so-called X-date and Fitch expressed concern that the repeated debt-limit standoffs and last-minute resolutions have eroded confidence in fiscal management.<\/p>\n\n\n\n Market reaction<\/strong><\/p>\n\n\n\n The dollar index (DXY) rejected its 50-day moving average and retreated, stock futures fell by as much as 100 points, and yields on U.S. Treasuries edged higher. The reaction was similar to when S&P made a similar downgrade in 2011 following another debt limit crisis. However, while the S&P 500 dropped by 6.7% following the S&P downgrade, it quickly recovered within a week.<\/p>\n\n\n\n What does it mean for the Philippines?<\/strong> <\/p>\n\n\n\n Weakness in the U.S. dollar should be generally good for Philippine companies, especially importers and those with big exposure to foreign-denominated debt. However, the downgrade will likely have a negative effect on risk appetite and produce a kneejerk reaction. Despite the lower credit rating which implies higher risk, U.S. Treasuries remain the benchmark for risk-free investment, and higher yields will eventually make these more attractive to fund managers and draw funds away from emerging markets like the Philippines.<\/p>\n\n\n\n