US rate hike not all bad for Singapore

Singapore

THE US Federal Reserve is expected to inch a step closer to a rate hike at its meeting this week. Whether that rise in interest rates comes before the middle of 2015 or after, economists expect any detriment to the Singapore economy to be offset by stronger US demand that a rate hike ought to signify. But any positives will also need to be weighed against Singapore's own domestic constraints and diverging economic policies and performance globally, economists say.

The Wall Street Journal's survey of 45 economists found that they expect the Fed to start raising its benchmark short-term rate around June next year, while Bloomberg's survey suggests that some expect a hike before then, with a median central bank rate forecast of 0.39 per cent in Q2, up from the current upper bound of 0.25 per cent. This will inevitably affect Singapore's interest rates, which respond freely to global conditions since its central bank conducts monetary policy via the trade-weighted exchange rate instead of interest rates.

Said Barclays economist Leong Wai Ho: "The transmission to Singapore from movements in US money market rates will be rapid and significant. If markets expect a June move, the period between March and June will be closely watched, and possibly be volatile for rates. Singapore short-end rates may be pushed higher even before June."

The 3-month SIBOR (Singapore interbank offer rate) is expected to rise from last Thursday's 0.45 per cent to a median forecast of 0.64 per cent by Q3 next year and 0.81 per cent by Q4 2015, according to Bloomberg.

This could exacerbate the ongoing property market slowdown, as a higher cost of borrowing dampens credit growth. OCBC economist Selena Ling expects domestic credit growth to moderate from 2014's estimated 11.6 per cent year-on-year, to about 8 per cent in 2015.

Deutsche Bank economist Taimur Baig thinks although the slowdown has reduced the risk of a price bubble bursting when rates go up, there's still cause for concern. "How the housing market deals with upward pressure on rates will remain a lingering question as the economy's exposure to housing-related debt remains considerable," he said in a recent report.

And a quickened property downturn could crimp Singapore's services activity. "This is likely to mean even slower services growth, as fewer transactions are processed - less work for banks and lawyers," said Mr Leong.

The most immediate negative impact from a US rate hike is likely to come through the foreign exchange markets. Mizuho Bank economist Vishnu Varathan said: "One of the sharpest effects may initially be in the foreign exchange space - Singapore dollar and regional currency swings - as these markets tend to front-run and in some cases may be leveraged." This could lead to flux in the funds and asset management industry based out of Singapore, he said.

But other than an initial spike in market volatility and a softening of the property market, higher interest rates and a stronger US dollar may not be disruptive if the hikes are moderate and flagged well, he said.

State Street Global Advisors' fixed- income portfolio strategist Oh Boon Ping thinks that a repeat of the bond market rout of 1994 cycle of US rate hikes is unlikely and that next year's hikes are likely to be more similar in impact to those of 2004, when rates were gradually repriced thanks to clarity from the Fed.

"If anything, the emphasis on forward guidance is now greater than before. For this reason, we believe that the fixed-income market is well positioned to weather the policy adjustment, and we should see a flattening of the yield curves in Asia," he said.

Also, SIBOR does not tend to rise or fall by magnitudes equivalent to that of the US benchmark rate, said UOB economist Francis Tan. He is thus not expecting a fast reduction in credit growth nor material impact on the property market.

"I'm actually quite optimistic. If the Fed has delayed hiking rates for so long and then chooses to do so, there must be strong positive reasons in the real economy, with benefits for Singapore through the trade channel," said Mr Tan. International Enterprise (IE) Singapore expects non-oil domestic exports to grow 1-3 per cent next year, turning around from this year's projected 1-1.5 per cent contraction.

Indeed, many stressed that Singapore stands to gain from stronger US growth that ought to catalyse a rate hike. Barclays' Mr Leong said: "The most important point is that the US economy is now on a resurgent path - and has emerged from life support. So rate normalisation should be seen in that context: an eventuality."

DBS economist Irvin Seah said: "Higher interest rates could take their toll on market performance, but if you take it in the light of it coming about due to stronger US growth, then it's a net positive for the Singapore economy."

But Mizuho's Mr Varathan pointed out that the current US recovery seems to be driven more by investments and industrial factors that may not be as reliant on Asia's exports - such as the housing market and shale. "So, while the US recovery is generally good for broader Asia and Singapore, the magnitude of 'positive pass-through' might have diminished," he said.

Ms Ling too cautions that the overall lift from US growth will be modest, given that demand growth in China and EU remains sluggish.

In addition, Singapore's labour constraints from economic restructuring persist. The labour crunch which companies say has impeded their ability to capitalise fully on global growth will continue, with a final round of manpower curbs taking effect next July. "Overall, this means that economic growth may remain sub-par as US tightening adds to the restructuring impediments. But this is more likely to result in a phase of consolidation in sub-trend growth, rather than a fresh recession altogether," said Mr Varathan.

Side-bar: Changing semantics of a rate hike