Impending Fed rate cut offers Singapore firms silver lining amid cloud of global uncertainties

AS the US Federal Reserve prepares to cut interest rates, Singapore businesses are weighing the potential benefits of cheaper financing against global economic uncertainties, industry observers say.

“The Fed rate cut story has been one of the most highly anticipated events this year,” OCBC chief economist Selena Ling told The Business Times.

Now, as US inflation shows signs of easing, the focus shifts to the pace of these reductions – whether they will come “fast and furious”, or be more gradual.

“I think the case for 50 basis points is actually quite compelling,” said former Federal Reserve Bank of New York president William Dudley at the Bretton Woods Committee’s Future of Finance Forum in Singapore on Friday (Sep 13).

He said: “If you need to be at neutral (monetary policy) and you’re at 5.33 per cent on the federal funds rate – nobody thinks neutral is above 4 (per cent) – you’re at least 150 to 200 basis points away from neutral. So the question is: ‘Why don’t you just get started?’”

Since the Fed began hiking rates in March 2022, global markets have felt the effects. The current Fed policy rate is in the 5.25 to 5.5 per cent range.

The market has already priced in expectations of at least 25 to 50 basis points in rate cuts, with further reductions anticipated next year, noted SGListCos pro-tem chairman Chew Sutat.

The pace of future cuts hinges largely on the trajectory of the US economy, which appears to be heading for a “soft landing” rather than a recession, said Ling.

For Singapore businesses, the impact will depend on how they perceive the US outlook – those expecting a downturn may hold back on capital expenditure and hiring, while growth sectors may take advantage of cheaper financing, she added.

Lower borrowing costs

Lower borrowing costs could benefit manufacturers reliant on US dollar-denominated funding.

However, this advantage may be offset by the strengthening Singapore dollar, driven by the Monetary Authority of Singapore’s (MAS) focus on curbing inflation, said Singapore Manufacturing Federation (SMF) president Lennon Tan.

The Singdollar has strengthened this year against the greenback, trading at around S$1.30 to the US dollar on Friday, compared with S$1.36 levels in late-April.

“Firms with significant exposure to US financing need to consider the risk of currency fluctuations,” Tan warned.

A sustained “divergence” between US and Singaporean monetary policies could prompt some companies to shift their financing strategies and lean more on international capital markets, he added.

In the logistics sector, last-mile delivery provider GoGoX expects lower financing costs to provide a boost. “We are cautiously optimistic about our business for the rest of 2024 and into 2025,” said chief operating officer Eugene Lee.

The logistics sector – partially driven by consumer spending – could also benefit from lower interest rates, which may spur both corporate investment and consumer demand, Lee said.

However, he noted that while lower rates may bring some relief, the broader economic landscape “is still facing headwinds”.

Ang Yuit, president of the Association of Small and Medium Enterprises, echoed this cautious view.

While lower rates could enhance consumer sentiment and ease borrowing costs, many small and medium-sized enterprises (SMEs) remain hesitant to invest in a still-uncertain economic environment, Ang said.

“Consumer sentiment is still weak, and sectors like retail and F&B are not performing well,” he added. “For many SMEs, it’s a wait-and-see approach.”

On a broader scale, lower borrowing costs could stimulate investments and boost demand for loans – though it may pressure banks’ margins, said Singapore Business Federation (SBF) chief executive Kok Ping Soon.

“It could also drive the recovery in credit growth regionally, although this also depends on the economic environment in the countries, as cost of funds is just one of many factors that businesses have to consider when investing overseas,” Kok said.

Pressure on exporters

A weaker US dollar following the Fed’s rate cuts could create mixed outcomes for Singapore’s manufacturing sector, noted SMF’s Tan.

Singapore – which relies heavily on exports – might find its goods priced less competitively in the US and dollar-linked markets. Meanwhile, US-based manufacturers may find their products more competitively priced vis-a-vis foreign imports.

Additionally, MAS’ strategy of maintaining a strong Singdollar to manage inflation could further amplify competitive pressures on export-driven industries, Tan said.

“A stronger Singdollar could make Singaporean exports more expensive relative to regional competitors, such as those from China or South-east Asian countries, whose currencies may weaken alongside the US dollar,” he explained.

“This could pose challenges for key sectors like electronics, precision engineering, and biomedical manufacturing, which rely heavily on global trade.”

However, a strong Singdollar also plays a crucial role in guarding against both imported and domestic cost pressures, said SBF’s Kok.

“Low and stable inflation is needed for businesses to operate and plan for the long term,” he added. “Our export competitiveness will have to be anchored by our ability to be more productive and innovative compared to other economies.”

Follow our coverage ahead of the US Fed meeting on Sep 17 to 18, and look out for reactions and analysis on Sep 19 after the decision.