BT : Interest rates: easy does it

Business Times - 15 Mar 2010

THIS WEEK'S TOPIC
Interest rates: easy does it

How do you see Singapore's interest rates moving over the rest of the year? How will higher interest rates affect the economy, and your industry and organisation in particular?

Reto Isenring
Managing Director
VP Bank (Singapore) Ltd

SINCE we do not expect rate hikes in the US, the Eurozone or Japan, the upward pressure in interest rates is mainly coming from neighbouring countries. However, their tightening of the monetary policy will be gradual.

Rising interest rates are definitely sure signs of economic expansion; and despite the rising costs of doing business, it also creates a positive investing environment for the private banking sector. However from an organisational perspective, the challenge is that while interest rates are gradually returning to pre-crisis levels, companies are now faced with higher labour cost due to inflation.

The Singapore government's call to mobilise the nation to increase productivity is a great strategic move where it will offset the higher labour cost, and will continue to position the country to attract foreign investments.

Bill Foo
CEO
ANZ Singapore

INTEREST rates are likely to rise gradually in the second half of 2010 as the economy recovers to pre-crisis levels, and global interest rates begin to rise on monetary tightening in major developed economies.

Borrowing costs will rise as banks pass on part of the increase in cost of funds. Companies that are traditionally more dependent on bank financing (eg SMEs) are likely to experience greater increases in average borrowing cost. Higher mortgage rates will also reinforce efforts to curb speculative activities in the housing market.

Banks' balance sheets should remain resilient in 2010, given the strong capital positions and adequate liquidity in the banking system. Overall, although interest rates are likely to move up, feedback from our customers indicate that the year has started on a positive note with signs of a strong recovery.

JY Pook
Vice-President and Managing Director
FICO Asia-Pacific

AUSTRALIA has already increased rates, and I expect Singapore to follow suit, eventually. However, we expect the interest rate adjustments to be in sync with market requirements and mindful of market sentiments. I don't expect it immediately as the economic recovery is very fragile.

Globally, interest rate modification changes the borrowing patterns. Higher rates may result in increased defaults or may require deeper understanding of customers to lend more to them, and lower interest rates may result in increased borrowing due to lower costs of borrowing. In either case, we help banks - our customers - understand the signs of default, delinquency and creditworthiness of their customers, helping them manage their risks better.

Jackie Cheng
CEO
Hisaka Holdings Ltd

OTHER countries are likely to follow suit in increasing their interest rates to keep the economy balanced. However, with such a move, business costs as well as operational costs will increase mainly for companies which have high borrowings.

The economy can be influenced easily by interest rates. When interest rates are high, people do not want to take loans out from the bank because it is more difficult to pay the loans back.

It goes the same for our industry as we are in a capital intensive industry - if companies in our industry take up more loans from banks, it also means that it would not be easy to pay back the principal as interest rates are also much higher than before.

That's why, at Hisaka, we operate with a very low gearing, not wanting factors such as an increase in interest rate to affect our business operations.

Sharon Lim
Executive Director
Pacific Time Pte Ltd

SINGAPORE'S interest rates may well head north for the rest of the year. Rising interests rates from the key economies due to inflationary pressures could well trigger a similar rise locally. This will definitely put a lot of pressure on the luxury retail and distribution industry in which we operate. The interest rate itself directly impacts availability and cost of working capital - particularly for highly geared players.

Other accompanying factors could pose a bigger problem. Retail rentals rising in tandem with the interest rates, together with wage inflation pressures, would result in higher operating costs. A weaker property and stock market resulting in lowered consumer confidence would torpedo any demand-led recovery. This 'scissors effect' in terms of rising costs and weakening demand will mean a tougher time for most retailers.

Sim Giok Lak
Chairman
Zicom Group Ltd

WITH the world's economies on the mend and recovery evident (although with uncertainties in some quarters), excess liquidity is now breeding inflation. If this is left unchecked, it may lead to a potential bubble precipitating a new crisis. Rapid fixed asset formation, particularly, leading to inflated property values has become pervasive in the Asia-Pacific region, primarily driven by low cost funds.

The global economic recovery is having a strong push effect on commodity prices as evidenced by recent reports of a potential 50-100 per cent increase in the price of iron ore from Australia, leading to a potential resource boom that will give rise to a job squeeze and a resurgent inflationary trend in Australia. The Australian Fed acted in anticipation of this. Basically, resource-rich countries such as Malaysia would feel the same effect, hence Malaysia's reaction.

Interest rates have an immediate impact on the currency values of a country, and can act to control the inflationary trend of a country. Singapore cannot avoid increasing its interest rates to be in line with this global trend, and I would expect to see gradual rate increases within the next six months.

As this is a global trend, I would not expect this to impact against the Singapore economy. Our borrowings are low, so we do not expect any increase in interest rates to impact us significantly.

R Dhinakaran
Managing Director
Jay Gee Enterprises Pte Ltd

THE recovery in the global economy is still in the nascent stages and much remains to be seen in this quarter after the traditional highs of the festive months.

Singapore's economy, while showing signs of recovery, is also working on several fronts now, including better utilisation of resources, productivity improvement etc. A rate increase at this moment will add undue pressure on local companies which are trying hard to focus on long-term goals.

An increase in rates may trigger companies to look at short-term efforts which may have detrimental effects on the recovery and employment levels, besides undoing more than a year's hard effort in building the country towards long-term sustainability using measures such as continuous training and development.

An increase in rates from Australia is more an exception than the beginning of a global high interest rate regime as Australia was the only major country to have registered growth in the first half of 2009.

The commodity and natural resources boom has yet to show any sign of reduction; and as the majority of produce and exports are from Australia, the situation is starkly different from other consuming economies especially service oriented ones such as Singapore.

In the event of any immediate increase in rates in Singapore, we will have more inflow of monies from overseas - which may again trigger inflationary trends that have only recently shown some signs of calming down. Therefore, it would be more appropriate for rate hikes to follow confirmed signs of recovery across different sectors of the economy over the year than an immediate increase.

Lim Soon Hock
Managing Director
Plan-B ICAG Pte Ltd

MOST primary dealers see a Fed rate hike this year, especially in the second half. Being an open economy, I expect Singapore to follow suit, in the footsteps of Australia, Malaysia and possibly other economically vibrant countries, such as Hong Kong and China, when they take similar actions.

I base my view on the fact that we are seeing more signs of a recovery in the labour market and the easing in financial conditions, which should improve economic growth. The unemployment rate fell from 3.4 per cent in Q3 2009 to 2.1 per cent in Q4, reiterating most economists' views that the labour market in Singapore has stabilised.

 Businesses obviously would not like to see any hike in interest rates as this will increase the cost of capital - and hence business cost - especially when large sums are involved, for example, in capital expenditure, project financing or infrastructural developments.

To attract more deposits, financial institutions will have to raise the interest rate in a buoyant economy to compete not just locally, but with others in the region as well.

At the macro-level, any excess credit growth relative to GDP growth will need to be prudently tightened to prevent the economy from going out of control through increasing its leverage.Â

Dora Hoan
Group CEO
Best World International

WITH the easing of the economic situation throughout the world, there is a trend of increasing interest rates in anticipation of higher inflation. However, there should be a careful determination of whether the economy is strong enough to withstand an interest rate hike. I foresee that corporate profits over the next several quarters will remain feeble while high unemployment will persist for some time.

Increasing interest rates, being the main determinant of investment on a large scale, would not augur well with Singapore's stance to support business recovery in order to protect jobs first and foremost.

Hikes in the interest rate, a key ingredient in the cost of capital, will significantly impact companies and governments. Globalising companies in particular require debt financing for expansion and capital projects. An interest rate hike will hit hard on businesses just recovering from a slump.

An increase in interest rates will also affect prices in other financial markets as well as the buying power of consumers and their ability to climb out of debt incurred during tougher times, therefore the impact will be far-reaching.

On the whole, recovery will be gradual, and the inflation rate will not need a major tweak for the time being. I believe therefore that factors weigh heavily in favour of keeping the interest rates low - which we hope is what we will see happening in Singapore until the economic rebound is solid enough to withstand such a move.

Loi Pok Yen
Group CEO
CWT Limited

THERE is a saying that behind every bad borrower, there is a bad lender. Easy money coupled with abnormally low interest rates is a toxic and potentially fatal combination in the long run.

At some point, rates will start normalising. Thus, there will certainly be rate hikes coming but I expect it to be measured for fear of derailing whatever recovery is anticipated. For the rest of the year, I expect and hope that rates will remain low.

David Leong
Managing Director
PeopleWorldwide Consulting Pte Ltd

SINGAPORE interest rates will remain fairly stable with a possible pre-emptive modest rise in the short term since the US rate is likely to stay low for a while. Asian central banks typically follow the Fed in interest rate setting though with a lag effect.

The growth momentum in Asia outstrips those in US and Europe but despite this, the central banks in Asia are unlikely to pursue any aggressive normalisation of domestic interest rates independent of those pegged by the Fed.

 In the short to mid-term view, there are two temporary depressants to any possible rate hike. The first depressant is that the world economy is still beset with uncertainties in Europe and the US. The second depressant is the uneven effects of stimulative policies employed to promote recovery - their sudden withdrawal may cause steep drop in capital and consumer spending. The recovery momentum is already showing signs of a slowdown, and any spike in interest rates can shift the axis of the spinning recovery to bring growth to a halt.

 An interest rate hike will likely shift demands of capital and consumer purchases to a lower gear. The flow rate of hot money will also likely be slowed down, bringing assets prices - especially property prices - to realistic levels. Fiscal spending is expected to wane as a growth driver.

At this juncture, it is better for Singapore to maintain a low interest regime to grow the economy out of the woods confidently before any contemplation of a rate hike. Q3 2010 should be a good time for an interest rate rethink - not now. Singapore can have the last laugh.

David Low
CEO
Futuristic Store Fixtures Pte Ltd

WITH Australia and Malaysia leading the pack, it is only a matter of time that other countries will follow suit. Domestic interest rates react to both domestic monetary policy announcements and external forces.

Historically, Singapore's interest rates have moved in tandem with that of the US, and I believe that this trend will stay. With recovering global economy, interest rates in the US will move up gradually over the next two to three years, and I see Singapore's interest rates moving up from Q3 onwards along the line of 25 basis points quarterly.

An appreciation in interest rates will certainly moderate consumer spending, especially affecting sales of big-ticket items which will impact economic growth. It can be a vicious cycle without closely monitoring the correlation of the two.

In general, we are still well protected in a low interest rate environment, and the gradual raise will likely pose a minimal impact on the economy at the rate it appreciates.

Futuristic Store Fixtures is a retail industry-driven business with an export focus so our business is very much affected by how other countries' monetary policies play out, especially in the West.

With interest rates increasing gradually and positive retail sentiments, our industry will register slow but promising growth compared to the last two years which saw drastic dips.

Liu Chunlin
CEO
K&C Protective Technologies Pte Ltd

MY personal view is that interest rates should not go up, as that would tighten credit at a critical time when business costs are already rising because of the foreign worker levy and the soon-to-be removed Jobs Credits.

Moreover, the economy is just recovering and is possibly fragile - particularly against a background of a knock-on effect from the sovereign debt crisis already engulfing Greece and threatening some other EU countries. We cannot afford stagflation - when inflation eats into the economy and businesses find their growth stifled.

Teng Yeow Heng Michael
Managing Director
Corporate Turnaround Centre Pte Ltd

I ANTICIPATE that interest rates should start to rise in Singapore in tandem with the global trend this year. How fast and how high they may rise will depend on the rate of increase in spending and inflation as well as the rate of the recovery of the economy.

From a wider economic perspective, raising the interest rate should have the impact of increasing interest payments and hence decreasing cash reserves for many companies. If these companies subsequently cut back cash expenditure such as in advertising, training and consultancy expenditure, this will reduce income in my industry and company.

A change in interest rates will affect our business in several ways. My company has taken loans, so an increase in interest rates will mean higher repayments, thus reducing profits. Also, if my business wants to borrow money to expand the premises, then I am less likely to go ahead with the project when interest rates increase. Furthermore, my customers are going to find that they are more attracted to saving than to spending if interest rates go up and will be less likely to borrow money to spend as well. This will reduce sales for our business.

Tan Kok Leong
Principal
TKL Consulting

SINGAPORE'S current interest rates, measured in terms of one-month and three-month inter-bank rates, are at the lowest in decades.

As Asian countries pick up growth in GDP after the global financial crisis, one could expect the rate of interest to rise probably by half a percentage point within this year - which is a good sign of economic recovery and a compliance to the global trend of tightening monetary policy.

The rise in interest rates should not have any adverse impact on the stock market, property market and businesses because it is for a better financial order.

Joshua Yim
CEO
Achieve Group

SINGAPORE'S interest rates will naturally go up incrementally, in pace with the improved economy. And the confidence of the economy is reflected by our industry - the recruitment and manpower industry - because we see our customers' business confidence return in their appetite for hiring people. In fact, we are already seeing a lot of confidence with regard to hiring for various industries.

On the other hand, when interest rates go up, less 'free money' is available and this may not be as favourable because there will be higher barriers to business as the cost of borrowing goes up.

As an industry player, I believe that there will be a lot of changes in my industry because a hike in interest rates will mean that the economy is doing well so companies will start hiring. Now, we are going into a cycle where the economy is better, especially in the Asia-Pacific region.

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