S'pore Firms Likely To Weather Sub-Prime Storm

Source : The Business Times, August 17, 2007

Electronics, financial services somewhat vulnerable: analysts

SINGAPORE) The stock market may catch a cold, but Singapore companies in general are unlikely to be infected by US sub-prime woes, analysts said.

The only ones slightly vulnerable to the fallout are those in the electronics and financial services sectors, they added. That, too, is indirectly so.

It is the uncertainty in stock markets and poor investor sentiments, rather than any collateral debt obligation (CDO) exposure, that could hurt financial services companies.

'Trading volumes are already starting to dry up,' noted Citigroup economist Chua Hak Bin.

Offshore lending, which has been growing very strongly, is also likely to slow down.

Market observers also pointed out that fewer deals such as mergers and acquisitions (M&As) and initial public offerings (IPOs) are taking place.

'So there will probably be an impact on banks' fee-based income for the second half,' said David Lum, an analyst with Daiwa Institute of Research.

Companies in the electronics sector may also take a hit.

'What is worrying is whether the sub-prime crisis will translate into dampened demand in investment and consumption,' said UOB economist Alvin Liew.

If it does, companies will start paring down investments.

And if the US economy goes into a recession, companies in the electronics sector may suffer. Said Citigroup's Mr Chua: 'A lot of the electronic exports are dependent on US consumer demand which is already very weak.'

There is also some risk to the luxury property market segment here, as a large proportion of the buyers are wealthy foreigners 'who are more sensitised to global sentiments and who may have had their financial assets hit already', said Mr Chua.

But the risks are largely contained.

Domestic economic growth will continue to be fuelled by burgeoning construction and building activities which are not going to halt, said analysts.

'Domestic demand is going to hold up fairly well, and investments should still be quite strong. We still see a lot of commercial and industrial construction investments going on,' said UOB's Mr Liew.

Agreed Daiwa's Mr Lum: 'I doubt any of the projects are going to be delayed. The IRs (integrated resorts) are still going to be built, and many of the other projects are already pre-sold.'

The tight office space supply also means that there will continue to be strong demand for office space.

'So the building and construction driver is not going to slow down at all, and that driver is good for a few more years, not just this year,' said Mr Lum.

Other sectors like pharmaceuticals and tourism will be fairly resilient, said Mr Chua.

Companies, even in the electronics business are not too worried.

'While USA remains the largest economy, the consumption power of China, India and others has edged up considerably in recent years,' said Tan Kay Guan, chief operating officer of Miyoshi Precision Ltd. This could mitigate any US slowdown.

Not mincing his words, Leslie Wa, CEO of HLN Technologies, said: 'The world market does not hinge solely on the US market. For example, one of our smartphone makers will launch its products in Europe. Moreover, the China market is booming.'

The weakening Singapore dollar against the greenback could also make up for any weakness in demand, said Miyoshi, HLN and other companies with export sales.

Said Tan Kok Hiang, executive director of Viz Branz Ltd: 'Most of our exports are invoiced in US dollar, so the strong US dollar is positive for us.'

Would the drying up of liquidity cause concern? Analysts don't think so. 'For a long time, money supply growth has been incredible in Singapore,' said Daiwa's Mr Lum. 'If you look at the local interbank rates, they are not spiking up, so there is ample liquidity in Singapore.'

The loans to deposits ratio in banks here is also very low, so they do have the ability to finance companies in their expansion and businesses, he added.

Companies also said that they do not foresee difficulty in raising capital, said Miyoshi's Mr Tan, as the fundamentals are still strong.

However, Singapore companies that might be adversely affected are the larger ones that have been turning to global capital markets to raise funds, said Citigroup's Mr Chua.

'Corporate bond spreads have been widening, even for investment grade in the US. They are increased by about 50-70 basis points,' he added. 'So those companies that had been able to price their bonds very cheaply in the past - at only 20-30 basis points above the Libor (London Interbank Offered Rate) - may now find that their cost of capital has increased.'