US credit woes top threat to the Singapore party
Now that the fireworks are over, here comes a reality check.
While the fanfare is over how a sparkling first half will lift the entire year’s economic showing — the Government announced on Friday that the GDP expanded by 8.6 per cent year-on-year in the second quarter — a growing monster halfway round the world is threatening to gatecrash Singapore’s party. The pundits call it the “United States sub-prime problem”. In layman lingo, it’s a wave of Americans with dodgy credit histories defaulting on their home loans, causing some of their lenders to keel over.
Scarily, many such high-risk mortgages have been packaged into complex financial instruments bought by banks worldwide, including those in Singapore.
With banks crying for help, government after government has been pumping in fresh funds to boost liquidity since Thursday. Financial markets, rattled by doomsday scenarios of a global contagion, went into a tizzy.
Singapore share prices plunged by 1.6 per cent on Friday, wiping out all gains made since late April. Investors were pushing the “sell” button, ignoring reassurances by officials that morning.
“We stand ready to inject additional liquidity if the situation so warrants … At this stage, market conditions remain relatively stable,” the Monetary Authority of Singapore’s (MAS) deputy managing director Ong Chong Tee said, when asked if the central bank would follow its counterparts in Japan, Europe and the US, which together ploughed in billions of dollars just before the weekend. Banks have grabbed the funds to cover losses.
Dow Jones Newswires quoted unnamed sources as saying that the MAS injected $1.5 billion into the country’s money supply on Friday. The MAS declined to comment on the figures.
Investors hardly took heed of Singapore’s glowing economic numbers that day.The second quarter saw the construction sector expanding at the fastest pace in nearly a decade and a continued flourish in financial services demand, leading the Government to upgrade its growth forecast for the year to 7 to 8 per cent — up from the previous 5 to 7 per cent.
The bullish prediction factors in the sub-prime situation, said Mr Ravi Menon, Second Permanent Secretary at the Ministry of Trade and Industry. He added that the risk of credit woes spreading was “the most significant downside to the (growth) forecast”. But even if the situation does worsen, “it will take some time before it feeds into the real economy”, Mr Menon said, noting that the fundamentals of the major economies remained sound.
Private-sector economists are not so sure. Mr Vishnu Varathan of research house ForeCast, uncertain when and whether the credit crunch will unravel, has put off revising his growth forecast for Singapore until more clarity on the sub-prime situation emerges.
Singapore’s three local banks recently said their exposures to sub-prime-linked funds were small and limited. But if the US economy does take a hit from the reeling credit market, a ripple effect will certainly touch the Republic despite its attempts to ensure its revenue sources come from other markets besides the US. “None will be spared,” said Mr Varathan.
For now, however, the outlook remains benign — even rosy.
“It’s all cylinders firing,” said CIMB-GK Securities economist Song Seng Wun, confident of continued support by the property, construction, and biomedical sectors. He is also optimistic the sub-prime woes are “a US-Europe problem”.
Other than that, few risks threaten to derail Singapore’s economic progress, Mr Song said. Even oil prices, once the bogeyman, have fallen below US$70 ($106) per barrel.
The only domestic concern, he said, may be rising costs. Consumer prices rose 1 per cent in the second quarter, double the rate of 0.5 per cent in the first quarter. At current levels, inflation has not crimped Singapore’s competitiveness as a business centre. But Mr Song says: “If it continues, then it probably will.”
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