Economy On Track Despite US Sub-Prime Woes

Source : The Straits Times, 18 Sep 2007

THE Singapore economy is still on track to meet the official 7 to 8 per cent growth forecast even as world financial markets grapple with a credit crunch sparked by a United States housing crisis.

Ministers told Parliament yesterday that financial and property markets here are still in good health and that there is plenty of cash in the system.

But they said the risk of the money market woes spilling over to the real economy has risen, adding that the central bank is ready to intervene if necessary.

‘It’s too early to assess how the sub-prime mortgage problem in the US housing market will affect credit and other financial markets,’ said Minister of State for Trade and Industry S. Iswaran. ‘At this stage, although the risks have increased, it’s not clear that there has been a significant spillover to the real economy.’

In recent weeks, rising numbers of defaults of US home loans to risky or sub-prime borrowers have triggered a tightening of liquidity in money markets.

Since global money markets are interconnected, this has caused a wider aversion to debt financing as investors prefer to hold on to cash in these uncertain times.

If this uncertainty drags on, borrowing costs may rise sufficiently to curtail investment and consumption, especially in the US and Europe.

For export-oriented Singapore, a slowdown in its two biggest export markets would inevitably take some wind out of the local economy, said Mr Iswaran.

Second Finance Minister Tharman Shanmugaratnam, who is also Education Minister, said financial institutions here have been prompt in disclosing their small exposure to US sub-prime mortgages.

He added that the benchmark interest rates at which banks lend money to each other are at pre-crisis levels. ‘That’s a good indication that the market has been stable and liquidity has been ample.’

Mr Tharman said Singapore’s central bank, the Monetary Authority of Singapore, has not had to ‘do anything extraordinary’. But it is ready to inject liquidity if there is a systemic shortage where ‘normal borrowing and lending between banks is not taking place’.

National Development Minister Mah Bow Tan said the local property market has so far been unaffected by the US sub-prime woes. ‘New developments are still unfolding every day.’