US Rate Cut Likely To Boost S'pore Growth

Source : The Business Times,September 18, 2007

GDP may rise 1.4% points with 75 basis point cut in Fed rate: Citigroup

SINGAPORE'S economic growth may jump by another 1.4 percentage points, if the key US interest rate is cut by 75 basis points, says Citigroup.

In a report, its economist Chua Hak Bin said he expects the Fed funds and discount rate to be slashed by 50 basis points (bps) to 4.75 per cent and 5.25 per cent respectively at the upcoming Federal Open Market Committee meeting.

Also, he sees another possible cut of some 25 bps before year-end, which will 'lift Singapore's gross domestic product growth by 1.4 per cent points'.

Based on Citigroup's analysis, this is almost double and far higher than the average of 0.8 per cent across Asian economies, because of Singapore's heavy dependence on external demand and sensitivity of domestic interest rates to US interest rates.

Expectations of rate cuts came after the recent financial market troubles, which have affected US consumption outlook.

For example, 'US housing prices have declined by an average of 8 per cent, but elevated levels of unsold homes suggest that further corrections are likely'.

Fed rate cuts will thus help cushion and reduce the potential negative impact from slower US growth.

The research house also thinks the Singapore economy is less sensitive to any US economic downturn, due to the diversification away from segments more sensitive to US business cycles, such as the electronics and pharmaceutical sectors.

In all, Citigroup says a one percentage point fall in US GDP growth cuts Singapore's GDP growth by about 1.7 per cent point.

Indeed, its projected cut in rates may possibly lift Singapore's GDP growth by more than necessary if US consumer spending does not slow as sharply as expected, aggravating the current pressures arising from supply bottlenecks.

Citigroup believes that the rate cut will strengthen the Sing dollar by 0.6 per cent, improve the current account surplus to GDP by 0.3 per cent point, and increase the fiscal balance to GDP by 0.2 per cent point.

However, the impact on local interest rates is likely to be modest, thus limiting the impact on mortgage rates and property market.

For example, the three-month Singapore Interbank offered rate is expected to shed only about 10 to 20 basis points to about 2.6 per cent in six months' time, if the US rate cut is realised.

'This is because short-term interest rates had already fallen sharply in the early part of the year and the ongoing upward adjustment since represents some normalisation.'

Stronger domestic investment growth may also start putting upward pressures on rates early next year.

Overall, Citigroup expects mortgage rates to fall by possibly 10 to 20 bps.

On the property front, Citigroup's analyst Wendy Koh sees a supply crunch amid strong employment growth and falling vacancy rates. She expects residential rental rates to rise by 20-30 per cent a year.

This came as a record 113,800 jobs were created in the first half of this year, and Citigroup sees residential occupancy rates rising higher next year to over 97 per cent.