Businesses Roll With Stronger S$ But Some Brace For A Crunch

Source : The Business Times, October 15, 2007

Singapore companies keep firm eye on competitiveness as US dollar slides

Some are thinking of shifting their operations to cheaper locations like China and Vietnam. But for most businesses here, the strengthening Singapore currency and weakening American dollar have not made more than a dent on their cost competitiveness - at least not yet.

The falling US$ is very much what's needed to correct the troubling global imbalances fed by excessive consumption in the US and Europe, says Nizam Idris, an economist and currency strategist at UBS bank in Singapore.

Even as the Sing dollar shot up to a 10-year high against the greenback at $1.463 last week, industry sources say it's still early days to assess the impact on the economy here.

'For now, businesses have not felt the pinch. The economy is doing well,' says one industry leader.

Just last week, the Ministry of Trade and Industry (MTI) released estimates showing the economy expanded by a blistering 9.4 per cent in the third quarter, trumping analysts' forecast.

The government seems not particularly concerned about the falling US dollar, the common currency for global trade and business. More concerned about inflation, the Monetary Authority of Singapore is moving to raise slightly the pace of appreciation for the trade-weighted Singapore dollar.

That is good news for local businesses that are importing a lot. 'The drop in value of the US dollar is beneficial in the sense that it becomes cheaper for us to buy fuel which is quoted in US dollars,' says Tammy Tan, spokeswoman for transport group Comfort Delgro.

MTI has declined to comment, but BT understands government planners are keeping a close watch on the local currency's movements - especially against the US dollar.

The Singapore Tourism Board, keen to draw more visitors, says it is too soon to say if tourism would be affected by the stronger Sing dollar.

The Singapore Chinese Chamber of Commerce and Industry (SCCCI) expects local retailers and service providers in the tourist trade to be affected by a dip in tourist spendings.

Small exporters who ship their goods direct to the US will also be among the hardest affected, it says.

'A strong Singapore dollar will definitely affect the price competitiveness of our exports done in Singapore dollars,' says Chew Ker Yee, vice-president for business at Wangi Industrial, a provider of surface finishing and optical thin-film coating solutions. His company is moving its operations to lower cost countries like China and Vietnam, where 'the local currency appreciation against the US dollar is not as steep'.

Erman Tan, chief executive of Asia Polyurethane, a chemical exporter, finds his costs rising in tandem with the falling US dollar.

Even companies not dealing with the US are feeling the effect, because they have to convert revenues mostly in the US dollar to the Singapore currency.

Miline International, which ships its plywood to Australia, Malaysia, Thailand and the United Kingdom, has sustained 'book losses' of 16 per cent in the past four years, when the Singapore dollar climbed from $1.69 to $1.45 against the greenback. 'A stronger Sing dollar will not benefit us as we trade 100 per cent in US dollars,' says Mikell Koh, Miline's managing director. Homegrown technology company Aztech Systems is in similar straits, but says the losses which the company sustains 'will not be significant to the group's operations'. Still, Aztech is considering hedging to ease the effect of the falling US dollar, says Herman So, its vice-president for finance.

Some businesses, like logistics provider Lorenzo International, worry that if the greenback keeps tumbling and hence boosting the Sing dollar, profit margins will be squeezed.

Says Raju Chellam, vice-president of market research firm Access Markets International in the Asia-Pacific region: 'If the US dollar continues its slide, we may need to re-negotiate with our local partners to accept payment in US dollars, instead of in local currency.'

On the other hand, Victor Loh, CEO of the VicPlas Group, a producer of building plastics and medical devices, is fretting that clients may seek to pay in US dollars if the greenback keeps falling.

But there are also gains to be made in cheaper imports and lower inflation. This is seldom mentioned among businesses, lest they have to pass the gains to customers.

Nizam Idris, an economist and currency strategist at UBS bank in Singapore, says the falling US dollar is very much what's needed to correct the troubling global imbalances fed by excessive consumption in the US and Europe.

In any case, he says that in real trade weighted terms, the Sing dollar has not strengthened much against its trading partners.

Similarly, Fortis Bank strategist Joseph Tan also does not expect the weakness of the US dollar to affect Singapore's trade 'so starkly'.

He says Singapore's chief competitors in Asia have also seen their currencies appreciate - some even more - against the greenback, leaving Singapore's competitiveness relatively unscathed.

But Mr Tan is concerned that the falling US dollar, along with the recent cut in the Fed rate, is exporting US inflation to the rest of the world.

While a strong Sing dollar could hit exports, the SCCCI does not see any long-term harm to Singapore's competitive edge.

'For most large corporations, the rising Sing dollar is unlikely to have a major impact as these companies leverage on niche manufacturing capabilities and efficient supply-chain and logistics management to compete globally,' it says.

The more immediate concern for many businesses is the recent sharp hike in residential and commercial rentals, according to SCCCI.

Says an expatriate businessman: 'This almost bubble aspect of commercial and private rents is making Singapore a much less attractive place to do business than in the past.'