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Businesses roll with stronger S$ but some brace for a crunch
Singapore companies keep firm eye on competitiveness as US dollar slides
(SINGAPORE) 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.
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.’
Source: Business Times 15 Oct 07
US$80b fund planned to mop up bad mortgage loans
US Treasury, global banks talking to find way out of looming credit crunch
(WASHINGTON) Major banks including Citigroup are looking at setting up a roughly US$80 billion fund to buy ailing mortgage securities and other assets, sources said.
Representatives from the US Treasury have organised discussions among top global banks in a bid to prevent the crunch from further hurting the global economy, the sources said.
Financial institutions are growing increasingly concerned that a certain type of investment funds linked to banks may have to dump billions of dollars of repackaged loans onto financial markets.
A fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets. Such sales could trigger huge losses for banks, and, in the worstcase scenario, tip the US or Europe into recession.
The fund is the latest response to a global credit hangover after at least three years of easy credit that fuelled massive mortgage lending in the US and spurred record levels of leveraged buyouts.
‘Banks made unwise business decisions, and now they’re scrambling to save themselves,’ said Steve Persky, chief executive at Dalton Investments in Los Angeles.
Citigroup, JPMorgan Chase & Co and Bank of America Corp are involved in the discussions, according to people familiar with the situation. The three banks declined to comment.
Though the US Treasury is involved in the discussions, taxpayer money is not expected to be used, they said.
The Financial Services Authority, the UK market regulator, has suggested British banks consider participating in the fund, The Wall Street Journal reported on Saturday, citing a person familiar with the situation.
Details concerning the fund the banks are setting up, including its size, are still being hammered out and may change as other banks and investors become involved, sources said. The fund that is being contemplated would bail out funds known as ’structured investment vehicles’ or SIVs.
SIVs bought assets like mortgage securities from banks, and financed their purchases using short-term debt known as commercial paper. They make money by earning more from their investments than they have to pay to fund them.
But if SIVs cannot sell commercial paper, they must sell their assets, and many of the assets do not trade often and would be hard to sell.
The idea for a fund was first broached at a meeting at the US Treasury on a Sunday in mid-September in Washington, DC, according to a person familiar with the details of the meeting.
That meeting was led by Robert Steel, US undersecretary for domestic finance, and Anthony Ryan, US assistant secretary for financial markets.
The informal meeting lasted four-and-a-half hours as banks came up with ideas to jump-start the short-term lending markets. Outstanding commercial paper has dropped since the summer.
According to the US Federal Reserve, there was US$1.865 trillion in commercial paper outstanding in the week ended Oct 10, down from US$2.187 trillion outstanding in July.
Source: Reuters (Business Times 15 Oct 07)
Why Singapore is what it is
Minister Mentor Lee Kuan Yew was the keynote speaker at the opening of the International Bar Association’s annual conference last night. This is his address.
TO UNDERSTAND Singapore, you have to know how we were suddenly thrown out of the Federation of Malaysia in 1965 and became an independent state. Peninsular Malaya had been Singapore’s hinterland ever since the British founded Singapore in 1819.
We faced a bleak future. We had no natural resources. A small island-nation in the middle of newly independent and nationalistic countries of Indonesia and Malaysia, each determined to cut Singapore off as the middleman. To survive, we had to create a Singapore different from our neighbours – clean, more efficient, more secure, with quality infrastructure and good living conditions.
We sought to provide an environment that our neighbours did not provide – First World standards of reliability and predictability. Important for investors and economic growth is the rule of law, implemented through an independent judiciary, an honest and efficient police force and effective law enforcement agencies. Had we not differentiated Singapore in this way, it would have languished and perished as a shrinking trading centre instead of becoming the thriving business hub it is today.
I studied law in the Cambridge Law School and am a barrister of Middle Temple, an English Inn of Court. I practised law for a decade before I first took office in 1959 as prime minister of self-governing Singapore.
Therefore I knew the rule of law would give Singapore an advantage in the centre of South-east Asia where the law was often what was decided by the leader, whether a president or prime minister, often an ex-military man.
Singapore inherited a sound legal system from the British. Clear laws, easy access to justice and an efficient legal system provide the basis for citizens to compete equally in the market and to grow the economy.
A stable and predictable legal environment facilitates the enforcement of contractual rights and protection of property rights. The common law heritage and its developed contract law are known to and have helped attract investors. Our laws relating to financial services are similar to those of leading financial centres in other common law jurisdictions such as London and New York. As these are the two leading financial centres in the world, their laws govern most financial transactions worldwide. They are used freely in Singapore.
Since 1959 we have adopted English as our working language.
While we have kept key English legal principles; after the United Kingdom joined the European Union, it adopted EU laws and doctrines. We have not followed them. Instead we have amended our laws to fit our needs and circumstances.
The independence of our courts is protected by the Constitution that prevents removal of judges from office by the executive. We established our final Court of Appeal in place of the Privy Council as our courts would be more familiar with our own legislation and local conditions and culture.
We still look to English precedents and examples, but increasingly we look also to those of United States, Australia, New Zealand and other Commonwealth countries. Even civil law countries have given us useful concepts and ideas, especially those adopted and incorporated as part of UNCITRAL trade laws.
Needs-based legislation
WE have special legislation to meet our needs: A multi-racial and multi-religious society is prone to conflicts.
Race, language and religion in Singapore have to be handled sensitively, especially during elections. We have enacted the Religious Harmony Act and set up the Presidential Council for Minority Rights. We created Group Representation Constituencies to ensure minority representation in Parliament.
For good industrial relations, we enacted the Employment Act and Industrial Relations Act to provide the framework for our tripartite system of industrial ties, a system for collective bargaining, and an Industrial Arbitration Court to resolve industrial disputes.
For law and order, we have strong deterrent sentences for offences such as drug trafficking, kidnapping, unlawful possession of firearms.
The Immigration Act provides for caning sentences to deter illegal immigrants and overstayers.
For national security, the Internal Security Act allows for preventive detention, an effective response to terrorists.
By the 1980s, the system of courts we inherited from the British could not cope with the increasing volume of work. It needed to be modernised and to make use of IT. This also needed a chief justice who is not only legally qualified, but also has managerial and administrative experience to reform the system.
It was Chief Justice Yong Pung How (1990-2006) who had practised law for over two decades before he became a merchant banker and finally chairman of Singapore’s largest bank. He restructured the system, instituted new procedures, used IT in the courts, increased the number of judges and courts and selected the most able and balanced of those at the Bar to become judges.
The World Bank, in a report this year entitled Judiciary-led Reforms In Singapore – Framework Strategies And Lessons, stated: ‘Over the past 15 years, Singapore’s judicial system has been transformed from one that many viewed as characterised by inefficiencies, delays, and inadequate administrative capacity to one widely seen as among the most efficient and effective in the world.’
Attorney-General Chan Sek Keong, who has since become Chief Justice, will maintain these standards.
Good governance, a sound legal framework and judiciary have resulted in stability and economic growth.
Transparency and integrity
OUR emphasis is on meritocracy, the building blocks of sound governance and integrity in our judiciary and legal system. The integrity of our financial systems withstood the turbulence of the 1997 Asian financial crisis that caused several of our neighbours’ banking systems to collapse. Singapore’s firm regulatory framework has facilitated economic progress.
Corruption, endemic in parts of the world, was seeping into Singapore in the 1950s when elections had introduced elected ministers in the transition to internal self- government. In 1959 when we took office in the first fully elected government, we moved swiftly to rid ourselves of corruption before it could become endemic.
Transparency International, a civil society organisation against corruption based in Berlin, has repeatedly listed Singapore among the top five of 163 countries. And the only one from Asia in the first five.
Our system does not tolerate corruption and we have avoided the problems of widespread corruption that have plagued Asia. Our Corrupt Practices Investigation Bureau (CPIB) annually tabulates the cases brought against officers and executives from the public and private sectors. In two cases, it led to the conviction and prison sentence of a junior minister. Another, a Cabinet minister, committed suicide after being investigated for corruption.
Three factors enabled Singapore to escape the poverty that plagued the region: First, clean and efficient government; second, the character and capabilities of the leadership in charge; third, an industrious people, eager and quick to learn to be productive and gainfully employed.
Defamation
POLITICAL leaders in Singapore take action against opponents who make statements against them that impute dishonesty and lack of integrity. Situated in a region where ‘money politics’ is part of the political culture and an accepted way of life, any allegation of corruption in Singapore must be taken seriously.
It leads to an investigation by the CPIB, and/or an action for defamation against the person making the allegation to clear any doubts on the integrity of the government.
As a result, people in Singapore do not equate their political leaders with second-hand car salesmen.
Economic competitiveness
INTERNATIONAL surveys of economic competitiveness of countries always include the legal framework and the administration of justice as key criteria in ranking such countries.
The Political and Risk Consultancy, World Economic Forum and other polls show that both foreigners and Singaporeans believe we have good judicial and legal systems, and fair administration of justice.
The Institute For Management Development World Competitiveness Yearbook has consistently ranked Singapore in the top two positions since 1997 under the Legal Framework component. (This category examines if the legal and regulatory framework encourages the competitiveness of enterprises.)
The World Bank released its study Doing Business Report 2007 in September last year. Singapore fared better in 2006, compared to the previous year, and has replaced New Zealand at the top spot.
Despite these endorsements, we cannot be complacent. We have to respond to new challenges that technology and globalisation have brought upon us.
With technology increasingly sophisticated in a world that is increasingly borderless, crime has become multifaceted, and multi-jurisdictional. Our legislative mechanisms have responded to meet these challenges. Many legal issues today require an international cooperation for solutions.
Law firms are also taking advantage of new global business opportunities and technologies. US and British law firms are able to venture aggressively into new markets, following their clients’ multi-jurisdictional businesses.
Businesses span many countries and lawyers must meet the needs of their multinational clientele.
We need to maintain Singapore’s position as a city par excellence, with an environment that is clean, safe and vibrant to work in and live in. We try to retain our best, and we attract the best to come, settle and raise their families here.
Source: The Straits Times 15 Oct 07
NEWS ANALYSIS – Asset inflation may not always be a bad thing
Property owners, for instance, could gain as asset prices climb
AS RECENTLY as four years ago, it was the fear of falling consumer prices and its corrosive effect on the stock market and residential properties which gave investors sleepless nights.
Now, economists are worrying about the very opposite phenomenon – rising levels of inflation and their impact on the global economy.
Inflation, like its cousin deflation, is usually seen as an economic bogeyman with the potential to wreak economic havoc if it runs out of control.
But there are circumstances under which investors – property buyers for instance – can win from rising consumer prices.
First, think back to 2003, when Sars stalked much of East Asia and the deflation beast was on the loose.
Buying sentiment was so poor that even though residential property prices plummeted, there were few takers.
Downward spiral
AND nearly every condo owner had a grim tale or two to tell of the blight on their posh estates – when, say, an unfortunate neighbour’s flat was repossessed by the bank and put up for mortgagee sale, after he had defaulted on his mortgage.
Such scenarios often turn into a downward spiral. The more buyers postpone purchases, the more sellers are forced to cut prices.
Deflation becomes the enemy of the borrower saddled with huge debts.
Even though he might have borrowed at a 1 per cent interest rate from the bank, if the price of his property falls by 5 per cent, he is actually paying 6 per cent rates in real terms.
Worse, he may suffer negative equity, as the value of his home slips below the amount owed on the mortgage.
In practice, this type of nasty economic downward spiral works like a massive dampener on the stock market too. From 2000 to 2002, the benchmark Straits Times Index ended lower each year for three consecutive years.
Fast forward to now, and the scenario could hardly be more different. Property prices are soaring and there is an air of growing prosperity.
The main gripe now is about how expensive condos are and how much extra cash is needed to fill up the car’s petrol tank, as inflation climbs.
Those old enough to have lived through the tumultuous 1970s, when inflation was in double digits, warn that too much inflation is a bad thing.
Then, like right now, inflation was unleashed by a lethal cocktail of rocketing oil prices and low interest rate policies by successive United States Federal Reserve chairmen, which caused prices of goods to surge, even as the global economy wallowed in recession.
But those looking back at the 1970s also observed that the era provided ample opportunities for great fortunes to be created.
Overall, the stock market performance back then was decidedly unimpressive.
After hitting record highs in 1972, blue chips such as OCBC Bank and United Overseas Bank sank to a fraction of their values, as a gigantic stock market bubble burst with the onset of rampant inflation, after oil prices quadrupled.
But in Singapore and Hong Kong, this also created an environment where interest rates on loans became effectively negative, as inflation galloped ahead of mortgage rates.
In other words, paying off a loan with 5 per cent interest was a breeze if, for instance, prices – and presumably wages – were rising at 7 or 8 per cent year.
Those who took out big loans to finance real estate purchases in Singapore and Hong Kong, where prime land was in scarce supply, were amply rewarded for taking the risks.
Inflation eroded the costs of their borrowings, while providing the perfect backdrop for soaring property prices.
This spawned a new generation of billionaires such as Hong Kong’s Li Ka Shing and the Hong Leong group’s late patriarch Kwek Hong Png, as they rode the property bubble caused by worldwide stagflation – inflation coupled with stagnant economies – to create massive business empires.
It is too early to say whether the world is on the verge of entering a scenario like that seen in the 1970s, which wrought havoc in global economies but also richly rewarded the few who were fortuitous enough to recognise how they might profit from it.
But one thing is certain. Inflation is here to stay, as long as oil prices continue to stay at their current sky-high levels of above US$80 a barrel.
Negative interest
AND with the Fed bowing to domestic pressure by cutting interest rates to combat a souring mortgage crisis back home, prices of prime assets such as Singapore real estate may go on a roll, as funds flee from the falling returns offered by a weakening dollar.
So just like in the 1970s, home owners may get to enjoy effective negative interest rates once again, as theirhome prices appreciate well above the servicing costs on their mortgages.
For a young couple just starting out in life, the best bet is to get married early and apply for a new HDB flat.
Although they will have to slog to pay back the enormous home loan they take out, it will be the best insurance they can take out to protect their Central Provident Fund life savings from being eroded over the years by inflation.
The odds are good that, like their parents before them, they will stand to reap huge capital gains, as property prices swing up.
Inflation can pose some serious economic headaches if it begins to run out of control, as it can create major uncertainty throughout an economy. People on fixed salaries suffer badly too.
But for some investors at least, inflation can represent a happy problem to live with, at least for now.
As one economist observes, the opposite of inflation – deflation – is like quicksand, easy to get stuck in, but difficult to escape.
Inflation may have its problems but, for some, it can be turned into fabulous investment opportunities.
Source: The Straits Times 15 Oct 07
