US credit crunch – will history repeat itself?

IT was about two months ago on Sept 18 that the US Federal Reserve cut its short-term lending rate by 50 basis points to 4.75 per cent, sparking a worldwide rally in relieved stock markets. After a rise that lasted about two weeks, however, the rally then stalled. This was followed by a 25 basis point cut on Oct 30 but again, after a brief spike-up, markets have failed to respond.

Hopes are now high among analysts that the Fed will play saviour once again at its next meeting on Dec 11 – indeed, the futures market is certain that rates will be lowered again.

But given that the two cuts totalling 75 basis points have not provided the necessary stimulus yet, will more cuts really do the trick?

In his book, The Age of Turbulence, former Fed chairman Alan Greenspan wrote about the savings and loan (S&L) crisis of the late 1980s and the related property market crash that led to the closure of several banks and a recession in 1990-1992. The subsequent credit tightening meant that businesses found it hard to get loans and this, in turn, made the recession difficult to overcome.

‘Nothing we did at the Fed seemed to work,’ wrote Mr Greenspan. ‘We’d begun lowering interest rates well before the recession hit but the economy had stopped responding. Even though we lowered the fed funds rate no fewer than 23 times in the three-year period between July 1989 and July 1992, the recovery was one of the most sluggish on record.’

Those words must have an uncannily familiar ring to those who have tracked the current sub-prime crisis.

In its latest quarterly economic projections, for example, the Fed has cut its outlook for 2008 US economic growth to 1.8-2.5 per cent, down from 2.5-2.75 per cent. The downward revision stemmed from a number of factors, ‘including the tightened terms and reduced availability of sub-prime and jumbo mortgages, weaker-than-expected housing data, and rising oil prices’.

Worse, the situation today is potentially more damaging than during the S&L crisis because of the opacity surrounding the collateralised debt obligations market. Bad loans with questionable payment streams were embedded within complicated packages that were then marketed as being of good investment grade.

To further complicate the picture, derivative products are involved, which means the effect of a collapse could be magnified by leverage.

Investors – and central bankers – would therefore do well to note this insight from Mr Greenspan in his book: ‘Historically, societies that seek high levels of instant gratification and are willing to borrow against future incomes to achieve it have more often than not suffered inflation and stagnation.

‘ The economies of such societies tend to run larger government deficits financed with fiat money from a printing press . . . Eventually, the ensuing inflation leads to a recession or worse, often because central banks are forced to clamp down . . . I regret that the US may not be wholly immune to it.’

 

Source: Business Times 22 Nov 07

No deep recession in the US, going by consensus forecasts

WHEN the respected Business Times of Singapore takes a stick to the World Bank’s humble East Asia and Pacific Update (‘World Bank’s analysis wide of the mark’, BT, Nov 20) , I sit up and take notice. What a pity, then, that your editorial, while high on sound and fury, adds little worth to either the facts or valid arguments about the outlook for East Asia. The Business Times seems quite upset that we are projecting a rise in East Asian growth to 8.4 per cent this year. Is your paper really unaware that most of the larger economies have already released GDP growth numbers through the third quarter of 2007 and that the outcome for the year is therefore already pretty much ‘in the bag’.

China grew 11.5 per cent on average in the first three quarters and growth has also accelerated over the course of the year in other large economies like Korea and Indonesia. The fact is that East Asia will have a hard time not growing more than 8 per cent this year.

Turning to next year, we note that the risk of recession in the United States has clearly increased but that the bulk of reputable economic forecasters still forecast an extended period of weak growth in the US and in other major developed economies in 2008 rather than an outright recession. We tend to stick fairly closely to consensus or mainstream forecasts for the developed world and are unable to assume ‘deep recession’ quite as airily as The Business Times. If that, in fact, is how conditions in the developed world turn out next year, then we argue that East Asia could also well be able to maintain its solid performance of recent times. Just look at what has happened in 2007; US GDP and import growth have already slowed sharply and, as would be expected, East Asian export growth has also slowed. But, despite slower exports, East Asian GDP growth has actually accelerated in 2007, because domestic demand growth in the region has picked up, a development related to quite favourable domestic macroeconomic, financial and corporate sector conditions in many countries. This is another among the set of important recent developments that seems to have escaped your newspaper’s attention.

What if the US does go into recession? We have taken the laborious route of looking at some of the historical facts about how East Asia has responded to past recessions, as well as some formal econometric studies of the issue. These suggest that the impact varies a lot across countries and also at different times, depending on what other factors are in play.

The downturn of 2001 was particularly severe because it was combined with a huge recession in global high-tech demand at a time when domestic demand in many East Asian economies was still very weak, in the aftermath of the financial crises. Neither of those conditions applies today. Of course, it is possible that some other combination of factors could cause a more severe downturn in East Asia and so the evolving economic situation in the region has to be closely monitored. But to claim that a recession is inevitable merely because of ‘increased economic integration’ and that past trends should be ignored simply because ‘the world has changed’ – these are surpassingly crude and simplistic assertions.

Milan Brahmbhatt

Lead Author

World Bank East Asia and Pacific Update

The World Bank

Washington, DC

BT’s editor replies: The main focus of our editorial was the World Bank’s projections for 2008, not 2007, which was only mentioned in passing. For next year, we had flagged a ‘possible deep recession’ in the US.

We do not believe we are in disreputable company here. Other forecasters who have indicated this same possibility include Goldman Sachs, which has pointed to the risk of a ’substantial recession’, Prof Joseph Stiglitz (a Nobel laureate and former World Bank chief economist) who said that the US faces a ‘very major slowdown’ and Prof Nouriel Roubini of the Stern School of Business of NYU, widely acknowledged to have been one of the earliest to anticipate the US housing bust, who has, in fact, predicted a hard landing and an outright recession for the US economy – although we have not taken that position.

We also noted that China’s own government has a decidedly less upbeat (and more realistic) view of its country’s future growth prospects than the World Bank’s East Asia and Pacific update.

We stand by our editorial as constituting fair comment.

 

Source: Business Times 22 Nov 07

Lower US forecast again prompts flight to safety

FRIGHT turned to flight once again in financial markets yesterday, when overnight news of a lowered Fed US growth forecast for 2008 spawned yet more painful losses for Asian equities, punished favourite high-yield carry trades, but lifted the euro and Swiss franc to record highs again.

Overnight, it was revealed that the US central bank’s key Federal Open Market Committee or FOMC had lowered its growth forecast for 2008 to a 1.8 to 2.5 per cent target range, compared with an earlier forecast of 2.5 to 2.75 per cent. And by the time Asian stock markets had closed, stock indices like the Straits Times Index and Nikkei had chalked up more painful losses of at least 2.5 per cent each, South Korea’s Kospi was 3.5 per cent worse off, and Hong Kong’s Hang Seng had tumbled more than 4 per cent.

As for the flight to safer destinations, the euro responded by elbowing its way to a fresh post-launch peak of US$1.4856 yesterday, and a new 31-month high of S$2.1519. Against the Swiss franc, another saferefuge favourite, the US dollar plunged to an all-time low of 1.1025 francs in Asian trading. The unit was also lifted to a fresh 18-month high of S$1.3141.

Indeed, the start of higher euro forecasts such as US$1.60 to US$1.70 was already being discussed before the end of Asian trading hours yesterday. An economic adviser to the German government was quoted as saying that the euro could well hit US$1.60, while UK-based research firm IDEAglobal warned in an FX alert that a US$1.6 to US$1.7 euro could not be ruled out if sub- prime mortgage debt problems in the US spread next year to other parts of the US bond market like corporate junk bonds and so-called ‘Alt-A’ debt offerings.

Gold, meanwhile, found its way back above US$800 per ounce with a handsome US$15 jump – as oil continued its almost inexorable climb to the US$100 per barrel mark yesterday. This time, however, such gains were not enough to lift either the Australian or Canadian dollar – due to another heavy sell-off for high-yield carry trade favourites, as risk aversion sentiment continued to mount.

In percentage terms, it was therefore the Japanese yen that finished with the most impressive gains, ahead of a US holiday today and an extended Japanese weekend break starting tomorrow. By the close, it had chalked up handsome gains of more than one per cent each versus the US and Singapore dollars, and recorded even larger gains against erstwhile carry-trade favourites like the trio of Australian, Canadian and New Zealand dollars.

The US dollar was eventually forced past our first key yen support at 108.8 yen to finish 1.5 per cent weaker at 108.62 yen, while the Australian, Canadian and New Zealand dollars ended over 2 per cent worse off each at 95.54 yen, 82.13 yen and 110.65 yen. Against the Chinese yuan, the greenback slipped a further 0.2 per cent to close just a whisker above its post-depeg low of 7.4103 yuan. Closer to home, the greenback rose between 0.5 and 0.7 per cent to close at 9,395 Indonesian rupiah, 928.9 South Korean won and 3.3810 Malaysian ringgit, and ended a more modest 0.2 per cent better at S$1.4498.

 

Source: Business Times 22 Nov 07

Asia must act quickly on monetary cooperation

TOKYO CORRESPONDENT

THE US dollar is on the skids and it is time for Asia to put on its skates with regard to regional monetary cooperation. The connection between the two things should be obvious, although many Asian policymakers (including those in Japan who see themselves as leaders of the pack) continue to utter facile comments to the effect that it would take ‘40 years’ for Asia to catch up with Europe on monetary affairs.

This is complacent and irresponsible nonsense. The dollar is sliding so far and so fast that its future role as a reserve and transaction currency is being called into question almost daily. The euro is becoming the currency of first choice (if not yet last resort) for official and private investors alike, but it cannot carry the burden of diversification by itself for too long.

Asia has a responsibility not just to itself, but also to the rest of the world, to come up with a new regional currency (be it a composite of the yen, yuan and won plus Asean currencies – or whatever) in order to create a new tri-polar world of global currencies. The euro alone cannot be expected to bear the burden of reserve diversification from the dollar or of becoming the preferred denominator for transactions as the use of the dollar declines.

The question that Asian policymakers should be asking themselves as they bask in the illusion that global currencies are other people’s business is, where would they be now if European leaders had not had the vision to conceive of and create a common currency? The answer is, utterly dependent upon a declining dollar.

The dollar was big enough to take over from the pound when the Sterling Area collapsed, but the euro is less able to assume this role.

The Americas, as well as Europe, are ahead of Asia in thinking about the implications of what is happening to the dollar now. And, for a continent that boasts thousands of years of history as Asia does, this is a sad reflection.

The US, Canada and Mexico have at least begun to talk about the possibility of a common currency – the ‘Amero’ – to succeed the declining dollar, while Asia is content simply to dismiss the idea of a common currency as a pipe dream.

Asean has come up with a formal charter of incorporation, or constitution, if you will. This is a first step along the road to formal integration among the 10 countries, and it is a sad commentary on the lack of leadership in other parts of the region that Japan, China and South Korea at least have as yet not even begun marching down the road towards similar integration, let alone being in the vanguard of the movement.

Utterances from East Asian policymakers about ‘market-led’ integration being preferable to government or institution-led integration are lamentably lame and naive.

Markets or business can create production networks across Asia, as they have done already, but they cannot provide the monetary infrastructure needed to support such networks. Nor can they create the kind of monetary integration needed to underpin the intensity of trade and investment transactions that characterise economic relations among nations of this region.

This is another reason why Asia has to get its act together, and quickly, on monetary cooperation instead of treating the subject as though it were fit only for rarified discussion within academic circles.

Instead of contributing to global monetary cooperation, Asia is creating currency wars through its narrow focus on preserving national currencies instead of thinking about a regional currency.

China often seems to be ahead when it comes to intellectual appreciation (or at least articulation) of such concepts. People’s Bank of China deputy governor Wu Xiaoling has pointed out the fact – which should have been obvious to Japan and other Asian nations (as well as to US Treasury Secretary Henry Paulson) – that the yuan has become a proxy for the yen and other Asian currencies in taking the heat for the ‘underpriced’ exports of Asia Inc.

China is merely the sales department for the Asian factory. If this degree of economic and trade interdependence does not argue in favour of the need for exchange rate coordination among East Asian currencies, and eventually for a common currency, it is difficult to see what could.

It is in Asia’s interest to cooperate on monetary matters in order to ensure burden-sharing on a regional basis. And it is equally in the interest of the wider world for Asia as a bloc to share in the burden of global currency transactions. Time to face up to new responsibilities and not just lament the dollar’s decline.

 

Source: Business Times 22 Nov 07

ECs gain appeal as HDB, private home price gap widens

Easing of rules expected to increase demand for exec condos

THE rising property market has brought executive condominiums (ECs) back from the brink of extinction.

These homes – which are halfway between public housing and private condominiums – suddenly looked much more appealing after rules for buyers were relaxed on Tuesday.

Property consultants now expect that more plots for ECs, such as the 2.27ha site placed on the market on Tuesday, will soon be offered.

The main reason: the widening gap between prices of resale Housing Board flats and those of private condos.

ECs, which come with condo facilities but with sale restrictions similar to those for public housing, were introduced in 1995 to bridge this gap.

They became relatively unpopular, however, after the property market plunged a few years later, making private condos more affordable.

In fact, when the first few ECs hit the resale market in 2004 after the minimum five-year occupation period, many were sold at a loss or at breakeven prices. This was because they were booked when prices were at their peak in 1996.

Many people expected Far East Organization’s La Casa in Woodlands to be the last EC project on the market when it was launched for sale in 2005.

‘Mass market condo prices were in the doldrums, making ECs redundant. Today, that’s a different story,’ said Colliers International’s director of research and consultancy, Ms Tay Huey Ying.

Private home prices surged 22.9 per cent in the first nine months of the year – more than twice the rate achieved by resale HDB flats.

Lower-priced ECs are more attractive now because prices of condos in the suburbs – where ECs tend to be sited – have started to move up significantly. In the July- September period, prices of non-landed homes outside the central region rose 7.9 per cent. Consultants expect this growth to continue.

The easing of EC rules is also expected to increase demand from people looking to move from HDB flats. The HDB removed a hurdle for upgraders by scrapping a resale levy payable by EC buyers who had previously bought government-subsidised flats.

Buyers of new EC units are also no longer barred from buying second new EC units or new flats. In addition, the HDB now requires developers to reserve 90 per cent of units for first-time buyers in the first month of sale.

Although ECs still cannot be sold within the first five years and remain out of bounds to foreigners within the first 10 years, the easing of rules has helped ECs shake off their tag as second-rate condos, said Mr Eric Cheng, the executive director of the HSR property group.

Potential buyers include property agent Lester Tan, 27, who has been living with his parents for the past five years since he got married.

He and his wife started looking for a condo about two years ago, but regretted waiting so long to buy one, as prices have shot up.

He said: ‘We heard that the Punggol EC may be launched, and we are quite excited about it.’

Potential upgraders like Ms Elsie Cheng, 31, are also eyeing the future EC in Punggol. The teacher – who lives with her husband, seven-month-old son and maid in a two-bedroom EC unit in Tampines – is looking to move into a bigger EC.

‘Why pay so much for a private condo?’ she asked.

Knight Frank’s head of research and consultancy, Mr Nicholas Mak, said the changes were likely to raise the proportion of upgraders among EC buyers, from an estimated 5 per cent to 10 per cent, to 20 per cent to 25 per cent.

Developers such as Frasers Centrepoint Homes, which built the Lilydale and Quintet ECs, are optimistic. Its chief operating officer, Mr Cheang Kok Kheong, told The Straits Times: ‘The EC will do well in today’s market as a hybrid property – apartments with condo facilities but without private condo price tags.’

He added: ‘As a reflection of the strong confidence and growth potential of the EC market, we expect to see increased competition in this market segment and more developers taking part in upcoming EC land tenders.’

Buyers hoping to make a quick buck from ECs, however, should take heed. ‘The (full) value of the EC will not be realised immediately but in 10 years, subject to the property market being buoyant at that time,’ said PropNex chief executive Mohamed Ismail.

For now, all eyes are on the EC site in Punggol Field. Estimated to be able to fit about 620 homes, it will be put up for tender once a developer commits to a minimum bid that meets the Government’s reserve price.

The EC units, however, will meet only a small portion of the current demand for new homes. In a recent HDB sales exercise, almost 8,000 families applied for just 400 flats in Telok Blangah, while more than 1,600 applied for 516 homes in Punggol.

 

Source: The Straits Times 22 Nov 07

S’pore has fastest-growing prime office rents in the world: Report

It outpaces Mumbai as rents, occupancy costs rise 83% to $12.60 psf a month

PRIME office rents have grown faster in Singapore than anywhere else in the world over the past year, a new report has found.

The rate of increase beat even that in Mumbai, now the world’s second most expensive office market, after London’s West End, according to CB Richard Ellis (CBRE).

But overall, Singapore ranks 11th on the list of worldwide office rentals, which are generally rising quickly.

Rental levels plus other associated costs for Singapore prime office space shot up 82.6 per cent in the 12 months ended Sept 30 to $12.60 per sq ft (psf) a month, said the CBRE’s Global Market Rents report. Apart from lease rates, occupancy costs include expenses for management and basic building maintenance.

In terms of occupancy costs, Moscow posted the second-fastest growth, of 65.4 per cent. Third in line was Mumbai, where occupancy costs grew 55 per cent.

The booming economics of the Asia-Pacific region continue to support strong demand for office space and to drive occupancy costs at a faster rate than in any other region, said CBRE in the report.

In comparing the costs, it looked at the typical achievable rent for a 10,000 sq ft unit in a top-quality building in a prime location.

Of the 171 markets it monitored, 85 per cent recorded growth in occupancy costs.

London’s West End – which registered 41.9 per cent growth – still has the most expensive office space, at US $328.91 (S$476.76) psf a year.

Mumbai came in a distant second, at US$189.51 psf a year. But it is already 5 per cent more expensive than London City, where occupancy costs came to US$180.80 psf a year.

Moscow is ranked fourth most expensive, at US$180.78 psf a year.

To facilitate comparisons across markets, the report based the most expensive rents on US dollars while rental growth was measured in local currency terms.

Singapore is ranked 11th on the world’s most expensive list, at US$102.37 (S$148.39) psf a year.

It came just after Hong Kong, where costs were at US$106.31 psf a year.

At $100.79 psf a year, rents for prime office space in New York’s Midtown have come down. Costs in Tokyo ranged from US$154.56 to US$178.61 psf a year.

As was the case with other key Asian financial centres such as Tokyo and Hong Kong, office vacancy rates remained low in Singapore at 5 per cent or less, said CBRE.

It noted that the uncertainty in global financial markets has had no discernible impact on demand for office space in Singapore.

The companies in Singapore that require larger spaces are largely from the fast-growing financial and insurance sectors. And before year-end, several sizeable bookings by companies in these two sectors are expected, CBRE said.

The report also echoed comments by property consultants about rising tenant resistance to rental hikes as rents are at record-high levels.

Companies are now more prepared to move to cheaper space further out of town to avoid paying high rents.

 

Source: The Straits Times 22 Nov 07

Five estates sold to one buyer in collective deal

FIVE small adjoining freehold apartment blocks near Thomson Road have been sold en bloc to Kim Seng Heng Realty, a subsidiary of listed KSH Holdings, for $120 million.

The construction and property development group said yesterday that the combined site could be redeveloped into a high-rise residential block with about 142 luxury apartments of 1,250 sq ft on average.

It added that it is currently negotiating with other investors to form a joint venture to develop the site.

Credo Real Estate, which brokered the deal, said it is possibly the first time in Singapore that as many as five estates have been successfully combined and sold en bloc to one buyer.

The properties – Norfolk Court, Mergui Lodge, Northern Mansion, Mergui Court and The Mergui – are located near Rangoon Road and Moulmein Road.

They are single apartment blocks sitting on relatively small plots ranging from 10,061 sq ft to 18,524 sq ft.

When combined, they form a land area of 74,355 sq ft, which would permit a gross floor area of 208,196 sqft.

If small pieces of state land in between are thrown in, the developer will have a site of 87,092 sq ft, said Credo’s executive director, Ms Yong Choon Fah.

In any case, three of the developments could not have otherwise been redeveloped on their own. ‘They need each other because there’s a 30m buffer requirement from the expressway,’ said Ms Yong.

This Urban Redevelopment Authority rule would mean that it is impossible for Norfolk Court, Mergui Lodge and The Mergui to be redeveloped individually. But if combined with the other two sites, a bigger development that does not fall within the 30m buffer zone can be built.

The five estates have 88 units in total. Each unit owner will get between $906,856 and $1.91 million.

The $120 million price reflects a price of $580 per sq ft (psf) of potential gross floor area.

After factoring in the cost of the state land in between, the rate could come down to about $540 psf, said Ms Yong.

KSH Holdings’ recent projects include a construction contract for a luxury boutique hotel at Clifford Pier.

 

Source: The Straits Times 22 Nov 07

TAKING STOCK – Bourses buckle across Asia on US, oil worries

ST Index falls 91 points, marking its fourth slump in five sessions

REGIONAL bourses including Singapore suffered a rout yesterday in the face of fresh worries about a slowdown in the United States and record crude oil prices.

The Straits Times Index (STI) plunged 91.07 points, or 2.65 per cent, to end at 3,347.20 – its fourth slide in five sessions.

About 1.83 billion shares worth $2.18 billion were traded, with gainers trailing way behind losers by 176 to 677.

Said CIMB-GK research head Song Seng Wun: ‘It doesn’t take much to knock the wind out of the market’s sails at the moment.

‘Today, it was a continuation of US recession worries, sub-prime fears and high oil prices.’

Earlier, the Federal Reserve slashed its US growth forecast for next year to between 1.8 per cent and 2.5 per cent, down from the 2.5 per cent to 2.75 per cent range forecast in June.

More bad news battered the markets as crude oil continued its charge towards the psychologically significant US$100 mark, hitting a peak of US$99.29 during intra-day trade due to a weakening greenback.

Market players also pointed to Japan’s Nikkei index, saying its early dive had set the scene for a bearish regional trading session.

Said a Singapore dealer: ‘The Nikkei slid quite heavily in late morning trading, which affected regional sentiment.

‘Here, we saw the herd mentality at work, which sparked a selldown.’

The Nikkei dipped 2.46 per cent to 14,387.66 points, while bloodletting on Hong Kong’s Hang Seng Index sent it down by 1,153.02 points or 4.15 per cent to 26,618.19.

Here in Singapore, traders’ fears that Tuesday’s modest recovery was just a ‘dead cat bounce’ – a mild recovery before another fall – were realised.

Singapore Exchange shares led the STI’s decline, as they dived 70 cents to $12.40. That alone accounted for a 10.8-point fall in the index. Dealers said hedge funds were largely responsible for this selldown.

SingTel shares continued their southward spiral as they fell another six cents to $3.72. Investors are concerned about the fallout from an unfavourable ruling by Indonesia’s competition watchdog, but some analysts feel such fears might be overdone.

A Credit Suisse report noted: ‘Concerns over the political and regulatory risk are unlikely to affect short-term or possibly even long-term forecasts. Thus, a further correction could signal a buying opportunity.’

Bank stocks also took a hit, with United Overseas Bank dropping 60 cents to $19. DBS Group Holdings fell 40 cents to $19.20, while OCBC Bank slipped 15 cents to $8.25.

There was no bright debut for Z-Obee Holdings, which managed only 28.5 cents – below its issue price of 34 cents.

Given the volatile times and cautious mood, market experts urge investors to switch from speculative stocks to those with a proven track record and a low price-earnings ratio.

Mr Song added: ‘There are still buying opportunities, despite the uncertain environment. Blue chips, defensive stocks and resource sector counters still continue to be attractive.’

 

Source: The Straits Times 22 Nov 07

Dow down 163 points

UNITED States stocks plunged in early trading on fears that the fallout from credit losses and mortgage defaults will hurt economic growth.

After two hours of trading, the Dow Jones Industrial Average was down 163.14 points or 1.2 per cent at 12,847.

The Standard & Poor’s 500 Index fell by 20.3 points, or 1.4 per cent to 1,419.11 while the Nasdaq Composite Index shed 45.99 points or 1.7 per cent to 2,550.82.

Stocks extended losses after data showing consumer sentiment fell this month to its lowest in two years.

US Treasury Secretary Henry Paulson’s remarks that the number of potential home-loan defaults will be significantly bigger next year also dampened sentiments.

Source: REUTERS (The Straits Times 22 Nov 07)