What does US Quantitative Infinity mean for Singapore economy?

The US new quantitative easing program is seen to impact Singapore more than peers.

Under the new program more popularly known as QE3, Fed will purchase $40 billion in agency mortgage-backed securities every month until unemployment improves 'substantially'. Interest rates are to stay 'exceptionally low' through to 2015, even if the economy improves in the meantime, and 2% inflation is now an explicit objective.

Overall, experts interviewed by Singapore Business Review see a mild positive impact in the U.S. economy and by extension Asia. The impact, they said, may however be particularly significant to Singapore, especially on the property market.

Here’s what they got to say about the new program and its impact to Singapore:

Alaistair Chan, analyst, Moody’s Analytics

One place in Asia where it may have an outsized impact is Singapore, because of the city's relatively small size and alignment with global markets. Any impact on Singapore would be generally positive. Clearly, lower unemployment and faster economic growth in the U.S. would be positive for Singapore's exports. To the extent that Fed action boosts U.S. stock prices, Singaporean stocks' tight correlation to global growth suggests that they would also benefit, resulting in the usual wealth effects.

The effect on Singapore's property market is more ambiguous. Past episodes of easing has supported the housing market, which is a concern as the government is still committed to reining in price growth. Increased stamp duty and increased minimum cash deposits for multiple homes are two such measures, and they could be joined by further measures if the market reaccelerates. However, in our view this has less to do with liquidity 'leaking' from the U.S. and into Asia, and more to do with local investors reentering the market on the expectation that conditions were improving. It remains well within the power of the government to tamp down frothy activity in the property market if it judges that to be the case.

THOMAS LAM, Group Chief Economist , OSK-DMG

Firstly, the Fed's large-scale asset purchase program--often referred to as QE3--coupled with an enhanced forward guidance last month is unlike any of its prior policy initiatives simply because of the shift toward an outcome-driven (i.e., based on economic outcomes) commitment from a calendar-based commitment.

Therefore, at least from this vantage point, one should not lump QE3 with prior balance sheet programs nor view the shift in the forward guidance at the Sept meeting in the same light as prior changes in communications. Naturally, the open-ended nature of the recent Fed announcements further complicates the analysis of the likely impact on asset markets and the economy. Secondly, the Fed policy announcements in Sept, by attempting to stretch the intended positive effects from unconventional monetary policy, could end up raising the costs of policy actions and potentially increasing the risks to Fed credibility.

To analyze the net impact on Singapore's open economy, one has to figure out both the direct (strictly looking at the spillover from the US to Singapore) and indirect (via other countries closely tied to Singapore) effects from the recent Fed announcements. In theory, gauging the former should be less challenging than dissecting the latter; however, in reality, it is still a highly intricate exercise. The oft-mentioned chain reaction from the Fed's accommodative actions generally commences with some appreciation of the Singapore Dollar vis-a-vis the US Dollar, some degree of compression in Singapore interest rates and uneven gains in Singapore equities. But the current environment of weaker domestic economic growth, feverish property prices and unenthusiastic overall earnings growth in Singapore seems generally out-of-whack with the aforementioned spillover reactions from the Fed announcements. Therefore, our sense is that the recent Fed actions, all else equal, could possibly cast a more ominous veil on Singapore.

Richard Jerram,  Chief Economist, Bank of Singapore

The impact of unlimited US quantitative easing on Singapore will mainly be felt in the property market, and related areas. Singapore is no different from much of the rest of the world in feeling some consequences from the sluggish US economy that has led to the Federal Reserve announcing it will make monthly purchases of US$40bn of mortgage backed securities until the labour market improves. Any positive impact on exports if the Fed’s policy boosts US growth is straightforward and not unique to Singapore. However, it differs because the exchange rate regime implies that interest rates in Singapore will remain very low for many years to come. This is a potential problem because it implies that the struggle to control real estate prices will continue. So far the authorities have done well in preventing a bubble by the use of various macro-prudential measures, such as taxes and borrowing limits, but the challenge is not over, because interest rates in major trading partners will remain near zero for many years to come.