What Fed's tapering means for Singapore

Being a small and open economy, Singapore is largely influenced by the external economic landscape, particularly in large economies like the US. Hence, it is worthwhile for us to understand the current economic situation in US and its implication for Singapore.

Tapering soon in process?

The latest report by payrolls firm ADP shows that US private sector has fastened the hiring pace with a creation of a net 215,000 new jobs. This is a surge from 184,000 seen in the month of October.

The Fed has repeatedly linked the QE program with the labor market and inflation condition. With a stable and improving labor market, there is anticipation for the Fed to initiate a tapering of the QE program in the near future.

Impacts of Tapering

The Fed $85 billion monthly bond purchase program has lead to a growing momentum of US economic recovery. It has also eliminated the liquidity risk in the financial market and sparks an on-going rally in global equities since the Quantitative Easing (QE) program was initiated.

The tapering of the QE, which in general means a reduction in the monthly bond purchase program, may result in a reduction of liquidity in the market and perhaps a hike in interest rate.

If that is so, corporate borrowing cost may increase with higher interest rate and this can hurt corporate earning. The resultant effect may be a correction in the equity market that has been long been supported by the QE program.

Banks and Households

The increase in interest rate has profound effects on Singaporeans as it can change the spending pattern of firms and consumers. Borrowing cost for mortgage is likely to increase as the low interest rate era starts to fade. This means that the property boom partly spurs by easy credits and low interest rate may tend to slow.

Households who intend to purchase new housing have to take into consideration of future repayment cost if their mortgage loan is inbuilt with a floating interest rate. Build in expectation of Fed’s possible tapering can potentially accelerate this process.

Banks are likely to be affected by facing stiffer competition in acquiring bank deposits in the period of tighter liquidity in the market. As with higher interest rate and thus borrowing cost, the growth in corporate and domestic loan may see moderation and this can hurt bank’s profitability.

USD to shine?

The US dollar is the largest reserve currency in the world. It is also one of the highly traded foreign currencies in the financial market. An improving economy that leads to possible future Fed’s tapering means a likelihood of USD to appreciate in the medium term. If this is realized, household with US holdings may see potential gains.

In fact, local banks have been offering foreign currency deposit accounts and households have been tapping onto this banking facility either for investment or personal requirement needs.

For businesses, a rise in USD may results in higher import cost in the long run for importers of US made products. To ameliorate this effect, hedging is critical for companies with significant exposure to USD trade.

Conclusion

The recovering of US economy has profound impacts to the world economy. If the recovering US economy is set to transform into a considerable export-oriented economy, Singapore can benefit by being a complementary partner in the value chain production network.

If the appetite for global goods by US consumers spurs again, Singapore can also benefit by being a major exporter in the world’s market especially for US consumers.