The Fed's plan to increase deposit interest percentage had been signaled since last February. At that time Ben Bernanke's successor Janet Yellen made a statement in a certain forum that the Fed planned to increase benchmark rate in within six months after Tappering Off.
Referring to Janet's statement, the tentative closing date for Tappering Off would be around September next. In the next 6 months around March or April 2015, other countries and all the marketplayers must prepare themselves when the plan was executed by the Fed.
In this case International Research Agency Capital Economics estimated that Singapore and Hong Kong which was relatively prosperous today would most likely be affected by the Fed's increased interest rate. Daniel Martin, economists of the emerging markets stated that Singapore an Hong Kong were most vulnerable to the Fed's actions as domestic interest level of the two countries were closely related to the Fed's interest movement.
Only trouble was that the two states which were being monitored today had double problem, i.e. up-jump of credit growth and lack of flexibility of currency exchange rate value. The Fed was predicted to increase benchmark rate by mid 2015 as soon as Tappering Off cooled down.
Singapore adopted currency exchange rate system on fixed rate basis within a certain range, while Hong Kong Dollar was directly linked with USD on peg basis. Martin stated that as exchange rate of Singapore Dollar and Hong Kong Dollar was not flexible, their interest level - which was today 0.21 % and 0.41 % tend to soar high when the Fed increased their interest. A condition as such might create problem to borrowers of fund who had to prolong their debt.
Borrowers of those countries were accustomed to extremely low interest rate for years, so increase of interest rate in the years to come would shock them. Martin's opinion was supported by Seng Wun Soon, regional economist of CIMB Bank, who mentioned that Singapore's accounting would be vulnerable to the Fed's increased rate.
According to Soon, around 70% of mortgage credit referred to floating interest rate. However Singapore's economic power including their banking sector could help to run transition. But Martin said that total Singapore's household debt was nearly 80% of GDP, while Hong Kong was only 60%.
Of the two states, perhaps Hong Kong would face the gravest problem on the household sector because the bubble of mortgage market was the biggest. To be considered was price of houses in the two countries would fall when interest goes up; but the correction in Hong Kong tend to be bigger. This was the terrible economic disaster to happen in Hong Kong unless anticipative measures were taken.
Capital Economics also reminded that the risk at the corporate sector was even higher because companies of the two states had increased their debt quickly, after the application of extremely low interest over the year.
According to IMF, corporate -to GDP ratio in Singapore had come to around 90% in 2013, double that of 2004 and 2007 which was 45%, while the ratio in Hong Kong came to 120% last year, up from 80% in 2013 and 2007.
However, admittedly economy of the two countries had their positive sides which were supportive growth, including the healthy banking sector, high standard of lending system and strong Government capital. The two countries were even rated as being able to reap advantages from global economic recovery.
Many economists in the Asia region agreed that Singapore and Hong Kong were sensitive to increase of interest by the Fed, but they refused to categorize the two countries as the most fragile in Asia.
According to the analysts, the two countries posted balance of current transaction and bank capitalizing which was able to bumper shocks. Both countries had taken preventive measures to muffle increase debt of the household sector by taking tight macro-prudential measures.
They said that it was India and Indonesia instead who were more vulnerable to the Fed's action. The sensitive external condition would trouble their fiscal deficit which was structural, although their macro economic imbalance was not as bad as last year.
However it was believed that the monetary authorities in India and Indonesia. BI had enough room to ease their monetary policy this year end if current account of Q-2 and Q-4 changed for the better.
Although Indonesia's economic growth by Q-1 was only 5.21%, it was not strong enough to be used as reference to ease monetary policy. BI could consider to lower BI's benchmark rate when current transaction of Q-2 and Q-3 were released.
Perhaps only toward year end BI rate could only be considered for adjustments. The situation itself must be seen from the data of current account, i.e. around 2% - 2.5% against GDP. If things turned better in Q-3 for instance, then only monetary policy could be considered.
Deficit in current transaction in Q-3 2014 which came to 4.2 billion or 2.06% against GDP was still sizable. Therefore BI rate must still be maintained at 7.5%. No need to worry about external condition such as the Fed policy when current transactions in Indonesia improved in the next two quarters ahead. In the positive case, Indonesia would remain attractive to foreign investors.
In the hope that Presidential election on July 9 next would run smoothly and peacefully, and to be followed by formation of the new administration, BI and the Government must start to consider to ease monetary and fiscal policy as high public expectation of economic betterment was shaping up.
The general public perception was that the role of a new President would bring hope and expectation for a better condition and such would be realized if monetary and fiscal policy could be implemented by early 2015 so Indonesia would not lose the momentum of global economic betterment. (SS)
Business News - May 30, 2014