Cai Jin

How Singdollar woes will hit us

An Indonesian employee preparing US dollar banknotes at a money changer in Jakarta, Indonesia, on Aug 25, 2015.
An Indonesian employee preparing US dollar banknotes at a money changer in Jakarta, Indonesia, on Aug 25, 2015. PHOTO: EPA

Cost of living likely to go up as imports get costlier, interest rates rise

In the past 12 months, the Singapore dollar has plummeted 11.4 per cent against the US dollar.

Worse, the pace of the decline appears to have accelerated. Last month's drop alone accounted for one-quarter of the Singdollar's slide against the greenback over the past year. Yet, we are by no means alone in encountering a faltering currency. Our neighbours - Malaysia and Indonesia - are faring even worse.

Since August last year, when crude oil started its 60 per cent price plunge, the ringgit has nose-dived 25 per cent and the rupiah has lost 17 per cent against the US dollar.

Pundits can offer a range of different interpretations of how the slide in the Singdollar's value is likely to affect us. For hard-pressed exporters, it means their goods are more competitively priced overseas.

Even then, it may be a double-edged sword for them as they may have US dollar borrowings and this will make their debts dearer in Singdollar terms.

A recent survey shows that private sector economists had pared their forecast growth numbers for this year to 2.2 per cent, from a projection of 2.7 per cent made just three months ago. Such deepening gloom will certainly dampen hopes of a hefty enough pay hike to offset any increase in costs of living caused by a declining Singdollar.

For the rest of us, there is the alarming prospect that the cost of living may go up, since almost everything we consume is imported and much of it is priced in US dollars.

Then there is the worry that Singapore's economic growth may slow this year. A recent survey shows that private sector economists had pared their forecast growth numbers for this year to 2.2 per cent, from a projection of 2.7 per cent made just three months ago.

Such deepening gloom will certainly dampen hopes of a hefty pay hike to offset any increase in cost of living caused by a declining Singdollar.

So far, however, we have not experienced a big impact on our wallets unless we travel overseas or we have children studying aboard. But if there is an issue affecting the real economy worth airing in this general election, this is it.

Understandably, a lot of people have not wanted to ask too many questions since they believe that this involves complicated issues that are best left to policymakers.

But as this column flagged recently, it is the potential fallout on the interest rates front from the currency wobbles that we have to be wary of, since many of us have huge mortgages on our homes. Even though the Monetary Authority of Singapore loosened monetary policy in January, interest rates have inched up as investors demand higher compensation for holding a weaker Singdollar.

In the past eight months or so, the three-month Singapore interbank offered rate (Sibor), which is used to set interest rates for many mortgages, has more than doubled to 1.07 per cent, while the three-month swap offer rate (SOR), used to price commercial loans, has more than tripled to 1.51 per cent - a rate last seen in December 2008.

It is not going to stop there. Ms Cheryl Lee, UBS Investment Bank's head of Singapore research, predicts that Sibor may jump to as high as 2.75 per cent by the end of next year. If this materialises, a homeowner with a $1 million mortgage will have to fork out an additional $17,500 in interest payments a year, or $1,458 more in monthly instalments. It is not a prospect many relish, given the squeeze they face from higher living costs and possibly faltering job prospects.

Currency wobbles may also be a manifestation of bigger economic problems ahead. As Mr Dominic Rossi, global chief investment officer of the giant fund manager Fidelity Worldwide, observed in a recent Financial Times article, all emerging market crises start in the foreign exchange markets before making their way to other markets - commodities, debt and equity - before finally surfacing in the real economy.

Some market pundits blame China's economic stimulus programme in the wake of the 2008 global financial crisis for blowing a super-bubble in the commodities market that perhaps even exceeded the US bubble in 2000 and the US sub-prime bubble in 2008.

Now that its new leadership is reversing gears and scaling back investments, China has turned the world upside down for commodity exporters, which had borrowed heavily to boost production in order to meet its supposedly insatiable demand for raw materials.

It has resulted in a rout in commodity prices, forcing many central banks to cut interest rates. That has, in turn, diminished the appeal of their currencies to yield- seeking international investors.

Then there was the clumsy move by China last month to de-peg its currency from the US dollar, which caused a further roller-coaster ride in the world's foreign exchange markets just as investors were trying to grapple with the meltdown in the Shanghai stock market.

Another culprit may be the US central bank, which unleashed trillions of dollars of liquidity into the global financial system with its three quantitative easing programmes between 2009 and last year.

While its intention had been to put cash into US banks to encourage them to lend to cash-strapped US companies and create jobs, a huge swathe of the money found its way to Wall Street.

That money was used to finance a highly profitable carry trade, with big-time traders borrowing US dollars at almost zero interest costs to take huge bets on commodities and emerging market assets, where they enjoyed a higher return.

Now with the US economy on the mend, the Fed is putting itself on a collision course with other central banks by proposing to hike interest rates at a time when falling commodity prices are causing economic weakness in commodity-producing countries all over the world, from Brazil to Indonesia. The anxieties are aggravating volatilities in commodity prices and emerging market currencies as traders liquidate their carry trades and repay their US dollar loans.

History has shown that once the Fed embarks on raising interest rates, it is unlikely to stop with just one rate hike.

Between 1994 and 1995, the Fed raised interest rates from 3 per cent to 5.25 per cent over 10 months with four hefty hikes.

That tightening caused a strengthening of the greenback, which made Asian economies such as Thailand and Indonesia uncompetitive as their currencies were then pegged to the US dollar.

It triggered Asia's biggest financial crisis in decades as one regional currency after another crashed following the 20 per cent devaluation of the Thai baht in July 1997, when Thailand was forced to float its currency after it failed to fend off attacks by speculators.

While history may not repeat itself as Asian countries have buttressed themselves with a huge hoard of cash to prevent any run on their currencies, this may still not be enough to stop them from being hit by a nasty economic slowdown as the Fed tightens.

Being in the same neighbourhood, this will have a knock-on impact on us. You have been warned.

A version of this article appeared in the print edition of The Straits Times on September 07, 2015, with the headline 'How Singdollar woes will hit us'. Print Edition | Subscribe