Tighter US Monetary Policy to Temper Growth in Singapore

Singapore could see lower growth rates thanks to US monetary policy, according to the latest report from ICAEW.


The accountancy and finance body has warned that increased yields in the US, following the market pricing in the Fed’s tighter stance, may well mean reduced capital flows to ASEAN.


The ICAEW report Economic Insight: South East Asia is produced by Cebr, ICAEW’s partner and economic forecaster. Commissioned by ICAEW, the report provides its 140,000 members with a current snapshot of the region’s economic performance.


The report undertakes a quarterly review of South East Asian economies, with a focus on the five largest countries; Indonesia, Malaysia, the Philippines, Singapore and Thailand.


According to the report, annual growth in loans throughout the region is expected to fall from 2012 to 2015.


Cheap money from the Fed’s exceptionally loose monetary policies has previously helped companies and governments to borrow easily, funding infrastructure and business projects. This has also led to high inflation rates, property prices and impressive – though unsustainable – gains in local stock markets.


“Both companies and individuals in Singapore and the region have benefited from low interest rates, which has fuelled consumption and borrowing against future income," says ICAEW Economic Advisor and Cebr’s Head of Macroeconomics, Charles Davis. "We are likely to see this gradually change as the US economy recovers and the Fed looks for an exit strategy from its very loose monetary policy stance."


Davis adds that consumers, businesses and governments will all now have to adjust to a period where loan availability drops and where the cost of borrowing money increases.


"However we believe that this will pick up again in 2015 as investor capital returns to seek advantage of opportunities for growth,” notes Davis.The slowdown in capital inflow is acting as a serious pressure on regional markets. However a return to the Asian financial crisis conditions - where investors believe that ASEAN currencies will continue to depreciate more than previously anticipated - is not expected.


“Currency movements suggest that there is already an element of wariness among investors, with ASEAN currencies depreciating across the board from their 2011 highs," says Davis.


Citing an example, Davis notes the Indonesian rupiah is 21.5% lower against the US dollar at the beginning of this quarter compared to 2011. Currency depreciation for other ASEAN members was not as steep, though values have declined between 6% to 11% over the same period.


"While we believe that the strong underlying fundamentals for the region - and more crucially, low debt to GDP ratios - mean that the onset of tighter monetary policy in the US will not trigger the currency crises we saw in the late 1990s, volatility is creating a more uncertain environment," says Davis.


Countries like Indonesia have reacted strongly to the depreciation by upping interest rates, sending a clear signal that it is committed to protecting the value of their currencies. But this comes at the clear cost of downside risks to growth in the coming months.

Export-wise, China’s slowdown will continue to affect the region, both because it is ASEAN’s largest trading partner and because of the impact it has on commodity prices.


Domestic as well as intra-ASEAN consumption remains an important driver for the region’s economies and increased productivity will play a key role in boosting living standards.


Mark Billington, Regional Director, ICAEW South East Asia, said: “Large growing populations and the potential for productivity improvements in Thailand, Indonesia, Malaysia and the Philippines provide a strong backdrop to the region. Healthy investments in physical and human capital will increase the amount of output per worker.”


Singapore will however face more difficulties in increasing productivity due to its current high levels.


"However we do not believe that the country has reached its peak and it is simply a matter of diverting the correct investments and resources to develop new technologies and systems, along with ensuring that workers are provided training opportunities to reskill and adapt to new industries.”


China’s slowdown will impact ASEAN economies
ASEAN economies are closely integrated with China in the global value chain and the giant’s slowdown will impact an already weak economy. Cebr forecasts that the world’s second largest economy will grow by only 7.2% in 2013, and this will dampen the demand for ASEAN’s commodities and other exports which are traditional drivers for growth in the region.


Consumption to contribute to a bigger slice of growth
ASEAN has traditionally been biased towards exporting goods to other parts of the world to fuel growth and productivity increases.


Tighter credit and squeezed real incomes in the developed world have dampened demand for ASEAN goods and countries must continue to rely upon boosting productivity and consumer spending to maintain growth.



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