Who's the spoiler?
US credit woes top threat to the Singapore party
Christie Loh
NOW that the fireworks are over, here comes a reality check.
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While the fanfare is over how a sparkling first half will lift the
entire year's economic showing the Government announced on Friday
that the GDP expanded by 8.6 per cent year-on-year in the second
quarter a growing monster halfway round the world is threatening
to gatecrash Singapore's party.
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The pundits call it the "United States sub-prime problem". In
layman lingo, it's a wave of Americans with dodgy credit histories
defaulting on their home loans, causing some of their lenders to
keel over.
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Scarily, many such high-risk mortgages have been packaged into
complex financial instruments bought by banks worldwide, including
those in Singapore.
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With banks crying for help, government after government has been
pumping in fresh funds to boost liquidity since Thursday. Financial
markets, rattled by doomsday scenarios of a global contagion, went
into a tizzy.
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Singapore share prices plunged by 1.6 per cent on Friday, wiping
out all gains made since late April. Investors were pushing the
"sell" button, ignoring reassurances by officials that
morning.
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"We stand ready to inject additional liquidity if the situation so
warrants
At this stage, market conditions remain relatively
stable," the Monetary Authority of Singapore's (MAS) deputy
managing director Ong Chong Tee said, when asked if the central
bank would follow its counterparts in Japan, Europe and the US,
which together ploughed in billions of dollars just before the
weekend. Banks have grabbed the funds to cover losses.
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Dow Jones Newswires quoted unnamed sources as saying that the MAS
injected $1.5 billion into the country's money supply on Friday.
The MAS declined to comment on the figures.
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Investors hardly took heed of Singapore's glowing economic numbers
that day.The second quarter saw the construction sector expanding
at the fastest pace in nearly a decade and a continued flourish in
financial services demand, leading the Government to upgrade its
growth forecast for the year to 7 to 8 per cent up from the
previous 5 to 7 per cent.
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The bullish prediction factors in the sub-prime situation, said Mr
Ravi Menon, Second Permanent Secretary at the Ministry of Trade and
Industry. He added that the risk of credit woes spreading was "the
most significant downside to the (growth) forecast". But even if
the situation does worsen, "it will take some time before it feeds
into the real economy", Mr Menon said, noting that the fundamentals
of the major economies remained sound.
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Private-sector economists are not so sure. Mr Vishnu Varathan of
research house ForeCast, uncertain when and whether the credit
crunch will unravel, has put off revising his growth forecast for
Singapore until more clarity on the sub-prime situation
emerges.
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Singapore's three local banks recently said their exposures to
sub-prime-linked funds were small and limited. But if the US
economy does take a hit from the reeling credit market, a ripple
effect will certainly touch the Republic despite its attempts to
ensure its revenue sources come from other markets besides the US.
"None will be spared," said Mr Varathan.
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For now, however, the outlook remains benign even rosy.
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"It's all cylinders firing," said CIMB-GK Securities economist Song
Seng Wun, confident of continued support by the property,
construction, and biomedical sectors. He is also optimistic the
sub-prime woes are "a US-Europe problem".
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Other than that, few risks threaten to derail Singapore's economic
progress, Mr Song said. Even oil prices, once the bogeyman, have
fallen below US$70 ($106) per barrel.
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The only domestic concern, he said, may be rising costs. Consumer
prices rose 1 per cent in the second quarter, double the rate of
0.5 per cent in the first quarter. At current levels, inflation has
not crimped Singapore's competitiveness as a business centre. But
Mr Song says: "If it continues, then it probably will."
