When the debt party ends

2016 was one of the tough­est for Sin­ga­pore with real GDP ex­pected to come in at 1.4%, or the low­est since the Global Fi­nan­cial Cri­sis in 2008.

Singapore Business Review - - ECONOMY WATCH -

Will Sin­ga­pore’s debt binge over the last five years lead to a hang­over once rates be­gin to rise? That is the ques­tion be­ing asked by econ­o­mists as the in­ter­est rate cy­cle be­gins to swing up. It may come as a sur­prise to some that Sin­ga­pore holds the largest amount of non-fi­nan­cial pri­vate debt in the world amongst ad­vanced economies – ahead of Ja­pan, the US, and even China. And a large part of this has been run up over the last five years, whereas the US, Ja­pan, and the UK have seen pru­dent pri­vate bor­row­ers cut their debt loads. Since 2011, Sin­ga­pore has added an equiv­a­lent of al­most 40% of GDP – over $150b – in debt. It is un­par­al­leled, but is it also dan­ger­ous? The first thing to look at is the fore­casts for in­ter­est rates.

Cur­rently, Sin­ga­pore SIBOR – the bench­mark in­ter­est rate – is sit­ting be­low 1%, mak­ing all that bor­row­ing very in­ex­pen­sive. But that is about to change. As CLSA’S Chuanyao Lu notes, the Fed’s 25bp hike in Dec

‘16 is a har­bin­ger of more to come with ex­pected US rate in­creases flow­ing onto Sin­ga­pore, bring­ing the 3-month SIBOR to 1.7% by end-2017. But the in­ter­est rate for cor­po­rate bor­row­ers would likely be higher still.

“The 10-year SG gov­ern­ment bond spread over the 3-month SIBOR has now moved slightly above its long-term av­er­age spread of 135bps as the mar­ket starts to price in the risk of fur­ther rate hikes. As­sum­ing the spread at the long-term av­er­age as the SIBOR climbs to 1.7%, it would im­ply a 10-year SG bond yield of ~3.0% by end-2017,” adds Lu.

In­debted com­pa­nies will be stretched fur­ther to re­pay loans, and as we have seen in the oil & gas in­dus­try with Swiber and Ezra, there has been a fair amount of bad loans made. UBS econ­o­mist Ed­ward Teather notes that the most ob­vi­ous ar­eas of cap­i­tal mis­al­lo­ca­tion are in the off­shore oil & gas sup­ply sec­tors and the prop­erty mar­ket, ev­i­denced by fall­ing prices and rentals.

“The de­cline in the profit share of GDP and slack­en­ing of the labour mar­ket sug­gests the scale of eco­nomic ad­just­ment needed prob­a­bly goes be­yond those sec­tors. We ex­pect this ad­just­ment to be­come more ob­vi­ous in 2017, not least be­cause higher SG$ in­ter­est rates will in­cen­tivise a more ef­fi­cient use of cap­i­tal. That ad­just­ment process should keep growth weak and push unem­ploy­ment higher but, ab­sent a sig­nif­i­cant ex­ter­nal shock, not tip the econ­omy into re­ces­sion for full year 2017,” says Teather.

World trade vol­umes are highly cor­re­lated with GDP growth, 75% to be ex­act. So any pickup in world trade flows through to Sin­ga­pore’s GDP.

Trade co­nun­drum

The other big un­known for Sin­ga­pore is trade. 2016 was one of the tough­est for Sin­ga­pore with real GDP ex­pected to come in at 1.4%, or the low­est since the Global Fi­nan­cial Cri­sis in 2008, and the third con­sec­u­tive year of fall­ing GDP growth for the coun­try. This im­pacted not just Sin­ga­pore’s ex­port-ori­ented man­u­fac­tur­ing and ser­vices in­dus­tries, but do­mes­tic de­mand as well as the de­cline in over­all sen­ti­ment weighed on the propen­sity to spend. In fact world trade vol­umes are highly cor­re­lated with GDP growth, 75% to be ex­act. So any pickup in world trade flows through to Sin­ga­pore’s GDP.

CLSA has a pos­i­tive view on world trade, Trump pro­tec­tion­ism not­with­stand­ing, and fore­casts GDP growth of 2.5% in 17CL. “We do note that we are much more pos­i­tive com­pared to the cur­rent con­sen­sus fore­cast of 1.5% for 2017, and this is pri­mar­ily driven by our view of global trade re­cov­ery. We ex­pect trade re­cov­ery to fur­ther pick up into 2018, and hence drive GDP growth to 3.5% in 18CL.” UBS is less san­guine, ar­gu­ing Sin­ga­pore’s growth mo­men­tum is likely to re­main weak.

Higher SG$ in­ter­est rates will in­cen­tivise a more ef­fi­cient use of cap­i­tal

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