SINGAPORE Aug 17 Singapore is attracting an
unwelcome flood of U.S. dollars that has caused a key interest
rate to turn negative, complicating efforts to dampen inflation
and prompting speculation the central bank will tweak its policy
to slow the rapid rise in the country's currency.
While Singapore prides itself on having a highly globalised
and open economy, the stream of investors seeking refuge from
international market turmoil in recent weeks could fuel price
pressures on the tiny island, adding to fears of a potential
property bubble, even as the economy shows signs of slowing.
That could persuade the city's central bank to reconsider
its policy on allowing further appreciation in the local
Authorities have allowed the Singapore dollar to gain
6.5 percent against the U.S. dollar so far this year, the most
among Asian currencies, to curb imported inflation and as
investors shy away from the United States and Europe where
governments are struggling to resolve debt issues.
As global markets plunged last week, the Singapore dollar
swap offer rate (SOR) fell below zero for the first time due to
inflows into the Singapore dollar. The rate reflects lending
costs as well as the expected forward exchange rate between the
U.S. dollar and Singapore currency.
The three-month SOR was fixed at minus 0.06
on Tuesday, widening from Monday's minus 0.01. It fell below
zero on Aug 10.
Singapore's current policy stance is to allow a gradual
appreciation of the local dollar against a basket of currencies
to curb price pressures.
That stance, however, has attracted even more safe-haven
inflows into the AAA-rated Southeast Asian city-state,
threatening to magnify existing price pressures and hurting
local banks by reducing their already low loan margins.
"A case could be made to argue for a slower pace of
appreciation in light of the recent (downward) revision in the
city-state's non-oil domestic exports," said Maybank head of FX
research Saktiandi Supaat.
Several traders speculate that the fall in SOR to negative
levels, due in part to the Monetary Authority of Singapore's
(MAS) failure to mop up excess liquidity, was an attempt by the
central bank to discourage inflows.
Some said the fall in SOR could even be a signal that MAS
might ease monetary policy to a slower or even zero percent
Singapore dollar appreciation stance, since the strong inflows
have had the adverse effect of fuelling inflationary pressures.
"We currently also have a parallel, but not identical,
situation in the Swiss franc, where the Swiss National Bank, is
attempting to engineer negative interest rates to discourage
strength in the franc," Oversea-Chinese Banking Corp said in a
note to clients.
Asian countries such as South Korea have already taken
steps to discourage hot money inflows while other AAA-rated
nations such as Switzerland are trying to force down the value
of their currencies, fearing big gains may threaten their export
competitiveness even as global demand slows.
MAS reportedly intervened in currency markets earlier
this week to prevent the U.S. dollar from falling below S$1.20.
Lorraine Tan, director of research for Asian strategies at
Standard & Poor's, said MAS will continue to maintain an
appreciating currency bias as it was its main tool against
"But inflationary pressures have come down and there is less
reason for MAS to let the Singapore dollar appreciate so much,"
Reflecting global weakness, Singapore's economy is also
slowing. Data on Tuesday showed non-oil domestic exports
registering a surprise fall in July as electronics shipments
contracted for a sixth consecutive month.
The weak trade figures raise the odds of the city-state
sinking into a technical recession in the third quarter, after
activity contracted in April-June, economists from Bank of
America Merrill Lynch and CIMB said.
Citigroup economist Kit Wei Zheng said "in the event that
MAS decides to steer the NEER (nominal effective exchange rate)
lower, the initial reaction would probably be a lower/negative
SOR fixing in the first instance to deter inflows".
"Once the NEER has depreciated and market expectations shift
towards a neutral or weaker Singapore dollar, the SOR could then
rise. This two-step process was also observed in July/August
2008" when Singapore let its currency fall, he added.
Singapore's three banking groups posted higher second
quarter net profits as loans grew by 20-plus percent and
interest margins stabilised, but the fall in SOR to negative
levels shows lending margins remain under pressure.
DBS , Oversea-Chinese Banking Corp and
United Overseas Bank , along with foreign banks in the
city-state, price some of their loans at a premium over SOR,
which is fixed daily by the Association of Banks in Singapore.
Nomura analyst Anand Pathmakanthan said that while banks
typically have provisions within their loan agreements to reset
the reference rate to zero, "this nonetheless still implies a 20
basis points-plus decline in total yield as compared to just two
The three-month SOR traded around plus 15 to 25 points
during the month of July.
Singapore borrowing costs are already among the lowest in
world, thanks to its high savings rate and safe image that helps
it attract inflows from around the world.
Speaking to reporters last week, UOB Chief Financial Offier
Lee Wai Fai said UOB had invoked "market disruption clauses" in
most of its loan agreements that will allow it to either reset
the benchmark to zero for mortages or use another reference in
the case of corporate loans.
But he acknowledged Singapore's third-largest bank by assets
had in the past priced some housing loans as low as SOR plus 75
basis points, which meant some lenders may soon be paying as
0.75 percent per annum on their morgages -- well below inflation
which is running at 5-plus percent.
"Until safe haven flows subside or we see broad U.S. dollar
strength, SOR fixings will probably staying low or negative in
the near term," said Citi's Kit.
(Reporting by Kevin Lim; Additional reporting by Saeed Azhar)