http://www.businesstimes.com.sg/sub/...87140,00.html?

Published November 5, 2010

Economists see more liquidity coming to Asia

Businesses here brace for forex fluctuation expected after QE2

By TEH SHI NING


THE US Federal Reserve's decision to buy US$600 billion in Treasury bonds over the next eight months will send more liquidity Asia's way and could spark more measures to contain speculative capital inflows here in Singapore, economists say.

Local businesses are also bracing themselves for the currency fluctuation expected to result from this second round of quantitative easing (QE2), though economists say the trade impact of a stronger Sing dollar will be tempered by the large import content of Singapore's exports.

The immediate impact of QE2 on companies here will be from the Sing dollar appreciating against the greenback, Singapore Business Federation (SBF) CEO Teng Theng Dar said. 'That will force our companies to look for immediate ways to cut costs or reduce margins (sales minus direct costs) to remain competitive on the export front,' he told BT.

Mr Teng thinks 'the fluctuation in forex will also cause serious challenges in trading and investments', especially with 70 per cent of the SMEs involved in the export of goods and services globally.

Economy observers, however, say the impact on trade growth should be limited. There will naturally be 'translation losses' as companies convert their US-dollar export earnings back to Sing dollars, says Citi economist Kit Wei Zheng. But the import-intensive nature of Singapore's trade remains a 'huge mitigating factor'. Raw materials and components are usually denominated in US dollar, so a stronger Sing dollar could benefit importers, manufacturers and those exporting import-intensive goods to a larger extent.

The impact of a stronger Sing dollar may also be 'overstated' since other Asian and developed country currencies have also strengthened against the dollar, said Barclays Capital economist Leong Wai Ho. 'So on a trade-weighted basis, the SGD has appreciated much less significantly,' he said.

Plus, stable appreciation typically does not affect exports as much, as exporters can easily hedge against that. 'It is the volatility in currency movements that is extremely detrimental to trade flows,' says DBS economist Irvin Seah, as hedging against erratic swings is expensive.

OCBC economist Selena Ling notes, though, that with the Sing dollar nominal effective exchange rate (SGD NEER) already at the stronger end of its parity band, the currency ripples from QE2 'may not sit too comfortably for exporters', especially since Q4 sentiment among manufacturers has turned cautious and October's electronics PMI showed a second month of contraction.

The Sing dollar has strengthened to just under $1.29 to the US dollar now, down from close to $1.36 in August when Fed chairman Ben Bernanke first signalled a QE move. Several emerging economies' policymakers have expressed their intention to invoke capital controls to stem the flood of liquidity headed their way with the Fed's money printing.

To SBF's Mr Teng, the worst-case scenario for businesses would be the escalation of these measures into a currency war which could negatively hit global trade and investments.

'Should such a protectionist and volatile environment take root, it is likely to pose significant risk for Singapore businesses, especially for exporters and manufacturers as they face the anxiety of currency fluctuation, the risk of inflation, as well as potential trade barriers in overseas markets,' Mr Teng said.

RBS economist Lim Su Sian thinks Singapore is likely to be one of the least interventionist in this region, in dealing with the influx of capital. 'In terms of depth of capital markets, I think we're able to better absorb these flows,' she said.

In fact, Mr Kit says the liquidity-associated capital inflows and positive sentiment 'could yield positive spillover effects for certain financial services with increased IPO and fund-raising activity, which are balanced against the negative impact of compressed net interest margins on bank loans'.

But with that comes speculative investment that could trigger a second round of macroprudential measures to ward off asset price inflation.

'More cooling measures are likely in store for the real estate sector, given that residential house prices appear to be resurgent,' said Mr Leong, who thinks these could take the form of further tightening of loan-to-valuation limits for second home buyers, or specific measures to curb foreign and institutional buyers.