IMPACT ON SINGAPORE HOUSEHOLDS, BUSINESSES
With the Federal Reserve set to hike rates a few more times this year, this will continue to put upward pressure on interest rates in Singapore in the short- and medium-term, said Mr Christopher Wong, Southeast Asia portfolio strategist at Fidelity International.
These higher interest rates may be felt by Singapore households and businesses.
“Households may be impacted by the rising cost of mortgage and other loans on top of the general rise in cost of living that they are currently already facing,” he said.
The ongoing upward trajectory for US interest rates is likely to drive further upside for domestic rates in the coming months, and that may translate to higher cost of debt for both households and businesses, added IG’s Mr Yeap.
But he said that while rising debt may go against household spending, potential pent-up demand driven by the economic reopening and wage adjustments may support consumption in the near term.
“For businesses, sectors which are more heavily reliant on debt may face greater challenges in protecting their margins and companies may be more cautious in taking on project investments with huge capital outlay,” said Mr Yeap.
As interest rates rise, the cost of funding and refinancing has risen “quite significantly”, therefore business costs and mortgage rates have also increased, said OCBC Bank’s chief economist Selena Ling.
“If businesses cannot fully pass on the higher business costs and workers do not get wage adjustments that commensurate with inflation, then there may be some margin pressure and belt tightening respectively,” Ms Ling said, adding that this could dampen capital expenditure investments and consumer spending.
Mr Wong said the higher cost of loans for businesses will be added on to the already rising cost of operations, materials or utilities.
“That said, the still-robust local economy and recent reopening of the economy may offset some of these pressures felt by local businesses,” he added.
A recession for Singapore “looks unlikely”, said Ms Ling.
While the stagflation risk has risen both globally and for Singapore, how things pan out from here would depend on other geopolitical issues, including Russia’s invasion of Ukraine, China’s COVID-19 lockdowns and growth slowdown, and whether the US and China manage a “soft landing”, among other headwinds, she added.
IG’s Mr Yeap agreed, adding that the rising rates may slow economic growth momentum but it “does not necessarily derail the recovery”.
The current environment still favours Singapore equities, given its sizeable allocation to banks that tend to do well in a rising rate environment, said Mr Wong. Singapore can also stand to benefit from a continued reopening of neighbouring Southeast Asian countries.