Asian currencies continue to weaken against the US Dollar as uncertainties loom with the new Trump administration.
As the United States gears up for a Trump presidency in 2017, the US Dollar has rallied against Asian currencies, including the Singapore dollar. How does this affect the Singapore dollar and the property market here?
By Hock Meng Tay
The election of Donald J. Trump as the president of the United States on 8 November was seen as a shocking event for many Asian currencies, prompting massive capital outflows into the US in search of capital refuge and higher yields.
Trump’s plans to ramp up infrastructure and defence spending upon taking office in January 2017 is akin to Reaganomics in the 1980s, when President Ronald Reagan introduced fiscal spending plans and tax cuts to reinvigorate economic growth, which partly boosted capital flight.
But just how much of the capital outflows were from Asia?
Asian outflow on Dollar’s rally
A Bloomberg article in November reported that Asian global fund houses diverted US$11 billion worth of equities and bonds into the US. The capital flight to quality drove up US Treasury yields, as well as the US Dollar (USD) to its highest level in eight years.
The article also reported that India suffered the worst levels of capital outflows between November 9 and November 18, followed by Thailand. The capital flight trimmed the year-to-date (YTD) inflow into India, Indonesia, the Philippines, South Korea, Taiwan and Thailand to around US$55 billion.
Thailand also suffered massive capital outflows from its bond markets, with approximately 80.5 billion baht (US$2.3 billion) worth of debt being traded from November 9 to 18. This was followed by India where bond market outflows amounted to US$1.5 billion and a further US$1.4 billion in equities YTD.
Meanwhile in China, household foreign currency savings climbed to a record US$113 billion in October, despite the yuan recording its biggest monthly decline in more than a year. Foreign exchange reserves shrank in tandem by US$69.1 billion, the most since January 2016, to US$3.05 trillion in November.
Tied to Chinese fortunes
Just like most regional currencies, the Chinese Renminbi weakened against the US Dollar. In fact, the USD strengthened at a faster rate against the Chinese Renminbi, with the Chinese currency now trading at around RMB6.92073 to one USD.
Given that the fundamentals of Singapore’s economy are, in various aspects, tied to the Chinese economy, the fate of the Singapore Dollar (SGD) is also intrinsically tied to the fortunes of the Chinese currency.
The current weakening of the Singapore Dollar (refer to Figure 1), just like the Renminbi, was partially expected, as their common trading partner, the US, is projected to see a new transition of government. This is further compounded by the uncertainties over trade and other exchanges under a new administration next year.
Furthermore, President-elect Trump’s recent announcement that he will halt any negotiations for what could have been the final breakthrough in the Trans-Pacific Partnership (TPP) agreement added more pressure to the two currencies. The TPP agreement would have helped to reinvigorate various economies in the Asia-Pacific region, including China and Singapore.
Despite this, industry experts say there is still hope, particularly in other trading pacts, including the Regional Comprehensive Economic Partnership (RCEP) where China is leading the negotiations. Other parties to the treaty include 10 ASEAN governments, and free trade agreement (FTA) partners such as Australia, China, India, Japan, New Zealand and South Korea. The Singapore government has indicated its interest in supporting RCEP.
Weaker currency and a slow economy ahead
Amid global economic uncertainties that continue to bring headwinds to the Singapore economy, a slower pace of economic growth in 2017 is expected.
In a recent report published by the Institute of Chartered Accountants of England and Wales (ICAEW), the organisation expects 2017 gross domestic product (GDP) growth to come in at two percent, which is considered “subdued”, as it is only up slightly from the 1.4 percent forecast for 2016.
The report also highlighted that the adjustment in property prices is a risk that is worth monitoring, even though banks in Singapore are well capitalised and there is little chance of a financial crisis happening. However, a prolonged spell of falling property prices could slow economic growth, which will then impact household wealth.
But despite falling prices, the number of foreigners buying properties in Singapore still weakened, a JLL report revealed.
Based on the Urban Redevelopment Authority’s (URA) statistics (refer to Figure 2), the proportion of private residential property transactions attributable to foreigners declined from about 16 percent in 2011 to just over five percent at the end of Q3 this year. JLL, on the other hand, noted that the number of foreign nationalities involved in those transactions also declined, from 66 in 2011 to 38 between Q1 2016 and Q3 2016.
According to JLL, the decline in foreign take-up of residential properties in Singapore was partly attributable to the Additional Buyer’s Stamp Duty (ABSD) imposed in December 2011 to curb excessive speculation. The ABSD is pegged at 10 percent of the purchase price on top of the three percent standard stamp duty. An upward revision of the ABSD to 15 percent for foreigners in January 2013 added pressure on foreign property purchases in Singapore.
More pressure on the market is also expected as analysts predict the end of an era of low to negative interest rates. Trump’s victory has caused interest rates, corporate and government bond yields to climb higher—fuelled by the rise of the US Dollar and other dollar-denominated assets.
This also means that loans pegged at interest rates calculated against a basket of foreign currencies are likely to take a hit as the cost of borrowing could increase soon.
Of particular concern among many investors is the level of household debt among regional countries. According to the Monetary Authority of Singapore’s (MAS) latest Financial Stability Review released in November 2016, the growth of Singapore’s household debt levels fell from an average yearly growth of 6.9 percent over the past five years to 2.8 percent in Q3 2016.
The MAS added that the drop was driven by falling trends in housing loans, which made up three-quarters of the household debt, slowing from 4.8 percent yearly in Q3 2015 to 3.3 percent in Q3 2016. This is, in large part, due to the Total Debt Servicing Ratio (TDSR) introduced in 2013, which limits mortgage borrowing to 60 percent of household income.
In other regional economies like Malaysia, household debt stands at around 89.1 percent of the GDP. Local property debt denominated in foreign currencies could have the potential of adding more stress to their highly leveraged household balance sheets.
Trump and the future
Looking ahead, it is undeniable that Trump’s election as the next US president has cast a shadow of uncertainty over Asia’s medium to long term growth opportunities, as well as intra- and inter-regional political alignments. The events in late 2016 that led to financial volatilities have caused some setbacks to many regional economies within the ASEAN region.
In addition, regional currencies may succumb to the pressures of heavy selling as many foreign exchange forecasters have predicted a sell-off of the USD next year after massive domestic spending plans were introduced, and are likely to dampen appetite for additional spending among households.
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