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Further credit tightening is almost a given.

Monday, October 24, 2011

I was talking to a friend whose family controls a public listed company in Singapore and he is very optimistic about Singapore, very confident that we will not suffer a recession. Although I reminded him that in the last global financial crisis, only China, India and Indonesia escaped a recession, he remains very optimistic. Is this optimism the norm?


Many think that the housing prices in Singapore are being driven up by foreigners. Numbers released not too long ago shows that foreigners accounted for some 16% of condos sold so far this year. The rest were sold to Singaporeans and PRs. If I remember correctly, PRs accounted for 5% or less of total HDB flats transactions. So, the vast majority of transactions in residential real estate here belong to Singaporeans. Logically, a great number of Singaporeans are doing well.

Indeed, if the recent astronomical COE prices are anything to go by, I would say that people and companies here are doing extremely well. Therefore, a pervasive sense of optimism and even invincibility is not difficult to understand.

Personally, I have a blog post not too long ago which questioned whether there would be a double dip recession or whether we would simply see very slow growth. Do I have the answer? If I were to say I do, would you believe me?

Do I know anything for sure? I know that if there should be a prolonged slowdown in the world economy, Singapore will not be spared. I know that if there should be a credit tightening in the world banking system, Singapore will not be spared. Singapore has a very open economy and to think that we will be spared any negative ramifications is simply naive.

In order to stay optimistic about Singapore's economy, we have to be optimistic about the world economy and we have to stay optimistic that there will not be any significant credit tightening in the world banking system. Do you think it is easy to be optimistic about these?


"In July, banks and insurers agreed to contribute to reducing Greece's debt via a 21-percent writedown on their holdings of Greek bonds... But recently there has been growing speculation that Athens needs to reduce the value of its debt by 50 percent -- or perhaps even more -- to make its finances sustainable." Read article here.

This speculation is likely going to be a reality.

"Diplomatic sources said Europe and the IMF would only proceed with a second planned Greek bailout of 109 billion euros if banks accepted losses of "at least 50 percent" on their debt holdings." Read article here.

This is going to be disastrous for European lenders holding Greek debt. How would this affect us in Asia?

In a discussion I had with my father a few weeks ago, I told him that we could see European lenders tightening on credit and recalling funds from Asia where they have a significant presence.  Although this could be a welcome development as Asia is sloshing in funds in search of higher returns, resulting in strong inflationary pressure, people and companies who have thus far done well by leveraging on cheap money could suffer.

I am not an economist but some form of credit tightening with the proposed Greek "debt haircut" of 50% is more likely to take place than not. I can only hope that the negative effects will not be as fearsome as some have made them out to be.

For any who recently borrowed to the max buying a dream private property or a dream car at record high prices here on our tiny island, I can only hope that the dreams will not become nightmares.

18 comments:

Singapore Man Of Leisure said...

I love macro top down topics!

On one side, credit may dry up or seize if there's an unorderly default or loss of confidence in European banks due soverign debts - banks don't trust each other just like during the 2008 Lehman crisis.

On the other hand, that may result in more money printing and keeping interest rate low - inflating our way out of debt may be more appealing than more austerity measures... To avoid more Occupy Wallstreet protests?

That would mean money is "cheap".

If global investors are risk averse, funds may flow back to US - Asian markets and currencies will suffer like in 1997 and 2008.

But if cost of fund is cheap (near zero interest), some brave investors may want to park their money in Asia and profit from the "carry trade" and benefit from the "eventual" strengthening of the Asian currencies against USD.

Although short term USD will strengthen in a crisis...

Battle between the timid and the brave.

I have no clue what will happen next. So "clueless" me just park some of my portfolio in defensive stocks, RMB, and silver, and have as much liquid SGD cash I can rasie that I hug tight tight as I suck my thumb in my sleep.

Heads I win, tail I win too (I hope!)

AK71 said...

Hi SMOL,

Thanks for sharing your thoughts on the matter. :)

I don't think the 17 countries of the eurozone are willing to print more money. They are asking the private lenders such as banks to take some of the pain, i.e. the 50% debt haircut.

To shore up confidence in the eurozone banking sector, they could also up Tier 1 reserves requirement for the banks. This would probably result in a reduction of liquidity.

The eurozone has been hiking interest rates in an effort to control inflation although they could be relenting soon as the French and German economies show signs of stagnation.

At the end of the day, all we can do as (insignificant) retail investors is to take necessary percautions for the possible worst case scenario. Whether it happens or not is not important. Having a contingency plan is. ;)

INVS 2.0 said...

Hi AK71,

The recession has started. US and Europe are already down. It's not there is no recession but it hasn't arrived at Asia, particularly Singapore yet.

I think the optimistism seen on the stock market now is like "the dying candle that burns the brightest".

AK71 said...

Hi INVS 2.0,

You could be right, of course. We just have to wait and see, I suppose.

Anonymous said...

Why risk ur money now? Stock market is not cheap enough to buffer the risk. Greece going to default is very real. EU is trying make it an orderly one. French banks will need bailout. Greece turoil might lead a revolt, which e new government might decide a total default n exit EU. This scenario is very possible. This is a black swam we need to reset e world economy.
...Chris

FoodieFC said...

Hi AK

like it or not we are affected by other markets. Our country has no natural resources and we are too small leading to a small domestic market. Companies based here have to internationalise.

As a result, we are affected by other markets (countries). The Euro crisis drag on will cont to take us on the roller coaster ride too. Looks like this is gg to be a long and bumpy ride. Until Greece officially defaults. Until then, market goes side waves on a down trend maybe?

not sure if you all will agree with me on this =)

Anonymous said...

Many have said the risk of a property crash is imminent. In HK and China, property prices have increased 50% over the last two years. Even if there was a ppty crash, only buyers of recent years will be affected. In Singapore, the increase in ppty price have somewhat been subdued in the last two years. I think the risk of 1997 is low.

AK71 said...

Hi Chris,

It is probably not a black swan if it is something you can see happening with certainty. Black swan refers to something which we are not able to foresee.

For me, I can paint different scenarios but I cannot say which one will be the future. So, I remain partially invested in what I think will be hardier in a recessionary environment. :)

AK71 said...

Hi FoodieFC,

I don't know if the crisis in Europe will drag on and I don't know if Greece will default.

I only know that Singapore will not be spared in the event that the crisis were to drag on or if Greece were to default. Singapore is too connected to the world economy and financial system not to be affected.

Have a plan for the worst case scenario and we can't go too wrong. :)

AK71 said...

Hi Anonymous,

The Asian Financial Crisis of the late 90s happened because of bubble economies and weak national balance sheets. This has been corrected a long time ago and it is unlikely Asia will revisit those terrible years anytime soon.

However, like you have pointed out, property prices have risen 50% in the last two years. It reminds me of a parabolic movement in price which in technical analaysis will try to find equilibrium when the gas runs out.

We could see the gas running out if European lenders were to recall funds from Asia. This will see prices moving towards a more sustainable uptrend and will see equilibrium restored. A 20 to 30% fall in market values will be quite normal.

Hwang said...

An interesting point to note about why EMU cannot bail itself out unlike US and Japan. They can't artificially inflate their money supply using a printer!!

That partially explains why US and Japan, while debt to GDP ratio is higher than EMU, the cost of borrowing is much lower.

Also i am against fiscal austerity at this point in time as it will only make things much much worse.

When consumers cannot and will not spend anymore, companies also won't hire because of no demand, and consumers get poorer, and the downward spiral gets as creepy as Halloween.

AK71 said...

Hi Hwang,

There is definitely pressure for interest rate to be lowered in the eurozone. It does seem to be the prudent thing to do although it could worsen inflationary pressure. Seems like they are caught between a rock and a hard place. A choice between two evils. Tough.

Anonymous said...

Ak, u r a brave man. I will stay away until there r enough buffer to take e extra risk. - Chris

AK71 said...

Hi Chris,

What is "enough buffer to take the extra risk"? Indeed, how do we quantify "enough"? ;)

In the last crisis, some were saying that 1400 points on the STI was not low enough and that it was still risky. They missed the boat.

I just know that I don't know everything and, therefore, I hedge by being partially invested.

So, my decisions are not due to bravery, they are due to pragmatism. I keep saying that I do not believe in being overly bullish or bearish. I believe in being pragmatic. :)

Anonymous said...

AK,

That's the point. Even if property prices orrect 20-30 percent (in HK and china, where it had run up 50% in the last two years), that is not going to affect too many people....

Anny

Anonymous said...

Must look for kung fu panda to give us bravery :p

AK71 said...

Hi Anny,

Well, we can only hope for a "normal" 20 to 30% correction in prices in a recessionary environment. Could be worse or maybe not.

In case you have not noticed, a 30% correction in price would mean giving up almost the entire 50% gain over the last two years.

As for how many people it will affect, I can only make a guess. How many people bought real estate for investment purposes in the last 12 months? I don't think the number is a small one.

In today's papers, I read that hundreds of buyers who bought newly launched Chinese real estate in the suburbs of Shanghai and a couple of other cities just months ago tore through the offices of developers who slashed prices as much as 50% in desperate attempts to sell their remaining stock of unsold units. Could this be a pre-cursor of things to come?

AK71 said...

Hi Anonymous,

Haha.. I like Kung Fu Panda. :)

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