Singaporean Dollar: Forecasts and Reasons

The perception of Singapore as a favorable investment haven due to its high ratings on economic growth, low government corruption and transparency contrasts to their weak underlying economic fundamentals. Its fragility is mainly derived from its dependence on the cost of capital remaining low or growing at a relatively slow and consistent rate. That is, if US rates increase earlier than expected the SGD dollar will slump. Why? The problem originates from the US Fed's quantitative easing approach undertaken from 2009-2013. Whilst the US' quantitative easing consequences were intended for domestic growth purposes, the stimulus created bubbles in foreign emerging economies. 

The SIBOR (Singapore Interbank Offered Rate) is linked to the US Federal Funds Rate in order to reduce volatility in the exchange rate. Therefore low Fed rates become a direct channel to form Singapore's credit bubbles. Since the SIBOR sets mortgage and loan prices, cheap credit meant household debt to GDP soared by 32% from 2005-2014. Singapore's property market prices also rose by over 50% from pre-GFC prices, now making it the third most expensive real estate market after Canada and Hong Kong. In fact, The Economist reports a 60% overvaluation of the Singaporean property market against the long term mean. If this asset bubble is popped, the banking sector will also suffer as half the banks' credit portfolios consist of general property loans, with a third being mortgages. Recently, the mean Singaporean mortgage rate has remained at approximately 1%. An increase of just one more percentage would result in interest costs more than covering the principal. Moreover, since the majority of these loans currently use floating interest rates, mortgage repayments will rise and reveal unsustainable debt once the Fed Rate increases to its historical average of between 3-6%. In fact, the prospect of a US interest rate hike for the first time in nine years was revealed today, mainly based on the fact that the number of job postings was the highest in fourteen years. As the Singaporean economy specialises in finance and property, effects are compounded, with the potential to mirror the post 2008 Irish economic crisis (where property values collapsed) and the 2008-2011 Icelandic crisis (where the banking system collapsed).

However, I do acknowledge that whilst the bubble is correlated with US monetary policy, the rate of return to average interest rates will be likely slow, allowing time for adjustments in Singapore. This centralises the risk on rates increasing before analyst expectations. Either or, conveying a bearish sentiment on the Singaporean dollar using long term call options is the best way to make returns from rising US rates and its consequences.