Reply to Parliamentary Question on Impact of Interest Rate Hikes
QUESTION NO 309
NOTICE PAPER 333 OF 2014
FOR ORAL ANSWER
Date: For Parliament Sitting on 3 November 2014
Name and Constituency of Member of Parliament
Mr Mohd Ismail Hussein, NMP
To ask the Prime Minister (a) what will be the impact of the US Federal Reserve rate hikes to Singapore SMEs and households; (b) whether there are any specific segments that are particularly vulnerable; and (c) what are the safeguards to lessen the impact of a steeper than expected rate hike on these vulnerable segments.
Answer by Mr Lawrence Wong, Minister for Culture, Community and Youth on behalf of Mr Tharman Shanmugaratnam, Deputy Prime Minister and Minister in Charge of MAS:
1 Market participants are expecting the US Federal Reserve to start raising interest rates at some stage next year. We can also expect some bumpiness in global financial markets in view of uncertainties over the pace of interest rate normalisation.
2 Singapore has coped well thus far, given our strong economic fundamentals and healthy reserves. Further, our financial markets are resilient, with the foreign exchange and money markets continuing to function well, and our banks’ balance sheets are sound.
3 The normalising of interest rates in the US, when it occurs, should be viewed positively as it signals a sustained recovery in the US economy, which should benefit Singapore’s exports. The rise in interest rates in the US and in the region should also enable more efficient and appropriate pricing of risks. The alternative of a continued prolonged period of low interest rates will likely lead to borrowing excesses and asset market instability.
4 Higher interest rates will impact some existing groups of borrowers, in Singapore as elsewhere. Companies and households that have borrowed heavily when interest rates were low will be vulnerable. Highly leveraged companies, especially those with low net profit margins, may find the increase in borrowing costs eroding their cash flow.
5 The Government will continue to monitor financing conditions, and ensure that viable businesses have continued access to affordable loan financing. SPRING administers a range of financing schemes to help ensure that credit remains accessible to SMEs.
6 The overall financial position of the household sector remains healthy. However, as MAS has indicated before, a small segment of highly leveraged households could be vulnerable, should interest rates rise more quickly than expected.
7 We have taken a series of measures to encourage financial prudence. These measures have prevented borrowers from taking on excessive leverage for their property purchases, and reduce the impact of eventual interest rate hikes. MAS has also introduced new regulations on credit card and unsecured credit to help those individuals with credit problems avoid accumulating further debt.
8 Taken together, the measures have tempered the growth of household debt, from a peak of nearly 13 percent year-on-year in Q3 2011 to 5.6 percent in Q2 2014. New housing loans have lower loan-to-value ratios and shorter loan tenures. The proportion of borrowers taking multiple housing loans has also declined.
9 MAS will continue to encourage financial prudence to keep household debt at a manageable level.