Helping Singaporeans Navigate a High-interest Rate Environment

Mr Speaker, I declare that I work in a financial institution in Singapore. Mr Speaker, Sir, as Prime Minister Lee has flagged in his recent National Day Message and National Day Rally Speech, the high rising inflation and cost of living is at the "top of everyone's minds" today.

But, besides rising prices, rising interest rates will impact Singaporeans and their cash or payment outlays. Our domestic interest rates are likely to increase further in tandem with global interest rates as rates here are largely market determined. For example, US policy rates have been raised to fight inflation by a total of 3% in less than six months, as compared to an almost 0% interest rate for the large part of 2009 to 2021. The US Federal Reserve System (the Fed) officials have indicated that interest rates may continue to rise and hit close to 4.6% in 2023. Some market participants are even forecasting it to reach 5%. In fact, there are no stated upper limits to what the Fed can hike rates to, to achieve their inflation mandate. Recent market volatility has also led to higher cost of funds and interest rates and we are not immune to these sharp moves.

Like me, many Members of this House have raised Parliamentary Questions or otherwise spoken about these issues in the last few months, both on rising prices and on rising interest rates. This Motion today is specifically on rising interest rates, what it means for Singapore and how we can help Singaporeans in this environment.

In line with the Government's approach in recent times, I believe there is room for targeted interventions. For this Motion, I want to focus on helping Singaporeans transition from a low interest rate environment to a high interest rate environment.

The world is unlikely to return anytime soon to the low inflation levels and interest rates it has enjoyed in recent decades. Singaporeans and Singaporean households will need to adjust to the new normal and plan their borrowings and expenditures accordingly. I note that the Monetary Authority of Singapore (MAS) and the Ministry of National Development (MND) have just announced that there will be revisions to the medium-term rate floors, to ensure that households borrow prudently for their property purchases in a higher interest rate environment, from last month onwards.

I am also heartened by recent Department of Statistics data and expert assessments that households will be able to weather higher interest rates and a potential economic recession given their financial positions as at the 2nd quarter of 2022, as their household assets-to-liabilities ratio remains healthy. Nonetheless, if interest rates rise significantly higher, one might wonder whether the expected assumptions behind these assessments will remain valid.

However, in the short-term, we can and should help Singaporeans make the transition to this new normal or new "abnormal" of high interest rates. Many Singaporean families have existing borrowings to finance big-ticket items like their mortgages, cars and education, and many of them have carefully budgeted, saved and invested to achieve their financial objectives, although based on the old normal. I understand that the Government is in the midst of formulating measures to help Singaporeans cope with the upcoming economic headwinds and would like to provide some suggestions for consideration.

My first suggestion: more can be done in filling the information gap on higher interest rates. I am sure that many Singaporeans, like me, have received notices from their banks that their loan rates are going up. The notices are quite brief, stating not much more beyond the new rate percentage.

That may not be helpful to less financially savvy Singaporeans, who might not realise how they might be impacted by that increase, including how much more income or savings they would need to service the loan subsequently. I have had residents emailing to meet me physically, to share with me their financial issues with servicing loans, where I realised that they did not understand that their payments paid off the interest first and the principal later. They thought the lender had cheated them. In this sort of backdrop, we must ensure that the banks and other institutions that provide loans of all kinds, including the non-bank financial institutions and authorised money lenders and so on, proactively clarify the impact to their borrowers. While there are various mortgage loan calculators offered by some banks and other websites on the Internet, not everyone may know of them or how to use them.

One simple solution would be to shift this task to the banks, financial and other lending institutions, who are sophisticated enough to model the practical effects relatively easily. While there may be certain uncertainties that may affect the precise impact of an interest rate rise on a particular borrower, the financial institutions can provide an indicative range to give the borrower an idea. This boils down to the basic principle of balancing caveat emptor for the investor/customer versus whether banks owe a social duty of care to more than just the average bank customer. Some of the less sophisticated retail investors and retail bank customers might not have the same level of savviness as the "average median investor".

This should not be unfamiliar to the financial sector. Insurance agents are already required to provide the benefits illustration in an endowment policy proposal based on different scenarios of investment rates of return. Financial institutions offering credit cards or mortgages are required by MAS to provide projections of instalment payments under different scenarios. They are all similarly aimed at giving the end-consumer an easy-to-understand picture of the financial calculations.

This will also mean that the financial institutions may be able to pre-empt when homebuyers might encounter issues servicing higher home loans if their incomes and savings rates have become insufficient. In such cases, I hope the Government or relevant agencies work with the financial institutions to allow for longer-term mortgage tenures to accommodate homebuyers who struggle to pay higher instalments? Or at the very least be more alert now about such cases and offer some flexibility in the current environment as a baseline.

My second suggestion: we should enhance the flexibility of some of our policies, in order to support the more leveraged and vulnerable households that may require help amidst higher borrowing costs.

Our local banks have raised home loan rates from 1.15% per annum as recently as late 2021 to around 3.85% just earlier today, surpassing the 2.6% applicable to Housing and Development Board (HDB) loans. The fixed interest rate on HDB loans was certainly less attractive just months ago, when bank loan rates were as low as 1.15% to 1.5%. HDB's statistics show that 6,800 households applied to refinance their HDB loans with bank loans in FY 2020/2021.

With the present global interest rate hikes set to continue, they will now be locked into a higher rate than the HDB rate which they were trying to find a lower alternative for. While I understand that the policy is that homeowners who opt for, or refinance using bank loans can no longer take up a HDB loan, perhaps the HDB can consider allowing eligible households to make a one-time transfer back to HDB loans? While I am mindful that it may have some backend implications for the banks, a refinancing sort of mechanism, if one is eligible, could be one possible approach.

The HDB loan rate is pegged at 0.1% above the prevailing Central Provident Fund (CPF) Ordinary Account (OA) interest rate, and HDB and CPF have recently confirmed that the applicable rates will remain unchanged until the end of this year.

I understand that the standing policy is for the OA interest rate to be reviewed every three months. Given the impact of changes in rates on borrowers' finances in the medium-term, it would be helpful if the Government or HDB is able to provide HDB borrowers more advanced guidance on potential rate changes, beyond three months. This will allow new and existing homeowners to make a more certain choice on how they finance their home, to better prepare them amidst this new normal of interest rate levels that we may be entering. On balance, the information provided will help household decisions but the impact of the extent in which this becomes a de facto forward guidance on the rates will need to be considered in totality.

We must also ensure that Singapore is prepared in the extraordinary event where home loan rates rise sharply, such as if the US Fed raises their rates to above 5%. The US mortgage rates have already hit 6% for the first time since 2008. Does the Government have any contingency plans in place? Will MAS consider implementing temporary measures, such as rate ceilings to ensure that rates do not spiral out of control and become unaffordable? For example, there are already maximum annual percentage interest rates on credit card and pawn loans. Many countries around the world, including our neighbours Indonesia and Malaysia, have forms of subsidised housing loans targeted at lower-income citizens, and this is also an interim policy measure that is worth considering for vulnerable groups not captured by the concessionary HDB loan.

Besides housing, education is another key reason for Singaporeans' borrowing. There has always been a strong policy reason to ensure that our students who are trying to secure a good education are not saddled with heavy debt before they enter the workforce. For example, the Ministry of Education (MOE) Study Loan allows low-income households to obtain loans that are interest-free for a limited or entire duration of the loan. The CPF Education Loan Scheme allows for the use of one's CPF OA savings to pay for one's own, children's or spouse's tuition fees for full-time diploma or degree courses at approved educational institutions.

As commercial interest rates increase and study loans become less affordable, perhaps we could enhance these existing schemes by raising the $2,700 gross monthly per capita income cap for the MOE Study Loan and extend the CPF Education Loan Scheme to cover more courses including part-time accredited diploma or degree courses. This will benefit a greater pool of Singaporeans who are in the pursuit of better education, better skills and who will ultimately be an asset in our workforce. Academic studies using US data have shown that an upskilled workforce has positive externalities to a sector, beyond the individual's gains.

My third suggestion: we should not stop at assistance for individuals. Our small- and medium-sized enterprises (SMEs) and firms, especially those that operate in sectors that are highly reliant on external financing, will require targeted help as well.

As our economy plays catch-up from the time lost during the pandemic, there might be a need to take a targeted sector-specific approach in limiting the adverse effects that might be brought about by higher interest rates that we cannot avoid.

To prevent a hard landing from steep hikes in the cost of capital, our SMEs will need some support in transitioning to have enough reaction time to adjust their plans for cashflow, servicing existing debt and taking on new debt.

There might also be a need to take a targeted sector-specific approach. Construction and manufacturing are sectors that are known to be sensitive to interest rate hikes as they are capital-intensive and dependent on commercial loans. I will focus on construction firms as their cash flows are also tighter due to the longer-term nature of construction projects, which have not been helped by the labour and cost disruptions caused by the COVID-19 pandemic.

The construction sector is critical to renewing Singapore's physical infrastructure, which itself is a key driver of our economic competitiveness. MND had announced in May 2022 that 58 Build-To-Order (BTO) projects were delayed by at least six months this year. This has already contributed to a tight housing supply situation and left many households in limbo waiting for their new houses to be completed. So, any uncertainty in interest rates could throw the sector into disarray again, within this post-pandemic period. So, it is important for the sector to be able to continue to access affordable loans.

It may not be commercially viable to expect commercial banks to cap or limit the interest rates charged to construction firms, especially when they have to price in the fact that the construction sector has already been trending towards a higher risk of defaulting on repayments.

But aside from arguments about consolidation as a form of creative destruction in this sector and that some of the firms may have limited long-term viability anyway, the Government may need to step in to provide reliable and affordable sources of temporary financing to eligible SMEs and firms – temporary financing.

So, I am thinking of schemes, such as the Temporary Bridging Loan Programme (TBLP) that was rolled out during the pandemic, as well as the Temporary Electricity Contracting Support Scheme (TRECS), which offer firms the ability to lock in a favourable interest rate or electricity tariff, at times where such rates are extremely volatile.

The multiple extensions of TBLP, a support measure implemented to help firms with their financing needs during the pandemic, show that it is effective in meeting its purpose. I hope that the Government can consider a further extension past the current end-date of the scheme on 30 September 2022, or a replacement that is also focused on providing eligible SMEs with affordable interest rates.

For the sake of fiscal prudence, I do not mean that we should commit to subsidising firms for a prolonged duration. What I have in mind is simply a temporary measure, to help our vulnerable firms and SMEs deal with interest rates that have doubled and may perhaps triple in just over a period of months. So, I urge the Government to provide updates as soon as possible on the duration of any support measures to help our firms with their forward planning.

Even as we try to enhance our long-term economic growth in this environment, we are fighting business decisions to reduce investments, made amidst higher hurdle rates for projects and investments. So, in addition, can the Government work further with financial institutions to keep the processing fees of these Government-assisted loans as low as possible?

To add, we should make sure that the measures apply across both bank and non-bank financial institutions or lenders. The latter might rise in prominence in the lending sector, if the rise in interest rates makes it harder for those with relatively lower credit worthiness or urgent credit needs to access bank loans. Several of them already target SMEs primarily.

My fourth and final suggestion on this front. As we transition into a new high-interest rate environment, our metrics for measuring systemic risk may need to be adjusted as well. Our efforts to measure this improperly or with a decent lag can lead to social implications.

There have been numerous mentions of the Total Debt Servicing Ratio (TDSR) in this House, in response to Members' concerns over the interest rate and debt situation in Singapore, in the last few months.

The TDSR framework captures a borrower's monthly expenses on all types of debt, including mortgages, car loans and unsecured debt as a proportion of income. Essentially, MAS sets a ceiling that only 55% of a borrower's income should be spent on servicing debt obligations. By lowering the ceiling, MAS can "tighten" the threshold up to which a person may borrow.

The interest rate that is used to calculate loan repayments under the TDSR is the higher of 3.5% or the prevailing market rate. The idea was to build in a buffer against interest rate rises for borrowers who have taken out a mortgage in the past.

However, with today's bank interest rates hitting more than 3% and the US Fed's expectation that its benchmark interest rate may hit close to 4.4% as soon as this year, and possibly some more next year, the "buffer" that is built into MAS' monitoring framework may soon be completely eroded.

The MAS has just raised interest rates used to calculate loan repayments under the TDSR by 0.5%. However, is this move sufficient to maintain the robustness of MAS monitoring and stress testing? Given the rate of global interest rate increases and their potential landing points at up to 5%, is MAS prepared to raise this again, potentially in a matter of a few months?

So, what is the impact of the current 0.5% adjustment on the TDSR data, and what would the projected impact of further increases be, considering the median TDSR of 43%? I ask these questions because, in part, housing loans are a long tenure, with significant overhang and forward risk exposure if the interest rates go up. And in an alternative worst-case scenario, if there is a wave of defaults/repossessions, there is always the risk of market instability with cascading social implications.

These interventions I have suggested above, Mr Speaker, would require the Government's use of its revenues. I would like to ask whether the Government has done an in depth-study on how both interest rate expense and investment incomes would be affected by the higher global rates and recent market turbulence.

On the borrowing side, the Government would have to incur higher borrowing rates in taking actions to manage banking system liquidity or even for our infrastructure needs.

At the same time, on the investment side, Deputy Prime Minister Lawrence has also shared in this Chamber that over the medium term, rising interest rates will also help to raise investment income from our foreign asset holdings.

So, has the Government also taken into consideration that the rising global interest rate environment and risk of potential US recession that may occur downstream, could cause increased volatility for our investments in foreign asset holdings? Global stocks and even cryptocurrencies have already taken a hit with the latest Fed announcements on the need for more interest rate hikes. Questions that probably need to be considered are first, what are the downside risks in the event of sell-offs in these holdings and what would be the impact on our fiscal position? And how may we also maximise the investment opportunities posed by a high interest rate environment?

I hope the Minister or relevant agencies can shed some light on these questions as it has ramifications on our fiscal trajectory and outlook.

Mr Speaker, Sir, it appears that a high interest rate environment is here to stay. I hope the Government will take into consideration my suggestions above in positive light to mitigate the risk of higher interest rates on Singaporean households. We will need to take considered actions to put Singaporeans and our firms in good stead to adapt to and thrive in this situation, while the Government balances the fine line between keeping prices from rising further and dampening economic expansion in the post-COVID recovery period.