Impact of Potential Rising Interest Rates on Singapore Economy

Mdm Speaker, the tapering of the quantitative easing (QE) programme in the US and subsequent normalisation of interest rates is likely to take place gradually, in tandem with a strengthening of the underlying economic conditions in the US. This is in line with the Federal Reserve's position that the QE tapering will take place only when the economic and labour market outlook in the US has improved.

In this situation, financial markets are likely to adjust to the QE tapering in an orderly manner. The impact on our exports to the US will therefore be small, as US economic growth is not expected to be significantly affected by the tapering. Accordingly, the overall impact of the QE tapering on the Singapore economy is likely to be limited.

Nevertheless, the Government is mindful of the risks of a more disorderly process of QE tapering. In particular, if the QE tapering is done prematurely or if financial markets overreact to the QE tapering leading to a sharp spike in interest rates, the US economy could stall. In this scenario, our exports to the US will be adversely affected. There will also be a sharp pullback in financial markets, which will affect the sentiment-sensitive cluster of our finance sector, including stock broking and fund management activities. These will, in turn, significantly affect our economic growth. However, our assessment is that the risk of such a scenario is low.

Barring the materialisation of downside risks, the main challenge that the eventual QE tapering will pose for businesses in Singapore is the normalisation of the interest rate environment. Due to unprecedented loose global monetary conditions, our domestic interest rates have remained unusually low for the past few years. However, when global monetary conditions start to return to normalcy with the QE tapering and the subsequent rise in US interest rates, domestic interest rates will also rise in tandem. This will, in turn, translate into

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higher borrowing costs for businesses, especially our SMEs.

Businesses should be prepared for the eventual rise in our interest rates, as it will not be prudent for the Government to lower borrowing costs for businesses artificially. Instead, the Government will continue to support our SMEs by helping them to raise their capabilities and productivity so that they can grow their revenue and cope with higher borrowing costs. In addition, to ensure that credit remains accessible to our SMEs, SPRING has schemes, such as the Micro Loan Programme, the Local Enterprise Finance Scheme and the Loan Insurance Scheme.

Mdm Speaker, I would like to ask the Minister while we are likely to see the unwinding of the quantitative easing in US, we may see another round of quantitative easing in a major economy in Asia which is Japan, which will also be introducing quantitative easing, and the result of which is significant weakening of the Japanese yen.

I would like to ask the Minister whether we would see another source of hot money coming into Singapore because of the QE in Japan, and whether that devaluation of the Japanese yen will lead to competitive devaluation among Asian countries and, therefore, impacting our competitiveness.

Mdm Speaker, the monetary policies of the major developed countries will differ slightly but, overall, the global conditions point to a tightening of monetary policies. That is the gist of my answer – that our SMEs have to be prepared for this normalisation of the interest rate environment.