With wreckage piling up, Fed eyes another interest rate cut

With wreckage piling up, Fed eyes another interest rate cut

Many expect the unemployment rate to hit 7.5% or higher by next year

(WASHINGTON) As the economic wreckage piles dangerously higher, the Federal Reserve is preparing to ratchet down interest rates - perhaps to their lowest point in more than four years.

Times are a changin’: Artist Geoffrey Raymond (left) standing beside a man as he writes a message on the artist’s portrait of former Fed chairman Alan Greenspan in New York’s financial district on Friday
The convergence of a housing collapse and a lockup in lending has created the worst financial crisis in more than a half-century.

With a recession seen as inevitable, if not already underway, any Fed rate cut would be aimed at cushioning the fallout.

Vanishing jobs and shrinking paychecks have forced consumers to cut back sharply.

In turn, businesses have cut back on hiring and other investments as customers hunker down and credit problems make it harder and more costly to get financing.

‘These are sobering times,’ said Paul Kasriel, chief economist at Northern Trust Co.

All the problems have been feeding on each other. So far, Fed chairman Ben Bernanke and his colleagues have not been able to break the vicious cycle, despite hefty rate reductions and a flurry of unprecedented steps aimed at getting credit flowing more freely again.

Mr Bernanke says he will use all tools to battle the crisis.

To that end, Fed policymakers are widely expected to lower the central bank’s key interest rate at the conclusion of a two-day meeting tomorrow - their last session before the November elections.

Investors and some economists predict the central bank will drop the rate by half a percentage point to one per cent. If that happens, it would mark the lowest rate since the summer of 2004. Others, however, think the rate will be cut by a smaller, quarter-point to 1.25 per cent.

In turn, rates on home equity, certain credit cards and other floating-rate loans tied to commercial banks’ prime rate should drop by a corresponding amount.

A half point reduction would leave the prime rate at 4 per cent; a quarter- point cut would drop the rate to 4.25 per cent. Either way, the prime rate would be the lowest in more than four years.

The Fed hopes that lower rates will spur people and businesses to spend again, helping to brace the wobbly economy.

‘I think it would be a good faith psychological move,’ said Richard Yamarone, economist at Argus Research.

However, Mr Yamarone and others doubt that another rate reduction will entice people - many buried under piles of debt - to ramp up spending. But it might help a little, they said.

Consumer spending probably fell in the July-to- September quarter. That would mark the first quarterly drop since late 1991, when the country was coming out of a recession, economists said.

Given that, many predict the national economy contracted in the third quarter. The government released the report on gross domestic product last week.

Many also believe the economy will continue to contract through the rest of this year and into next year. All that would more than meet a classic definition of recession - two straight quarters of shrinking GDP.

Mr Bernanke has repeatedly warned that the country’s economic weakness could last for some time - even if the government’s unprecedented US$700 billion financial bailout package and other steps do succeed in getting financial and credit markets to operate more normally.

Many expect the unemployment rate - now at 6.1 per cent - to hit 7.5 per cent or higher by next year. Employers have cut jobs each month so far this year. A staggering 760,000 jobs have disappeared.

Mr Kasriel thinks another rate reduction could help squeezed banks.

Lowering rates would increase the difference between the rate banks charge each other to borrow overnight and the rates they are paid on investments in super-safe Treasury securities, he said.

To unclog credit, the Treasury Department recently announced a historic step, saying it would inject up to US$250 billion into banks in return for partial ownership.

The hope is that banks will use the capital infusions to rebuild their reserves and boost lending to customers.

The money can also be used by a bank to buy another bank, strengthening both to better weather the financial storms.

Earlier this month, the Fed and other central banks joined together to slash rates, the first coordinated move of that kind in the Fed’s history. That dropped the Fed’s key rate down to 1.5 per cent and marked an about-face in policy.

The remote - but powerful concern about deflation - was among the reasons why the Greenspan Fed held rates at very low levels for so long in the aftermath of the last recession, in 2001.

By the summer of 2003, Mr Greenspan had ratcheted down the Fed’s rate to one per cent, which was the lowest since 1958.

The Fed held rates at those historically low levels for one year before beginning to bump them up to fight inflation.

Critics contend that those low rates fed the housing bubble and lax lending standards that eventually would burst and imperil the economy. — AP

Source : Business Times - 28 Oct 2008

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Singapore Hotel business still healthy but economic cloud dims outlook

Singapore Hotel business still healthy but economic cloud dims outlook

Singapore’s share of Asean’s tourism pie could be shrinking

By NISHA RAMCHANDANI

(SINGAPORE) Like a game of dominoes, the economic crisis is making its presence felt in most industries and tourism - which is dependent on the corporate dollar and discretionary spending - is unlikely to escape unscathed.

Filling the rooms: MICE events are proving to be a blessing for some hotels as they bring in the dollars
For now, it appears that local hotels are posting relatively healthy occupancies but as visitor arrivals continue to dwindle, what will happen next year seems to be anyone’s guess.

Singapore’s rapid increase in average room rates (ARR) over the last few years may have priced itself out of the market, reckons Citigroup economist Kit Wei Zheng.

‘The fact that until recently, tourist arrivals in the rest of Asean still maintained positive growth even as tourist arrivals in Singapore fell, attests to this. Not only is the size of the tourism pie shrinking, I suspect Singapore may be getting a smaller share of that shrinking pie,’ he said.

In a research note dated Oct 17, DBS Group Research noted that RevPAR (revenue per available room) in August was down 10 per cent from April’s peak of $210, but that FY08 RevPAR should finish off with a 20 per cent rise year on year, on the back of a stronger first six months.

For FY09, DBS Research is predicting RevPAR to worsen, chalking up a 15 per cent year-on-year fall, before strengthening 3 per cent in 2010.

Even then, DBS Research warned that downside risk still exists in its RevPAR estimates if Asia slumps into recession and the average length of stays is lower than expected.

While visitor arrivals in Singapore for the first six months of the year registered a 2.9 per cent increase to 5.1 million visitors, tourism receipts were 0.2 per cent less compared to H107 with $6.5 billion. June also marked the beginning of the decline, as it posted a year-on-year drop in tourist arrivals for the first time since early 2004.

Tourist arrivals contracted 4.1 per cent in June, a further 3.8 per cent in July and then as much as 7.7 per cent in August.

Speaking to the press at the sidelines of ITB Asia last week, Singapore Tourism Board’s (STB) assistant chief executive of business travel and MICE group Aloysius Arlando urged hotels to ‘cast nets wider’ as well as establish the optimum mix of business and leisure travellers. This is expected to put industry players in a better position to ride out the storm until the tourism sector regains its footing in 2010.

For now, MICE events seem to be proving a blessing for some hotels as they bring in the dollars. At the same time, the higher ARRs this year compared to 2007 should do well to protect profits even if occupancies dip slightly, as any increase in ARR generally goes straight to the bottom line.

The Mandarin Oriental, for one, was running a full house last week thanks to ITB Asia, and it expects occupancies for November and December to run into the 80s.

‘Bookings are on track compared to the past few years,’ said director of communications Ruth Soh. ‘People are still flying in. We’re not feeling the impact yet. We will have to see how next year goes,’ she added.

Grand Copthorne Waterfront Hotel is also banking on the MICE segment, which is fuelling demand for November and the first half of December.

‘The second half of December will be dependent on the leisure market, which might be hit by the financial turmoil,’ said DayLin Koh, director of marketing communications. Still, the hotel expects to post higher occupancy rates this November compared to last year, and December occupancies that are on par with last year.

The Raffles Hotel said bookings for its 103 suites are healthy because of the festive year-end.

Other hotels that have seen minor dips in occupancy include Swissôtel The Stamford and Fairmont Singapore, which saw occupancies in the low 80s and high 70s, respectively, this month, sinking a few percentage points year on year.

‘Bookings for November and December remain positive although we see a marginal drop in volume as compared with last year,’ said Belladonnah Lim, director of marketing communications at the group.

The two hotels will be ramping up sales and marketing efforts to actively seek out new business both here and abroad, in order to maintain market share.

And over at the Royal Plaza on Scotts, occupancy in recent months has been slightly below average. It expects occupancy to hit between 80-86 per cent for November, and 80 per cent in December.

‘Year-end is still good as most companies would have planned ahead and budgeted for their spending in 2008. However, Q109 would be challenging if the economic situation does not improve. It will be a real test of the room rates,’ said Patrick Fiat, general manager of Royal Plaza on Scotts.

Source : Business Times - 28 Oct 2008

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This may be worse than 1998 Asian crisis, warn economists

This may be worse than 1998 Asian crisis, warn economists

No safety in any region as the whole world is seeing slower growth

By LYNETTE KHOO

(SINGAPORE) Pain is seeping in as Singapore braces itself for a recession. And the big question is whether this pain will be reminiscent of what was felt in past downturns.

Some economists have started to warn that the current down-cycle may well turn out to be worse than the Asian financial crisis in 1998, during which the G-7 economies were still holding up well.

‘This time around, we may find that there is no safety in any region because the whole world is in a slower growth trajectory,’ says CIMB-GK regional economist Song Seng Wun. ‘Global investment and global consumption will be adversely affected. So where can Singapore hide?’

An International Monetary Fund (IMF) study of 113 episodes of financial stress in 17 advanced economies over the past 30 years found that downturns preceded by financial turmoil tend to be more severe and protracted.

‘In particular, slowdowns or recessions preceded by bank-related stress tend to involve two to three times greater cumulative output losses and tend to endure two to four times as long,’ the IMF said in its semi-annual World Economic Outlook.

Taking the onset of the sub-prime crisis last July as a gauge, OCBC economist Selena Ling says she expects a recovery only in 2010. Most economists are expecting Singapore to face at least three quarters of negative year-on-year growth in 2009.

‘I wouldn’t rule out the possibility that the current downturn may be as painful as the Asian financial crisis, simply because the current recession story is a global one, rather than just a regional one, and the market attention has shifted from the OECD economies to emerging market risks, including Asia,’ Ms Ling says.

Pain is already spreading on the corporate front through tight credit and higher costs of borrowing, eroding margins and curtailing capital spending.

Many companies here have strong balance sheets but their cashflows have become an issue because financial institutions remain skittish about lending, Mr Song notes.

Some analysts are even expecting negative earnings growth for 2008 and 2009. The knock-on effect is that wage growth will slow further, denting consumer spending and hurting the real economy.

Although the job market is still enjoying some buffer at this point from the pipeline of projects such as the integrated resorts, Singaporeans will feel the pinch from plunging stock prices, asset price deflation and slower wage growth.

During the Asian financial crisis in 1998, total wages for all employees here saw a rare dip of 0.4 per cent while private consumption spending contracted 2 per cent. Past recessions have also saw private home prices slipping, with the worst fall of 34 per cent year-on-year during the Asian financial crisis, based on Urban Redevelopment Authority data.

‘With the softening of the labour market and wages, consumer sentiment is likely to weaken in the coming quarters. Consumer spending is likely to slow dramatically,’ warns Ms Ling.

She is expecting private consumption, which grew 10.5 per cent in 2007, to ease to 3.3 per cent growth in 2008 and 1.5 per cent in 2009.

Higher refinancing costs and declining home values are also putting home owners at risk of negative equity when the value of their property is less than the loan taken to finance it - a plight that home owners landed in the years after the Asian crisis.

Economists reckon that the impact on Singapore this time will depend on the severity of slowdown in other Asian countries like China and India, and the policy responses from governments to assuage the downturn.

While Singapore has diversified its economic base since the Asian financial crisis, its export-oriented nature means that the impact of external problems will remain significant, given that trade revenue is still about 2.5 times its GDP.

‘While diversifying the economy is well and good, it does not solve the underlying problem. I think we can never escape the fact that Singapore is a very open economy and it is essentially a parameter of global growth,’ says Citi economist Kit Wei Zheng. ‘The problems of the global economy, as far as GDP growth numbers are concerned, are probably going to be amplified.’

Source : Business Times - 28 Oct 2008

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World markets slump as Nikkei hits 26-year low

World markets slump as Nikkei hits 26-year low

Seoul slashes interest rates as recession fears mount

(LONDON) European stock markets fell heavily yesterday after the Nikkei index in Japan closed at its lowest in 26 years as the financial crisis raised recession fears and drove up the yen, piling the pressure on the country’s exporters.

Tokyo’s Nikkei 225 index closed down 6.4 per cent to 7,162.90 - the lowest since October 1982 - with exporters such as Toyota Motor Corp and Sony Corp hit hard. The losses came despite a report that the government was considering massive capital injection into struggling banks in a bid to calm jittery financial markets.

Even Japanese banks that have avoided the worst of the losses that are weighing on their Western counterparts are now struggling as the value of their stock portfolios is hammered. Mitsubishi UFJ Financial Group, one of Japan’s largest lenders, said yesterday that it would seek to replenish its capital, raising billions of dollars by selling new shares.

In New York, shares marched lower again as trading began in New York, extending global losses. The Dow Jones industrials fell more than 150 points or 1.6 per cent at the open.

The Standard & Poor’s 500-stock index was down 2 per cent and the Nasdaq composite index lost 1.9 per cent.

Yesterday’s sharp stock market declines in Asia came amid another round of government measures to boost markets. In South Korea, the central bank slashed its key interest rate yesterday by three-quarters of a percentage point - its biggest cut ever - to prevent Asia’s fourth-largest economy from lurching into recession, while Australian and Hong Kong central bankers injected funds into their markets to ensure liquidity.

In mainland China, the benchmark index slumped to its lowest level in more than two years as investors reacted to dismal earnings reports. The Shanghai Composite Index lost 6.3 per cent, or 116.27 points, to 1,723.35. It is now down about 72 per cent from its peak about a year ago.

Hong Kong’s Hang Seng Index tumbled 12.7 per cent to 11,015.84, its lowest close in more than four years and biggest daily decline since 1991.

In the Philippines, the key index plummeted 12.3 per cent to 1,713.83 points, triggering a circuit-breaker that automatically halted trading for 15 minutes.

Only South Korea’s market managed to eke out gains, perhaps in part because of the big rate cut there. The benchmark Kospi ended 0.8 per cent higher at 946.45.

The MSCI index of Asian stocks outside Japan fell for a fourth consecutive session, losing more than 5 per cent to levels not seen since the first half of 2004.

The MSCI index has now lost more than 40 per cent since Sept 12, right before the collapse of investment bank Lehman Brothers set off heavy selling. The index is down over 60 per cent for the year.

Taiwan shed 4.7 per cent while Australia lost 1.6 per cent. India’s main share index closed 2.2 per cent lower after falling 11.5 per cent during trade to its lowest in three years, with local institutions and short covering pulling it off lows.

The Thai bourse was suspended for 30 minutes after it dived more than 10 per cent, triggering an automatic shut-down. It closed 10.5 per cent lower. Jakarta was down 6.3 per cent. Meanwhile, Wellington, Kuala Lumpur and Singapore were all closed for public holidays.

In afternoon trading, Britain’s FTSE 100 fell 1.63 per cent, Germany’s DAX Index lost 2.57 per cent, and France’s CAC-40 declined 4.91 per cent.

In oil, crude prices weakened after Opec’s move to cut production in an attempt to halt the declines. Light, sweet crude for December delivery was down US$1.95 to US$62.20 a barrel.

In another development, the US government will begin doling out US$125 billion to nine major banks this week as part of its effort to contain a growing financial crisis, a top Treasury official said yesterday.

Assistant Treasury Secretary David Nason said that the deals with the nine banks were signed last Sunday night, and the government will make the stock purchases this week. The deals are designed to bolster the banks’ balance sheets so they will begin more normal lending.

The action will mark the first deployment of resources from the government’s US$700 billion financial rescue package.

Meanwhile, sales of newly constructed US single-family homes rose in September and inventories shrank as builders slashed prices to their lowest level in four years to move property as a financial crisis deepens.

The annual sales pace of 464,000 homes was up 2.7 per cent from the revised August figure of 452,000, originally reported as 460,000 homes, Commerce Department data showed yesterday.

Economists polled by Reuters expected the new homes sales pace to dip to 450,000 homes from that original figure. — AP, Reuters, AFP, NYT

Source : Business Times - 28 Oct 2008

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All mis-selling complaints to be reviewed: MAS

All mis-selling complaints to be reviewed: MAS

By Lee Su Shyan, Assistant Money Editor

MAS managing director Heng Swee Keat reiterated that all investors with complaints about mis-selling will have their cases reviewed. — PHOTO: ZAOBAO

All investors in the DBS High Notes 5, Lehman Minibond and Jubilee Series programmes who feel they were mis-sold the product will have their complaints looked into, said the Monetary Authority of Singapore (MAS).

The regulator also said that its upcoming review of the structured products industry will cover areas such as clearer descriptions and better labelling of products and more professionally trained relationship managers.

About 10,000 retail investors here pumped over $500 million into structured products linked to now-bankrupt Lehman Brothers. Last week, DBS Bank, Hong Leong Finance and Maybank said they would look into complaints and fast-track vulnerable cases. This has led to some investors feeling worried about being left out.

However, MAS managing director Heng Swee Keat reiterated that all investors with complaints about mis-selling will have their cases reviewed.

‘I understand the anxiety of investors. There are different types of investors, and the way in which these were sold also differed. Hence, each case has to be assessed individually,’ he said in an interview last Friday.

‘The three-step process that MAS has put in place is serious and impartial, and is one that all investors can use if they feel they were mis-sold.’

The complaints resolution process involves investors lodging a complaint with the bank. The next move is to provide full documentation to the bank for it to make an assessment, and then for the investor and bank to resolve the case.

If this does not happen, he can go to Fidrec, the dispute resolution centre, where there will be a mediation process. If that fails, the investor can seek adjudication.

‘We’ve asked the financial institutions to properly resolve each case, and because of the large numbers that are involved, we’ve asked the financial institutions to give priority to the vulnerable investors,’ Mr Heng said.

So it does not mean that non-vulnerable cases will be ignored. Still there will be a group of investors who may not see much of their investment. There will also be a group he described as ‘knowledgeable and experienced’.

‘This group should have understood the risks of investing in these products and take responsibility for their actions,’ he added.

In the upcoming review of the structured products industry, one of the areas to be studied will be stronger suitability requirements for some types of products and investors. This means stricter checks on whether a product is appropriate before an investor buys it.

In addition, ‘we will also look into clearer product labelling and risk rating as well as simpler descriptions which can be more easily understood by investors’, he said. ‘We will also be looking at strengthening the training of persons who market such financial products.’

MAS will focus on how all the different parties involved in such products can work together better. He referred to banks - their boards and senior management - saying that they must be responsible for ensuring that investors get a fair deal.

One other area the review will cover is education of investors.

Source : Straits Times - 26 Oct 2008

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