When the rates goes up...

It is only a matter of time before the US Federal Reserve hikes rates. Everyone is watching Janet Yellen like a hawk (although she has yet to become one) because the impacts of the move distills down to everyone of us. In order not to tip the scales, the rate rise is likely to be gradual. However, here are some of the more pertinent implications for us to be prepared for:

Rise in borrowing costs (mortgage, car loans, credit cards) & savings rates - 

Savers can start smiling again as deposit rates will finally go up. However, the higher cost of funds will have to be compensated by higher borrowing rates for mortgages, car loans, and credit cards.

In Singapore, we have already seen that happening with the 3 month *SOR and SIBOR climbing to 1.405% and 1.075% respectively in August, the most since end 2008.

In light of the rising SOR, banks are already dangling offers to refinance home loans:

Rise in USD + fall in Emerging market currencies and EUR:

This presents a good window to accumulate the USD, which is set to appreciate as rates increase; and sell Emerging market currencies (e.g IDR, THB, MYR, VND), before they drop further when the Fed starts the ball rolling.

The Singapore dollar is already set for its biggest annual loss since 1997, hitting 1.42 to the USD just before the Fed decision. Declining currencies also implies lower asset values for foreign investors, but an opportunity to accumulate assets in emerging markets.

Companies at risk:

Interest payments for low grade debt could rise more quickly. This would increase the burden on ASEAN companies, which have already seen their currencies depreciate, and face higher USD repayments. The extended period (7 years!) of low interest rates have also sustained zombie companies, which might be unable to survive a rate hike. Look out before investing in these companies at risk.

*The Swap offer rate (SOR) is typically used to price corporate loans. A softer Singapore dollar can put upward pressure on local interest rates such as SOR, as investors seek higher yields as compensation for holding the weakening currency; the Singapore Interbank Offer Rate (SIBOR) is the rate at which banks lend to each other, and is used to price mortgages. It usually follows the SOR with a lag.

This time is different?

Bloomberg came up with a very relevant article on why where we stand is different from the Asian Financial Crisis of 1997.

In a nutshell, here is the gist of it:

What is happening?

The recent devaluation of the RMB and a strengthening USD, in anticipation of a rate hike (that didn't happen) has resulted in SE Asian currencies such as the Indonesia rupiah, Malaysia Ringgit, and Vietnamese Dong tumbling to levels seen during the 1997 Asian Financial Crisis.

How is this time different?

• These countries have lower external debt burdens.
• Exchange rates are now flexible; they were fixed and indefensible in 1997.
• They have more dry powder this time - higher foreign currency reserves - to shore up their currencies if required. In Indonesia and Thailand, for instance, there is room for further rate cuts, while Jakarta and Bangkok have announced higher domestic spending to boost their economies. Meanwhile, Kuala Lumpur has also announced a higher spending plan.
• Current account surpluses for these countries - exports are greater than imports.
• Asian banks are stronger - higher quality loan portfolios and regulations

In light of the above factors, analysts say that the drop in currencies is actually a healthy realignment that would help boost exports amidst a commodity slump. However, I'd like to add that there are now new factors in the equation:

What's new this time?

• It is a matter of time before the US starts raising rates, thereby exacerbating the outflows from emerging markets in search of safer havens and higher returns. 
• The slump in commodity prices have added on to the woes of Indonesia (coal) and Malaysia (oil).
• Loss of confidence in the Indonesian and Malaysian governments could lead to further political turmoil.
• China's slowdown, exporting deflation with it. 

All this volatility in the markets is not helping confidence, which is a prerequisite to boosting much needed investment and consumption. Surprisingly, 7 years from the crisis, we are still hearing about massive job cuts (read Deutsche, HP, Standard Chartered) with the only bright spot coming from Silicon Valley, widely touted to be approaching bubble territory. 

All eyes will be on the US and Chinese governments if they can bring their economies out of the deep end. It would also be crucial these new factors do not throw their economies out of balance; because this time it may be different ... a different crisis.