Finance

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

For only the second time in a dozen years, Singapore has taken a pause from seeking a stronger currency.

The other occasion when the central bank chose to target zero appreciation of the Singapore dollar's trading band against a basket of other currencies was at the height of the credit crisis in October 2008. Investors are bound to speculate if the surprising move means authorities in one of the world's most important financial centers are guarding against a nasty slowdown in China. They probably are. But will the insurance policy give a big lift to Singapore's banks and property market? Probably not.

Shares of the three homegrown Singapore banks -- DBS, Oversea-Chinese Banking Corp. and United Overseas Bank -- rallied Thursday after the Monetary Authority of Singapore announced the easing. The punt here is that expectations of a weaker Singapore dollar will attract foreign capital only if there's more compensation by way of higher interest rates. Standard Chartered's now forecasting the currency will slide to 1.38 against the greenback by midyear, a 2 percent decline from Wednesday's level.

In other words, the three-month interbank rate to which many of the lenders' loan rates are tied should rise after the MAS move. That should boost banks' net interest margins, provided they don't end up paying more to finance those loans. The latter, though, is not a given: Rising competition for deposits means investors can't take a repeat of last year's margin improvement for granted. Besides, their exposure to China and commodities like oil and gas could mean higher credit costs. If the current signs of stability in the Chinese economy prove to be short-lived, it's hard to see banks in Singapore having a great year.

Profitable Lending
Singapore banks' net interest margins rose last year
Source: Bloomberg

Then there's the soft Singapore property market. Prices have already seen their longest losing streak since the 1998 Asian financial crisis. Transactions have dried up as buyers wait for the government to reduce some of the stamp duties and other curbs imposed to damp speculation. If authorities refuse to budge, and the interbank rate resumes its climb from the still-reasonable 1 percent level, the squeeze on homeowners' finances could tighten, and property demand would take a further knock.

So if it doesn't do all that much for banks and property, whom will the MAS easing help?

Revenge of Rates
Rising interest costs threaten Singpore's soft property market
Source: Urban Redevelopment Authority; Association of Banks in Singapore; Bloomberg

Singapore's down-in-the-dumps electronics manufacturers could benefit from a weaker home currency. To a lesser extent, even rig builders such as Keppel and Sembcorp Marine would gain. A far bigger advantage would be a revival in global trade. The chances of that appear dim when one of the world's most trade-dependent economies' central bank sets its monetary gears to crisis-fighting levels.

And that's probably the main message to investors: The city-state's zero percent path is unlikely to be a cure for its own stalling growth; it's more a symptom of the malaise afflicting economies the world over.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net