​Question

Mr Arthur Fong: To ask the Minister for Trade and Industry in view of an impending rising interest rate environment and tapering of the third round of quantitative easing (QE) in the US (a) what is the prospect for the Singapore economy in terms of export outlook and domestic economic growth; and (b) how will the Ministry help SMEs to adapt and cope with possible higher costs and changes in demand.

Oral Reply by Mr Lim Hng Kiang, Minister for Trade and Industry

1.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.

2.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 also 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.

3.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. 

4.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 subsequent rise in US interest rates, domestic interest rates will also rise in tandem. This will in turn translate into higher borrowing costs for businesses, including SMEs.

5.Businesses should be prepared for the eventual rise in interest rates, as it will not be prudent for the Government to lower borrowing costs for businesses artificially. Instead, the Government will support the 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 SMEs, SPRING has schemes such as the Micro Loan Programme, the Local Enterprise Finance Scheme, and the Loan Insurance Scheme.