As we enter the New Year, fluctuations in the currency markets have left investors of foreign property worried about their returns. Here are some predictions for the year ahead.

By Paul Ho

When one looks at an overseas property investment, it actually consists of 2 components – the property investment and the currency investment. If you invest in a property that increases in value by 20% over a period of three years, but the currency depreciates by 30% over the same period, you will be realizing a loss if you liquidate.

Usually, Singaporeans will compare the local currency in the country of investment against either the Singapore Dollar (SGD) or the US Dollar (USD). Most often the base currency is SGD, simply because that is the currency that the Singaporean earns, and is most familiar with.

Interest rate trends in major economies

The US economy is recovering, with unemployment at five percent (as of Nov 2015) and an Interest Rate (IR) of 0.25%. On 16 Dec 2015, the Federal Reserve increased the overnight target rate from 0.25 percent to 0.5 percent. Inflation in the US is currently still under one percent, below the Federal Reserve’s target of 1.5 to two percent.

Although the US recovery seems tentative, it is nonetheless an economic recovery. It is possible there will be a few rate hikes in 2016 as the target overnight Federal Reserve funds rate at 0.5% is still low.

However, other global major economies such as the European Union, China and Japan are slowing down. EU’s growth rate is less than two percent, China is struggling to maintain seven percent growth, and Japan’s growth stands around one to two percent. EU’s interest rate is close to zero percent, Japan’s is at zero, while China dropped its benchmark yearly interest rate to 4.35 percent. EU and Japan have no more room to reduce interest rates, while China can continue to reduce both the interest rate as well as the bank’s reserve ratio to increasing lending to corporations to stimulate growth.

Just to put things into perspective, the world’s major economies are:

  • The European Union – at around 18 trillion USD
  • USA – Number 2 – at around 17 trillion USD
  • China – Number 3 – at around 10 trillion USD
  • Japan – Number 4 – at around 4.6 trillion USD

The world economy is around US$77 trillion dollars. The top 4 economies make up roughly US$49.6 trillion dollars or about 65 percent of the world’s economy and would be a good enough representative study.

Impact of capital flow

Singapore maintains a currency exchange rate based on a trade-weighted basket of its top 15 trading partners (refer to Figure 1) via a Nominal Effective Exchange Rate (S$NEER). Currently, Singapore has set a rate of slower currency appreciation. This means that Singapore watches the exchange rate of its major trading partners and appreciates the SGD against them on an aggregate basis.

Singapore’s top 10 trading partners are:

  • China
  • Malaysia
  • EU
  • USA
  • Indonesia
  • HK
  • Taiwan
  • Republic of Korea
  • Japan
  • Thailand
Funds and Gains - Major Trading Partners for SG over P3Y

Singapore’s Top 10 Major Trading Partners (Click to enlarge)

Currently, Malaysia’s Ringgit is under pressure due to political events, as well as the decline in oil
prices, one of its most important exports. Meanwhile the national currencies of the Philippines, Indonesia and Thailand are also under threat of funds outflow. This has contributed to a weakening SGD vis-à-vis the USD in recent months, as Malaysia and Thailand are two of the (speculated) currencies in the S$NEER basket.

If most of Singapore’s top 15 trading partners’ currencies are depreciating against the USD, based on a trade-weight S$NEER, the SGD will likely strengthen against some of these currencies, but will weaken versus the USD. Singapore is also entering a period of slower growth as inflation has dropped and GDP growth has slowed, with the Purchasing Manager Index coming in at 49.5 percent in Dec 2015.

The challenge for our policymakers hence, is to find a balance between import-led inflation, export competitiveness and economic growth. To do so, they will need to normalize interest rates upwards to maintain an orderly depreciation of the SGD against the USD.

Why do currencies come under threat?

Currencies generally come under threat when a number of factors are present. These include low foreign reserves, a pegged exchange rate, high debt levels at the state, household, or corporate levels, slowing GDP, inflated assets, low interest rates, among other factors.

Countries with low foreign reserves, high foreign debt and a high budget deficit are most at risk of a weak currency. Furthermore, a weakening economy with several of the mentioned risk factors are likely to suffer an extra blow from capital outflows, when it needs those funds the most. With an untimely exodus of funds from the country, the currency will weaken, causing interest rates to rise, and could lead to a rapid deterioration of its financial position.

High asset prices, such as an inflated stock market or property market, would be susceptible to speculative attacks and magnify the crisis.

Where are the bright spots?

Under-developed countries such as Cambodia, Laos and Myanmar did not receive a large amount of capital inflow. As such, they are less susceptible to capital outflows due to currency fluctuations.

These markets are potential high risk and high return locations to put your money. Their rule of law is weak and there is a degree of corruption within their systems. However, their fiscal positions currently are quite poor. For Myanmar, opening up their economy to foreign investors would be a good development. Should investors wish to enter these markets, they should benchmark property prices to Thailand’s and apply an appropriate discount. This is because Thailand is more developed, and has a better infrastructure. Hence, while these markets are rated positively, their risks are also huger.

Philippines is a fast growing economy with a young population. However, debt levels are high, and exports are weak. This is mitigated by remittances from Overseas Foreign Workers, which continue to be strong. Thus, the outlook on the Philippines is somewhere between neutral to positive.

Thailand’s economy is slowing down and may enter a period of recession, but it has one of the best infrastructure for tourism, far ahead of the Philippines, Vietnam, Cambodia, Laos and Myanmar. Thailand has about US$100 billion in reserves and a floating currency. Unless there is huge political insurrection or rioting, Thailand is unlikely to suffer from massive currency depreciation, and is therefore rated neutral.

Malaysia does have good infrastructure, but its currency has already taken a beating and its political stability is in question. Nonetheless, it is still competitive and runs a trade surplus. Despite its huge debt, Malaysia does have ample reserves, and has taken steps to mitigate currency depreciation by raising interest rates. Singapore’s northern neighbor thus remains good
for selective purchases due to its weak currency.

In the region, perhaps the one market that investors should really be wary of is Vietnam. Vietnam is highly trade dependent, and therefore, will be strongly affected by capital outflows. Furthermore, Vietnam has low foreign reserves and is running a huge budget deficit. Debt levels in this former Communist state are quite high, and corporate non-performing loans are on the rise. The rating on Vietnam is therefore negative, and investors should stay away from it for a while.

This article was contributed by Mr Paul Ho, Founder of

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