SINGAPORE: After four interest rate hikes in 2018, US Federal Reserve announced that interest rate increases would be put on hold, on the back of sluggish inflation and slowing growth in Europe and China.

This must be music to many ears, interest rate increases over the past year have had implications for investors around the world, including Singapore.

Unlike other countries where lending rates are typically dictated by the central bank, interest rates in Singapore are determined by the Singapore Interbank Offered Rate or SIBOR.

Interest rates movements in the US will influence the SIBOR in Singapore, which, in turn, will affect local mortgage lending rates.

LOW INTEREST RATES FOR ALMOST A DECADE

In the past, Singaporeans have enjoyed very low bank lending rates for almost a decade – close to 1 per cent. This is truly remarkable for consumers who are looking for bank financing.

The low rates have meant that many have been able to get a mortgage loan for close to 1.5 per cent, finance a car, and possibly even get a small business loan at very low rates at the same time.

READ: Succeed in your career, settle down, buy a BTO. Is this Singaporean dream outdated? A commentary

However, over the past year, these rates have been moving up and now they are close to 3 per cent. Clearly, this has consequences for consumers who have existing loans or are thinking of taking out new loans.

Consumers who have cash do not need to borrow money. However, those who are liquidity constrained, or do not have enough cash in hand are more likely to borrow from banks for big purchases. For them, it is difficult to service existing debt when rates go up.

Consider a family with a combined take-home pay of about S$3,000 a month, makes a S$1,000 mortgage payment, another S$1,000 for kids’ education, transportation and other necessities, and another S$1,000 for discretionary spending like dining out, clothes and travel. 

They are pretty much tapped out at the end of the month and are essentially living from paycheck to paycheck.

READ: A mediocre year ahead as dark clouds gather over global economy, a commentary

When interest rates go up from 1.5 to 3 per cent, the consumer debt service burden has essentially doubled. Consumers, especially those in the lower income group, will find it challenging to make their mortgage payment.

In our example, it is likely their mortgage payment will go up from S$1,000 to as high as S$1,500.

THREE OPTIONS

At this rate, they have three options.  First, they can default on their mortgage. With such increases in interest rates, the reality is that some people will have a hard time making ends meet.

The second option is to cut down on other forms of consumption. The easiest items to cut down on would be durables and discretionary items such as electronics, clothes and restaurant meals. Essentially, these consumers on the edge must tighten their belts.

The third option is to borrow on their credit cards and take on debt to support current consumption at the cost of future consumption.

Consumers who can afford the higher loan payments will nevertheless be concerned as many may have thought that interest rates will not go up beyond three percentage points.  If it were to rise higher to 4 per cent, it may put this group on the edge as well. 

They must start thinking about what to do moving forward in terms of their spending behaviour and savings. 

INTEREST RATE MOVEMENTS SHOULD NOT BE A SURPRISE TO HOMEBUYERS

Unfortunately, interest rates fluctuations are not new. Hence, in Singapore, the Housing and Development Board (HDB) offers a fixed-rate mortgage option to all public housing buyers. However, these mortgages come with some strict restrictions and are priced higher compared to bank loans.

READ: Mind the varied impact of HDB schemes on different groups of home owners, a commentary

So some HDB home buyers choose to take out a bank loan for their public housing. Meanwhile, all private home buyers need to get a bank loan. 

Since banks can only give a maximum loan of 75 per cent of the house value since been tighter restrictions on the loan-to-value limits were announced last year, homeowners will need more cash on hand for the down payment.

This will stretch their finances and force them to draw down on their savings, savings which would have come in handy when interest rates rise.

It is also often the case that many homebuyers buy bigger homes in anticipation of future housing needs. This increases their current debt service burden when rates rise. 

They should have instead bought a smaller house that requires a smaller mortgage payment every month, giving them more buffer for future rate changes.

BROADER IMPLICATIONS

Rising rates will also have broader implications in the economy. Consumers and businesses are less likely to take out new loans at higher rates and this will hurt economic growth.

Thus, banks need to think about how that transmission of SIBOR, will affect bank lending behaviours to consumers and businesses, and impact to their future business plans.

Commercial banks should consider how a higher SIBOR would affect their current portfolio of services. First, they will get fewer buying houses as the higher interest rate makes purchasing housing more costly.

Second, many may default on their mortgages so the banks will have a higher credit risk on their portfolio. We are already seeing early signs of this in Singapore with the mortgage slowdown due to rising interest rates and the latest round of property curbs.

Furthermore, the impact will also extend to consumers shying away from credit cards and auto loans.  Businesses some also will be less likely to take out commercial loans because of high interest rates.

From a regulatory point of view, monetary policy in Singapore overseen by the Monetary Authority of Singapore (MAS) takes the form of a nominal exchange rate policy to keep prices stable. This combined with the act that Singapore has a relatively open capital account, means that the MAS is unable to influence interest rates at the same time, without risking capital flows. 

What these collectively mean is that this rise in interest rates will inadvertently have implications for the most vulnerable consumer – those that do not understand financial markets and how banking works. 

There is really few effective solutions apart from greater financial literacy including an understanding of what can influence one’s loan payment amounts for one to make better decisions. 

Sumit Agarwal is the Low Tuck Kwong Distinguished Professor of Finance, Economics and Real Estate at NUS Business School. The opinions expressed are those of the writer’s and do not represent the views and opinions of NUS.

SINGAPORE: Embattled water treatment firm Hyflux and three of its subsidiaries on Thursday (Feb 21) received the go-ahead from the Singapore High Court to hold scheme meetings in early April for creditors to vote on its do-or-die restructuring plan.

Two creditor classes – the senior unsecured creditors and subordinated debt holders – will get to vote first on Apr 5, possibly via two separate meetings on the same day.

Senior unsecured creditors include the banks and medium-term noteholders. The latter refers to the large group of 34,000 perpetual security and preference share investors, who have been put together to vote as a single class.

Trade creditors of the three subsidiaries will have their scheme meeting on Apr 8.

To pass, the scheme needs to be approved by at least 50 per cent in number and 75 per cent in value of each creditor class present at these meetings.

The court on Thursday also granted mom-and-pop investors who hold Hyflux’s securities through nominees or custodians to cast their votes in person at the scheme meetings, and be counted both in number and value.

Under the law and as seen in the debt restructuring case involving Singapore-based offshore services firm Swiber Holdings, those who hold investments through nominees are not allowed to attend creditors’ meetings and have to be represented by these nominees. 

A nominee can only be counted as one vote, regardless of how many investors it represents.

Hyflux will release a notice for the scheme meetings and an explanatory statement of its financial restructuring scheme in the coming days. 

READ: Hyflux lays out restructuring plan to revitalise business, but retail investors lament big losses

READ: Hyflux’s retail investors face losses under proposed restructuring plan

WHY “RUTHLESSLY ELIMINATE” US: RETAIL INVESTOR

The clock is ticking down on Hyflux to sort out its financial woes. While its debt moratorium only finishes at end-April, it needs to get the okay from a majority of creditors and another court approval by Apr 16 before its S$530 million lifeline from Indonesian consortium SM Investments expires.

If the proposed scheme of arrangement fails to get creditors’ backing, Hyflux “will likely go for liquidation” which “can be quite brutal”, its legal advisor from WongPartnership told the court.

In a liquidation scenario, senior unsecured creditors can expect recovery rates of about 3.8 to 8.7 per cent, but those holding on to perpetual securities and preference shares will “probably get nothing”.

However, it remains to be seen whether Hyflux’s restructuring proposal can garner the votes that it needs for a second chance.

Recovery rates of 10.7 per cent and 24.5 per cent for its subordinated debt holders and senior unsecured creditors, respectively, have been cold comfort for many – so much so that some retail investors have said they would rather see Hyflux liquidated or are petitioning for counter proposals.

During the hearing, Justice Aedit Abdullah said he had received a letter and email from Madam Loo Leong Hun, a retail perpetual security and preference shareholder.

Mdm Loo, who was given an opportunity to air her concerns in court, said retail investors like her are willing to “waive or accept low coupons”, as well as consider “staggered capital redemptions or no capital redemptions until Hyflux sees better days”.

She urged the court to accept this proposal, which she described “as a glimmer of hope” for investors like her to recover their hard-earned savings.

“We understand what Hyflux is going through. We have been informed that the potential buyer does not want any debt therefore we have decided to step down,” she said.

“I wish to highlight that in this demand proposal, there are no contractual obligations to redeem capital or to pay interest, therefore it is not a debt and it is placed in the same classification as equity.

“Our ranking is the same as equity, so is there a need to write off the preference shareholders?”

She also referred to the company’s 2017 annual report, which suggested that perpetual securities do not fall under the category of a financial liability given that there is “no contractual obligation to repay its principal or to pay distribution”.

“So why is there a need to ruthlessly eliminate us from the balance sheet? We are a benign equity and not a toxic debt to Hyflux,” she added.

Mdm Loo also said many elderly folk are among those who have invested their retirement funds into Hyflux. She cited an 86-year-old retiree who relied on dividends from her investments for daily expenses. 

“Now (with mobility issues), it is not possible for her to work and recover her principal,” Mdm Loo said.

“There are many others like her out there. Many Singaporeans will be affected by the new scheme proposed by Hyflux.”

READ: SIAS to hold investor-only town hall session on Feb 25 for Hyflux perpetual, preference shareholders

READ: ‘A big shock’: Retail investors in Singapore caught out by Hyflux woes

Justice Aedit said he recognised the circumstances as “something unfortunate” but his role for Thursday’s hearing is “fairly limited” to assessing whether Hyflux’s application to convene scheme meetings meets minimum requirements.

“I am not in the position myself to put a proposal in. It has to come from the creditors as a whole,” the judge added.

He said he has given copies of Mdm Loo’s letter to Hyflux’s legal advisors and other working groups. To that, WongPartnership lawyer Manoj Sandrasegara said he will pass on the letter to Hyflux’s board of directors and SM Investments.

SINGAPORE: E-scooter sharing operators Telepod and Neuron Mobility are set to be charged in court for providing services at public places without a licence or exemption, the Land Transport Authority (LTA) said in a news release on Thursday (Feb 21).

The charges will be brought against Telepod on Thursday and Neuron Mobility at a later date.

LTA said it has impounded 68 personal mobility devices (PMDs) from Telepod and 131 from Neuron Mobility as of Feb 14. The devices were impounded as they had been illegally made available for hire at public places, LTA said. 

READ: LTA impounds PMDs from Neuron Mobility, Telepod and Beam

Telepod had been given repeated written warnings before the devices were impounded, LTA said.

Investigations into Neuron Mobility have been completed, and the company will be charged at a later date, the authority said.

Under the Parking Places Act, unlicensed operators convicted of providing device-sharing services at public places can be fined up to S$10,000 and/or be jailed for up to six months. If they continue providing the service illegally after the conviction, they can be fined a further S$500 per day or part of a day.

Telepod and Neuron Mobility were among the first shared e-scooter players in Singapore when they launched in 2017.

They are also among 10 operators who confirmed with Channel NewsAsia ahead of the Feb 11 deadline their intention to apply for a licence.

“LTA would like to remind all operators that when evaluating licence applications, LTA will consider their track record, including their compliance with the law and regulatory requirements,” the authority said in its press release on Thursday.

In November, LTA said that it had impounded 42 PMDs from operators including Telepod and Neuron Mobility, after they were found available for hire without a licence at Bencoolen Street and Bayfront Avenue.

SINGAPORE: Five suspected drug offenders were arrested on Wednesday (Feb 20) in a pre-dawn operation conducted by the Central Narcotics Bureau (CNB), it said in a press release on Thursday.

CNB said its officers were deployed to the vicinity of Jalan Bukit Ho Swee on Wednesday to observe two suspected drug offenders. 

The first suspect, a 61-year-old Singaporean man, was first spotted meeting up with the second suspect, a 28-year-old Malaysian man, around Tiong Bahru Plaza.

The two parted, but were seen meeting up near Block 41 Jalan Bukit Ho Swee a while later, said CNB. The Malaysian suspect later left on his motorcycle, while the Singaporean returned to his hideout nearby.

The Malaysian was later arrested at the Woodlands Checkpoint, as he was leaving Singapore. Cash of S$5,200 was recovered from him.

CNB officers also raided the Singaporean suspect’s hideout at the same time, where 500g of heroin and S$2,900 in cash were recovered. More heroin, 466g, was found hidden inside a black haversack left hanging outside the unit.

Investigations led officers to another suspect, a 57-year-old Singaporean male, believed to be linked to the first.

Officers who raided his hideout near Indus Road found a small amount of heroin and Ice. The man was arrested together with a 53-year-old Singaporean male who was also in the hideout.

A 47-year-old Singaporean male suspected of being a drug abuser was also arrested outside the unit.

CNB said investigations into the drug activities of all suspects are ongoing.

The amount of heroin recovered from the operations is enough to feed the addiction of about 464 abusers for a week, it added.