Sunday, June 13, 2010

Foreign Currency potential and local loan interest rates

The financial crisis of 2008 brought to an end one of the longest periods of sustained global growth experienced in modern times.

While many Western economies experienced unsustainable, property-fuelled consumer booms, which boosted both their growth rates and their exchange rates, the prolonged phase of expansion allowed many emerging market economies to expand their shares of world trade, increase their currency reserves and improve their fiscal balances to a remarkable degree.

The end of that global expansion was certainly not good news for emerging markets, but its aftermath has revealed this remarkable shift in relative structural fundamentals between the economies of the old and new industrialised worlds.
As the world economy now picks up again, we expect favourable cyclical forces to combine with relative structural improvements to generate significant further capital inflows to emerging markets, driving notable potential strength of their currencies.
Of the cyclical forces, interest rates antheir likely future course are of course critical, but so too the resilience of domestic economic growth, or prospects for commodity prices in the case of the larger resources exporters. Brazil, Indonesia and Turkey offer such cyclical appeal here.

Combining these factors, here are some currencies which offer the most appealing blend of value, yield and cyclical attractions:

 The Mexican peso is among the cheapest of major emerging currencies. It should also be supported by economic recovery, a moderate interest rate pick-up of 4.5 per cent versus the US, and a relatively firm oil price, as Mexico is an oil producer.

 The South Korean won offers value on all metrics and should remain supported by the economic recovery and Korea's current and capital account surpluses.

 The Indian rupee is cheap on most, though not all, value metrics. The currency should be supported by a pick-up in foreign direct investments and overseas corporate borrowings, as well as a policy preference to use the currency to contain imported inflation.

 The Turkish lira is reasonably valued at current levels, and should remain supported by economic recovery and one of the highest yields among the liquid emerging market currencies.

 The Russian ruble is not overvalued and should remain supported by a significant economic recovery, a continuation of firm oil prices and a high interest rate.

 The Indonesian rupiah is neutrally valued, and should remain supported by economic recovery and an improving domestic political situation.

 The Brazilian real has already appreciated significantly, such that it offers no outright value appeal, but the currency remains well placed to benefit from a positive commodity market and good domestic growth. High interest rates are likely to attract foreign capital inflows.

These currencies have the potential to show total returns (interest rate carry plus potential spot currency appreciation versus the US dollar) in the region of 7-10 per cent in the coming year.

As individual currencies always carry certain political and idiosyncratic risks, it important to approach currency investment in a well-diversified manner, spreading exposure across a number of favoured currencies. In this way, a portfolio approach can gain exposure to the overall theme of favourable cyclical and structural drivers of emerging market currency appreciation, while limiting the drawdown risk from any individual currency.

THE credit crisis has brought about a lowering of local interest rates across the board for loans to Singapore SMEs. We have certainly taken advantage of this opportunity by procuring bigger loans for our local company's expansion and development.

LOWER interest rates are indeed a boon to SMEs during good and bad times. Lower interest rates translate into lower cost of capital and ultimately lowers the cost of doing business and improve cash flow.

Pursuit was able to generate our own working capital from internal sources and so did not have to borrow from banks. However, as we continue to grow and expand in the region, we may have to tap appropriate available external financing options to fund our expansion plans. Hopefully interest rates will continue to remain low and attractive. Interest rates to remain at the current level for probably the next six months. However, as the economy continues to grow, pushing up prices and nudging inflation upwards, interest rates may rise in 2011.

Furthermore, the government's Special Risk-Sharing Initiative (SRI) scheme which was introduced during the recession will be discontinued in January 2011 and there is expectation interest rates for bank loans to gradually trend up.

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