Source : Straits Times - 5 Jan 2009
SIGNS of the credit squeeze are emerging everywhere in Singapore.
After a final, Christmas sales spending binge, consumers are really starting to tighten their belts. This has cast a shadow over the traditionally joyous mood before each Chinese New Year.
News of job cuts at multinational firms such as Philips and in the financial sector by Citibank and DBS Bank are fuelling fears of more job losses.
This, in turn, is leaving consumers worried about their ability to repay housing loans, for example.
The cycle of fear and caution is causing them to scale back on their spending drastically, even though it may ultimately prove unnecessary to do so.
Conspicuous consumption is out and austerity is in, as people switch from eating at restaurants to hawker centres and food courts.
Overseas travel is also taking a hit. Fewer Singaporeans are booking tour packages for the Chinese New Year holiday at the end of the month.
Investors, meanwhile, are extremely reluctant to take a punt on the market, preferring to hoard cash instead. As a result, daily traded volumes on the Singapore Exchange have fallen to their lowest levels since the Sars crisis six years ago.
Some of this may be an over-reaction but there could be valid reasons for adopting a wartime belt-tightening mentality.
Take a typical working couple with school-age children, paying off a hefty mortgage and servicing car loans. If either one loses that monthly pay cheque, they would face hardship - and if both are retrenched, it would spell financial calamity.
But widespread belt-tightening can cause an economy to literally collapse from fear.
One priority, therefore, is to find ways to put cash back into Singaporeans’ pockets as they grapple with possible job losses or a cut in their pay.
For many Singaporeans, their home is their key financial asset, while home loans form an integral part of many banks’ core assets, making up 28.4per cent of the lending which banks make to companies and individuals.
So far, the spotlight in the weakening property market has focused on a potential over-supply crisis, should cash-strapped buyers fail to complete transactions on flats on which they have deferred most of their payments until the projects are built.
But it is crucial to keep the rest of the property market healthy, too.
In Britain and the United States, the rotting housing market has devastated their economies. Singapore should take heed to avert a similar fate.
There are precedents from previous economic crises to offer a blueprint on how the credit crunch can be tackled.
In 2003, as Sars struck Singapore, fears emerged that the economy might sink into a deep recession.
Against this grim backdrop, DBS Bank came to the rescue of cash-strapped Singaporeans with a home loan package which allowed them to pay only the interest for the first three years.
Then-chief executive Jackson Tai said the deal was good for customers and shareholders alike. It allowed home-owners to free up their cashflow and the bank to maintain the quality of its loan book.
And why not? So long as the interest is serviced, the loan is healthy and there is no need for the bank to make any provision in its books for bad loans.
For consumers struggling to make their monthly mortgage payments, DBS’ move was a boon.
Take a $500,000 20-year home loan pegged at an interest rate of 3per cent. If a borrower had to service both interest and principal, he would have to pay a monthly instalment of $2,778. By servicing the interest only, his monthly payment drops to $1,250, putting an extra $1,528 back into his pocket.
Therefore, even if a working couple were deprived of one income, the fear of losing their home would be considerably reduced. They could pay their monthly housing instalment using Central Provident Fund cash if they were only servicing the interest on the loan.
We are now six years on from the Sars crisis.
Although DBS has received flak for selling worthless products linked to failed investment bank Lehman Brothers, it still retains its status as the people’s bank, mainly because of the acquisition of the much-loved and widely-patronised POSB in 1998.
As current chief executive Richard Stanley has said, the bank would never knowingly do anything that could hurt its customers.
At a time of crisis, it is in the position of being able to help Singaporeans. As the largest local bank, it is a big lender to HDB flat-owners via its extensive POSB network. It is also a key player in private housing loans.
It would be good if DBS could again display the leadership shown six years ago by offering interest-only loans to help consumers here through the inevitable tough times ahead.
This would enable Singaporeans to set aside less cash for their monthly housing instalments. It would also remove fears of a collapse in the residential housing market in the event that cash-strapped owners could not keep up their mortgage payments.
Fresh from a successful $4billion fund-raising exercise, DBS can lend Singaporeans a helping hand from a position of strength. Such a loan scheme would be the best Chinese New Year present it could give to the people of Singapore.
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