Sunday, June 26, 2016

How Brexit could affect Singapore, individually?

Brexit has happened! Stock markets crashed, most currencies dropped (including SGD) against USD, Gold rose; so as an individual how would this possibly affect us over here?

First off, in all likelihood, as almost all governments & financial firms are trying their best to assure, nothing significant is going to affect Singapore, due to the limited trade with UK (as a nation).

Unless (1) if you own UK properties, its value now dropped 5% (GBPSGD 1.95 to 1.85),
or (2) if you own UK stocks, depending on the stocks you own, some fell more (eg. Banks) which could results in paper loss of around 20%.

Great if you don't own anything remotely related to UK, but still some of what I am talking about below, are how Brexit would affect the main street people, like you and me, here in Singapore!


Is this worse than "the Great Recession 2007" or repeat of "the Asian Financial Crisis 1997"?
Honestly I don't know.
If we look at a typical boom bust cycle, we might be due for one, since its already 9 years from the last big one in 2007.

Fundamentally, debts have rose quite abit across most nations, corporates & individuals; if we look at Singapore households debts have rose about 3x from 1997.


Before you start to panic, it is important to look at the opposite side of the balance sheet, which is the assets, specifically the net assets (Household Networth).
The substantial increase in household networth can be attributed to 2 factors, (1) general wealth increase, in particular property assets and (2) increase in resident population from about 3million to 3.9million
[source: http://www.singstat.gov.sg/statistics/visualising-data/charts/resident-population]
Charts generated from SingStat downloaded data available for reference

So fundamentally, I do not think we are in a bad shape to service those debts (as a nation as a whole).

But you said Brexit could affect us individually, how?
Answer: through contagion effect & currency movement, via the single largest debt payment of average households, the monthly mortgage payment as a result of SIBOR/SOR increase.

Source of Chart: http://www.tradingeconomics.com/singapore/interest-rate

Current 3 months SIBOR rate: about 1%
Source: http://abs.org.sg/rates-sibor

You see, most recently there was a recent spike in Feb 16 to 1% interbank rate, or SIBOR about 1.25% (if you look at consumer's SIBOR from say Moneysmart http://www.moneysmart.sg/home-loan/sibor-trend)
That was the immediate effect prior & after US Fed interest rate raise its interest rate from 0.25% to 0.5%.

Add in the spread of 1% that Banks charged to individuals, the resulting mortgage interest rate is 2.25%.

Should SIBOR go all the way back to 2007 of about 3.5%, mortgage interest would jump to 4.5%!

Scenarios & impacts to Monthly Mortgage Payments
Assuming $1 million property with 80% loan; 
  Scenario 1
Current
Scenario 2
Potential Likely Case
Scenario 3
Unlikely Worse Case
SIBOR % 1% 1.25% 3.50%
Interest % 2% 2.25% 4.50%
Mortgage Monthly payment $2,956.96 $3,057.97 $4,053.48
Source: http://www.calculator.net/mortgage-calculator.html

In the worse case scenario, if the borrowers have max out the loan under TDSR 60%;
the borrowers'gross salary of $4,926 per million loan (divide $2,956.96 by 0.6)
would be wiped out!

However, this worse case scenario is unlikely to happen, as Singapore is one of the few strong financial centres with AAA ratings, thus our currency against USD is unlikely to depreciate that much.

Also, the last time SIBOR was 3.5%, US Fed interest rate was 5% then; as US Fed is likely to defer interest rate further; SIBOR is only likely to increase slightly such as Scenario 2 by 25bp. 

Still in this time of uncertainty, individuals might wish to save up more cash to cope with potential increase in mortgage payment or simply to invest in any good opportunities when the uncertainty subside.

Welcome to the Brave New World ;)

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