Volatility expected as debt ceiling negotiations intensify

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Investment strategy: How to trade the 14th Amendment?

David Woo writes that markets have largely disregarded the debt ceiling negotiation as a major risk due to the growth of passive investing and a lack of urgency from negotiators. However, concerns are rising over whether the positive talk is a mere show, and there is speculation that President Biden may invoke the 14th amendment if a deal cannot be reached.

Global Uncertainty Index Remains at Zero Line

David Goldman assesses how declining foreign deposits at US banks, signalling a global squeeze on dollar credit, could potentially lead to increased volatility and a shift towards alternative currencies in international trade, further impacting America’s economic position.

Russians strategize offensive options after the fall of Bakhmut

James Davis details how the war in Ukraine has entered a phase of increased uncertainty as neither side has a defined strategy. Both sides are regrouping after the Wagner group’s capture of Bakhmut, where Ukrainian troops suffered significant losses in morale and resources, with Russia now considering various offensive options.

China declares Micron a cyber threat while the long-term outlook favors Korean chipmakers

Scott Foster delves into China’s move to ban the use of Micron’s memory chips due to concerns over national security, which is seen as retaliation against US sanctions and is expected to lead to tougher sanctions on the Chinese semiconductor industry, favoring Korean competitors like Samsung and SK Hynix.

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Singapore pulling all stops to avert a housing collapse

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Singapore’s housing market is going through some big changes. It has a dual market structure consisting of a public and a private market. The public housing market is divided into a primary and a secondary (resale) market.

The Housing & Development Board is responsible for building and selling public housing flats at concessionary prices in the primary market to Singaporeans.

The primary public housing market is regulated and only open to Singaporean families, subject to a monthly household income cap of 14,000 Singapore dollars (US$10,400). After meeting the minimum occupation period of five years, owners can sell their flats in the secondary public housing market to Singaporean citizens and permanent residents who do not own private houses.

The private housing market is a laissez-faire market that supplies non-landed houses, such as apartments and condominiums, as well as landed houses, such as terrace, semi-detached and detached houses. Foreigners are prohibited from owning public housing flats. While they can buy and sell non-landed apartments and condominiums, they can only buy landed houses on Sentosa Island.

Despite Covid-19-related disruptions to supply chains and economic activities, the benchmark private residential property price index experienced 12 consecutive quarters of growth of 25% total after exiting the “circuit breaker” in June 2020. The resale public housing price grew by 28% over the same period.

The government introduced three rounds of cooling measures to pre-empt housing prices from diverging from economic fundamentals. On December 16, 2021, the government raised the Additional Buyer’s Stamp Duty (ABSD) — a form of transaction tax when buying private residential Singaporean properties — for foreigners from 20-30%.

The ABSD was also raised to 17% and 25% for Singaporean citizens and permanent residents respectively when buying second properties and 25% and 30% respectively when buying third and subsequent properties. Property developers also pay the ABSD of 40% — but 35% is remittable if developed units are sold within five years of the land acquisition date.

Another intervention occurred on September 29, 2022, when government agencies raised the medium-term interest rate floor — which is used to calculate the loan quantum granted by private financial institutions for property purchases — from 3.5-4%. The government also imposed a 15-month wait-out period for private owners to insulate first-time home buyers against intense competition in the public resale market.

The government is concerned about high housing prices weakening its social compact. Although foreign investments only constituted 7% of private property sales in 2023, they significantly drove up private housing prices, especially in the luxury housing segment. The latest ABSD rate hikes were intended to check the flows of oversea “hot money”, which have inflationary effects on the private housing markets.

On April 26, 2023, the government increased the ABSD from 30-60% for foreigners when buying private residential properties in Singapore. Singaporean citizens and permanent residents will now have to pay ABSD of 20% and 30% respectively — an increase of 3% and 5% — when purchasing second private properties for investment purposes.

Private residential property prices are already at historically high levels, with average launch prices ranging from S$2,000-S$2,900 (US$1,485–$2,153) per square foot. The current median housing price is 14 times that of medium-income — such high prices will make the private housing market unaffordable and inaccessible for medium-income families.

Using a recent project launched after the new ABSD rule, Blossoms by the Park, a local buyer purchasing a 3-room unit at S$2.28 million (US$1.7 million) will make a down payment of S$570,000 (US$423,000), based on a loan-to-value ratio of 75%.

Because of the 4% interest rate floor, their monthly mortgage payment will be S$10,360 (US$7,693). Based on the total debt servicing ratio of 55%, their monthly income must be at least S$18,840 (US$13,990) to obtain a mortgage loan from a local bank. This means that only the top 10% of Singaporean households by income could afford the unit in the Blossoms by the Park.

Interest rate hikes and geopolitical tension add significant risks to investing in private real estate markets. If macro-risks trigger negative economic outcomes — such as recession and unemployment — private housing market prices could spiral, leading to more socioeconomic consequences.

While the potential effects of the new ABSD of 60% are unclear, the costs of inaction could be more detrimental regardless of the direction private housing prices go.

A market failure could have a widespread impact on every stakeholder In the market. Developers may not recover the costs of investments and local buyers will face a negative equity situation when their housing value drops. Foreigners will lose money by selling their properties below the original costs. 

The housing market crash would destabilize Singapore’s financial system when borrowers default on their mortgage loans. But the economic costs of inaction would be higher than an intervention that curbs short-term foreign investment flows into the property market.

Tien Foo Sing is the Provost’s Chair Professor at the Department of Real Estate, Business School, National University of Singapore. The views expressed here are the author’s and do not represent the views of their companies and affiliates.

This article was originally published by East Asia Forum and is republished under a Creative Commons license.

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US-China trade war as mutually assured destruction

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Analysts at Fitch Ratings aren’t looking out for China as they tiptoe up to downgrading Washington’s AAA credit rating. But written between the lines in bold font is how a US default would give Beijing the big trade war win Xi Jinping has been seeking.

To be sure, China won’t love the paper losses on its stockpile of US$870 billion of US Treasury securities. Nor will Chinese leader Xi or Premier Li Qiang welcome the ways in which surging US debt yields make China’s 5% growth target less attainable.

But the immediate devastating blow to US leadership and credibility from a default would play right into Xi’s goal of increasing the yuan’s role in finance and trade — and thus giving China a bigger say in global economic affairs.

And yet, it’s not quite that simple. Just as US Congress members play games with the debt ceiling and teeter towards default, Chinese stocks are cratering.

The CSI index has erased all its gains for the year so far as China’s post-Covid recovery disappoints. It’s hard not to wonder if the common link here isn’t the trade war that neither side seems ready to end.

Call it mutually assured economic destruction. In the 855 days of the Joe Biden presidency, his White House continued predecessor Donald Trump’s punitive tariffs against China.

In many ways, Biden has gone after China with even greater verve. Biden is not doing it with blunt taxes and angry tweets, but surgical and steady efforts to deprive China of access to vital technology.

China, of course, has retaliated in kind. But as the two biggest economies face intensifying headwinds, it’s high time US and Chinese officials lowered the temperature and found a way to stop the insanity, many analysts believe.

A widely watched meeting in Vienna earlier this month between US National Security Adviser Jake Sullivan and China’s top diplomat Wang Yi generated some muted optimism. Both sides described the discussions as “candid, substantive and constructive.”

Another chance to return to normalcy will come at a dinner planned for May 25 in Washington, where US Commerce Secretary Gina Raimondo will dine with her Chinese counterpart Wang Wentao, marking the first cabinet-level meeting in Washington between the two sides during the Biden administration.

Yet where Biden or Xi stands on the it’s-time-to-talk continuum is anyone’s guess.

Chinese leader Xi Jinping and US President Joe Biden are locked in a contest for economic supremacy. Photo: Pool / Twitter / Screengrab

It’s time to admit the ongoing “decoupling” drama between the US and China is having an “adverse effect” on the companies of both nations, saysErgys Islamaj, senior economist at the World Bank.

What’s more, Islamaj notes, “the fragmentation of standards, especially between the world’s two largest markets, can not only constitute additional barriers to trade and investment between the two countries.”

The “fragmentation,” he says, “creates additional burdens and diseconomies on exporters and multinational corporations from third countries, as companies need to adjust their products and processes to comply with different regulations.”

All this is creating “additional costs and complexity in sourcing decisions” and it’s not a formula for innovation or economic confidence, Islamaj concludes.

Wang Qi, CEO of MegaTrust Investment, thinks ending what he calls an all-out “investment war” will be hard. As he puts it: “Trump started the trade war. Biden initiated the tech war. Yet they both wanted an investment war with China.”

Worries about heightened US-China tensions have weighed on Chinese stocks since late April. This is just months after the US Public Company Accounting Oversight Board completed its first round of audit inspections on Chinese ADRs, or American depositary receipts, “which reduced the delisting risk,” Wang says.

For now, at least. Many, though, “seriously underestimated the gravity of the so-called investment war, which is still on today,” Wang says. “Trying to limit Chinese companies’ growth by trade or tech sanctions is one thing. Putting an explicit cap on the US investments in Chinese stocks is another. The latter is arguably more direct and detrimental to the share price.”

US officers can, and do, make reciprocal claims about Beijing. Yet neither economy is thriving in this environment. US growth cooled in the first quarter. Gross domestic product (GDP) rose at an annual rate of 1.1% in the January to March period, down from 2.6% in the previous quarter last year.

“Compared to the fourth quarter, the deceleration in real GDP in the first quarter primarily reflected a downturn in private inventory investment and a slowdown in nonresidential fixed investment,” the US Commerce Department said earlier this month.

To Fitch economist Olu Sonola, the downshift is not a fluke. Despite unemployment sitting at a 54-year low, Sonola notes, US labor markets will weaken as aggregate demand stagnates in response to higher interest rates and tightening credit conditions, exacerbated by stress in the banking sector.

Silicon Valley Bank’s collapse could yet be the tip of the iceberg for US banks. Image: Screengrab / Twitter / TechCrunch

“Labor demand still exceeds supply, but this imbalance is declining, now at approximately 2.3% of the labor force in first quarter 2023 compared with 3.2% last quarter,” Sonola says. “Job openings have also declined by 1.6 million from peak levels. Wage growth year-over-year has decelerated significantly since last quarter in a number of states.”

Clearly, trade headwinds aren’t doing China any favors either. Retail sales, industrial output and fixed investment expanded much less than hoped in April. The youth unemployment rate hit a record high of 20.4%, raising concerns for social stability.

Economist Jeffrey Currie at Goldman Sachs says deep concerns over the health of the global financial sector, US debt ceiling risks, fears of an impending demand slowdown in the West and a disappointing recovery in China in April have all contributed to “fears of an upcoming US or global recession.”

Those fears will be turned up to 11 or higher as the US flirts with default. Enter Fitch, with a perilously timed downgrade warning as US politicians play with fire. It moved the US to “rating watch negative” the “X-date” when Washington runs out of cash.

In its statement, Fitch said “we believe risks have risen that the debt limit will not be raised or suspended before the X-date and consequently that the government could begin to miss payments on some of its obligations. Prioritization of debt securities over other due payments after the X-date would avoid a default.”

Adding to the uncertainty is where Biden and Xi might take their economic clash next.

Some think Team Biden should be careful what it wishes for. Economist Michael Beckley at the Washington-based Wilson Center says that “most debates on US-China policy focus on the dangers of a rising, confident China. But the United States actually faces a more volatile threat: an insecure China mired in a protracted economic slowdown.”

Chinese growth, he adds, has fallen by half over the past decade and is “likely to plunge in the years ahead as massive debt, foreign protectionism, resource depletion and rapid aging take their toll. Past rising powers that suffered such slowdowns became more repressive at home and aggressive abroad as they struggled to revive their economies and maintain domestic stability and international influence. China already seems to be headed down this ugly path.”

Performers dance during a show as part of the celebration of the 100th anniversary of the founding of the Communist Party of China, at the Bird’s Nest stadium in Beijing on June 28, 2021. Photo: AFP / Noel Celis

The bottom line, Beckley concludes, is that “slowing growth makes China a less competitive long-term rival to the United States, but a more explosive near-term threat. As US policymakers determine how to counter China’s repression and aggression, they should recognize that economic insecurity has spurred great power expansion in the past and is driving China’s belligerence today.”

Clearly, China could make a similar argument about the specter of Trump getting a second shot at power after the November 2024 election. Trump, after all, recently reiterated he favors a US default.

But if the definition of insanity, as Albert Einstein said, is trying the same play over and over expecting a different result, then there’s still too much crazy in US-China relations.

Follow William Pesek on Twitter at @WilliamPesek

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Man arrested for murder of woman in Pattaya

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Watcharaphon Onsongkhram, 39, arrives in handcuffs at Pattaya police station in Chon Buri on Wednesday after being arrested in Sakhon Nakhon for the murder of a 32-year-old woman in Pattaya last Saturday. (Photo: Chaiyot Pupattanapong)
Watcharaphon Onsongkhram, 39, arrives in handcuffs at Pattaya police station in Chon Buri on Wednesday after being arrested in Sakhon Nakhon for the murder of a 32-year-old woman in Pattaya last Saturday. (Photo: Chaiyot Pupattanapong)

CHON BURI: A 39-year-old man arrested in Sakhon Nakhon for the murder of a young woman in a Pattaya apartment room has admitted he killed her over a 30,000 baht debt, according to police.

The woman died from multiple stab wounds.

Police with a court warrant arrested Watcharaphon Onsongkhram, alias “Kik Kilo 10’’, at a shanty in Kud Bak district of Sakhon Nakhon province on Tuesday evening. 

Mr Watcharapaphon, 39, was returned to the Pattaya police station on Wednesday.

His arrest followed the discovery of the body of a woman identified only as Rattana, 32, in a third-floor apartment room in Soi Buakhao in Pattaya township, Bang Lamung district of Chon Buri, on Saturday.

She had 11 stab wounds about her face, neck and shoulders, police said.

Pol Lt Col Thananon Athiphansee, deputy superintendent for investigation at Pattaya police station, said on Wednesday the suspect admitted to having killed the woman.

During questioning, he allegedly told police he had quarrelled with her over a 30,000 baht debt he said she owed him. The woman had refused to repay the money and had scolded him.

He became very angry and used his hands to cover her mouth and then grab her by the throat. The woman fought back and bit his hand.

During the fight, they broke a large picture frame, shattering the glass cover. Ms  Rattana used a piece of the broken glass to attack him, he said.

He retaliated, stabbing her with a piece of broken glass 3 or 4 times, in the neck and shoulders, until she collapsed, he said, according to police.

He allegedly said he had previously been romantically involved with the woman. He was held in police custody for legal action.

Forensic officers gather samples  at the apartment room in Pattaya where a 32-year-old woman was found dead with multiple stab wounds. (Photo: Chaiyot Pupattanapong)

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Indonesia’s economic reform deeper than recognized

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The Covid-19 pandemic posed a tremendous economic challenge, especially for emerging economies such as Indonesia. But it also marked a watershed moment for the country’s economic reform efforts. The crisis enabled Indonesia to reduce its reliance on volatile foreign capital inflows and rethink its growth pathway.

During the pandemic, Indonesia was temporarily set free from its reliance on foreign capital as global investors fled emerging markets bonds and equity. At the same time, slumping domestic demand, which suppressed imports, and relatively large national savings ameliorated Indonesia’s current account deficit problem.

Russia’s war in Ukraine led to a commodity price boom that further boosted the domestic economy while it was still recovering from the pandemic.

Indonesia’s current account deficit problem stems from insufficient foreign direct investment (FDI). In 2021, Indonesia’s FDI inflow was only 1.8% of GDP, compared to Vietnam’s 4.3% and Malaysia’s 5%.

Instead, the economy has depended on volatile commodity-related exports and volatile foreign inflows in bonds and equity markets. The shallow and inadequate domestic financial market has not been able to sufficiently mobilize savings to finance the country’s investment needs.

In previous cycles of global volatility, subsequent outflows of foreign capital have significantly depreciated the Indonesian rupiah and caused liquidity crunches in the financial system.

This negatively impacted the domestic economy by increasing the government and corporate sector’s debt burden, creating inflationary pressure and raising funding costs and non-performing loans in the banking system.

Reform efforts to handle the problem by shrinking the account deficit have faced challenges. In previous years, reducing the current account deficit usually meant slowing down domestic consumption and imports, which inhibits economic growth. Efforts to boost manufacturing exports also have hit a brick wall.

The Indonesia rupiah is near a 20-year low. Photo: AFP / Bay Ismoyo
Stacks of Indonesian rupiah. Photo: AFP / Bay Ismoyo

As Indonesian wages are relatively higher, other Asian exporters — notably Vietnam and Bangladesh — have become more competitive.

Numerous financial scandals have undermined efforts to effectively mobilize savings and deepen financial markets. Despite these setbacks, institutional reforms are making some headway. The Ministry of Finance and Bank Indonesia are increasingly seen as credible institutions that adopt evidence-based policies, defend Western-style central bank independence and are led by respected figures.

Implementing measures to prevent excessive capital flows has proved complicated. Even a hint of capital controls or other regulations that would restrain the country’s relatively free and open capital markets have been met with resistance due to the experience of the Asian financial crisis. Relatively loose global monetary policy and prudent fiscal policies have also led to Indonesia’s rising popularity for foreign portfolio investment.

The government was quick to implement policy reforms that have partly borne fruit. The first of them is reform in the real economy. The government pushed through the Omnibus law in November 2020, which aims to improve Indonesia’s competitiveness and encourage labor-intensive industries’ growth. But its implementation is yet to be seen due to pushback by special interest groups.

The global energy crisis also inspired the government to enact a series of controversial policies, including “downstreaming” and the prohibition of raw material exports. These policies have partly contributed to increasing exports of nickel derivatives between 2011–2022 and stimulated economic growth in regional provinces.

The second policy group included financial sector reforms. The government passed a new financial omnibus bill to improve the credibility of the financial system, widen and deepen the domestic financial market, support new technologies growth and clarify crisis responses. Plans were also put in place to restructure the entire non-bank financial system after the collapse of a major state-owned insurance company in 2020.

The local bond market has grown substantially since the pandemic. Local banks are inclined to hold a large number of government bonds due to slumping credit demand, significantly boosting local ownership. The Ministry of Finance’s successful campaign to push savvy domestic investors to buy retail government bonds further mobilizes consumer savings and improves market discovery.

Indonesia’s central bank — Bank Indonesia — has also pulled its act in the domestic foreign exchange market. New derivative instruments have succeeded in driving market expectations of local currency movements and relieving pressure on the current exchange rate. The launch of a new time deposit facility for exporters also boosted foreign exchange supply.

A fishing boat is seen near a container terminal in Tanjung Priok , north Jakarta Indonesia November 16, 2016. Photo: Reuters/Darren Whiteside/File Photo
A fishing boat is seen near a container terminal in Tanjung Priok , north Jakarta Indonesia November 16, 2016. Photo: Agencies

In anticipating the sudden global dollar liquidity crunch, the central bank has intensified efforts to proliferate local currency settlements (LCS) — a program that encourages using local currencies to settle bilateral transactions — with Indonesia’s main trade partners.

Its efforts have significantly increased its monthly LCS usage. The central bank has also sought to reduce Indonesia’s reliance on foreign service providers by launching a new national credit card gateway.

Bank Indonesia has also embraced digitalization. The Indonesian QR standard has become widely available, logging over 24 million merchants and daily transactions of more than US$800 million.

It has enabled millions of informal sector vendors to interact with the mainstream financial system via Indonesia’s growing digital banking industry. This could be a potential goldmine for the government to increase fiscal policy effectiveness.

Indonesia has taken advantage of the Covid-19 pandemic and undergone fundamental reforms to address its previous flaws. Its job now is to finish implementing those “structural reforms” by enhancing the ease of doing business, reducing investment barriers and improving labor productivity and financial inclusion.

Suryaputra Wijaksana is an economist at Bank Rakyat Indonesia. The views expressed in this article are the author’s own.

This article was originally published by East Asia Forum and is republished under a Creative Commons license.

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Modi in Australia: Albanese announces migration deal with India

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Prime Minister Narendra Modi (R) with Australia's Prime Minister Anthony Albanese in front of the Sydney Opera HouseGetty Images
By Meryl Sebastian
BBC News

India and Australia have announced a migration deal as they aim to strengthen their economic cooperation.

The announcement came after Indian Prime Minister Narendra Modi met his counterpart Anthony Albanese in Sydney on Wednesday.

The deal aims to “promote the two-way mobility of students, graduates, academic researchers and business people”.

They also discussed regional security amid rising tensions in the region.

India and Australia are part of the four-member Quad group, which also includes Japan and the US.

A scheduled meeting of the group in Sydney was cancelled last week after US President Joe Biden had to return to Washington for debt ceiling talks.

Mr Modi, however, continued his planned visit to Sydney after attending the G7 summit in Japan and travelling to Papua New Guinea.

This is Mr Modi’s first visit to Australia since 2014, and comes two months after Mr Albanese visited India in March.

Negotiations for the migration agreement had been going on for a couple of years. Australia already has a significant number of people who have migrated from India – census data shows that of more than a million people who moved to Australia since 2016, almost a quarter were from India.

According to a statement, the finalised migration agreement will also lead to the creation of a new scheme called MATES (Mobility Arrangement for Talented Early Professionals Scheme), which has been “specifically created for India”.

On Tuesday, the Indian prime minister said the two countries had also discussed increasing cooperation on mining and critical minerals and made progress in establishing an Australia-India Green Hydrogen Taskforce.

India and Australia are also working towards a comprehensive economic cooperation deal for which negotiations began more than a decade ago.

On Tuesday, thousands of people from the country’s Indian diaspora had turned up at one of Sydney’s biggest indoor stadiums, where Mr Modi was speaking at a rally.

“The last time I saw someone on this stage was Bruce Springsteen and he did not get the welcome that Prime Minister Modi has got,” Mr Albanese said at the event.

Mr Modi called the Indian community in Australia “a living bridge” between the two countries.

“The relationship between India and Australia is based on mutual trust and respect,” he said.

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Man fined S,000 for failing to report change in residential address

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SINGAPORE: A 62-year-old man was fined S$2,000 (US$1,500) on Tuesday (May 23) for failing to report a change in his residential address, an offence under the National Registration Act. 

Singaporean Lee Kah Hin had moved out of his landlord’s home at Jalan Bukit Merah in April 2020.

More than two years later, in December 2022, the landlord informed the Immigration and Checkpoints Authority (ICA) that she was still receiving his letters. 

These included letters of demand from different credit companies.

ICA said that after Lee moved out of his landlord’s home to a new place at Tampines Street, he continued to take out additional loans from various licensed moneylenders using his former address.

“He did so knowing that the moneylenders would send him reminder letters whenever he could not keep up with his repayments,” the agency said.

“As a result, letters of demand were sent to the former address after Lee had defaulted on debt repayments.”

Under the National Registration Act, all identity card holders who change their place of residence must report it to ICA within 28 days. 

Those who fail to do so face a fine of up to S$5,000, a jail term of up to five years, or both. 

“ICA takes a firm stance against any person who fails to comply with the National Registration Act and its Regulations,” the agency said.

Those who need to report a change in their residential addresses can do so online via ICA’s change of address e-Service. The updated addresses will facilitate their transactions with government agencies.

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