OEI HONG LEONG
Bailout offers just a short-term reprieve

Mr Oei Hong Leong, investor, businessman and tycoon. He made the news last week when he bought one million American International Group (AIG) shares when their values plunged. Their prices later shot up. He donated the shares to the Lee Kuan Yew School of Public Policy.

'I think that this is the 'end of the beginning'. I don't believe that it is the 'beginning of the end'. Autumn is turning into winter.

Although the government bailout is having a positive impact on the market now, I fear that this may be just a short-term reprieve.

The ban on short-selling, while preventing prices from falling now, may take away liquidity from the market. This may cause problems for hedge funds needing to de-leverage. Ultimately, we could still see downward pressure on prices.

We have seen the problems of the United States sub-prime mortgage market. The problem has now spread to the entire US mortgage market.

As more and more people default on their mortgages, this will push more and more banks into bankruptcy.

There are many banks already queueing up to file for Chapter 11 bankruptcy protection. These are small outfits which have given loans, mainly secured on properties such as factories or commercial businesses. Now the prices of these properties have fallen.

The next problem will be the credit card market. Many Americans have 10 credit cards or more. They won't be able to pay off their credit card debts.

If the jobless rate hits 8 per cent or 10 per cent, then that will really be a disaster. As I have said before, it will be a tsunami.

The Federal Reserve in its latest policy statement on Tuesday indicated that inflation will moderate later this year.

In fact, what we should be more worried about is deflation. We could see something similar to Japan, which at the end of the 1980s faced a slump lasting a decade or more.'

By Lee Su Shyan

CHAN CHONG BENG
One silver lining: Job-hopping may ease

Mr Chan Chong Beng, chairman of Goodrich Global, an interior furnishings company

'Who would have expected the big banks to fall? AIG is so big, it was supposed to be invincible. On the other hand, if there are weaknesses in the system, there is some good in having consolidation.

I think Singapore banks are strong. But what is happening in the United States will certainly hit us. The crisis has definitely shaken the confidence of the average Singaporean here.

For small and medium-sized enterprises, expansion plans or new projects will have to be put on hold.

For construction and related industries, with projects already lined up and with the Formula One and integrated resort activities going on, we should still continue to have growth - perhaps not as weak as it is expected to be for other sectors, but this may come back to hit us two years down the road.

I expect consumer confidence to weaken so sales will definitely drop. My friend, who is a coffee shop owner, has already seen a drop in sales. Firms must look for other ways to cushion the impact of this.

I don't think we will see many firms closing. Those that are not in the right trade will close, crisis or no crisis.

In fact, this situation may actually be good for us by providing some stability to the job market and helping to cut down on expenses.

In the last six months, with the job market booming, we were having so many problems hiring workers. People were moving from job to job for higher salaries. Now they will be more cautious and think longer about job security.'

By Robin Chan

CHUA HAK BIN

Recession on the cards for Singapore

Dr Chua Hak Bin, director of Singapore research, Citigroup

'We've seen the fallout from the credit crunch in quite dramatic fashion and it is by no means over.

The crisis really started to hit home after it took down the larger brokers. With markets questioning whether the broker-dealer model is essentially broken, it could be self-fulfilling. A confidence crisis could lead to another shock and that itself could make the model slowly unworkable.

The effects of the crisis are beginning to filter down to the man in the street here. With the sell-down of the market, there is a bit of a contagion effect as everyone is asking, 'Who's next?'

Clearly a fear factor is going into high gear because if giants like Freddie Mac, Fannie Mae and Lehman Brothers can go broke, and add to that AIG, the biggest insurance company in the world, then it looks like no name can be ruled out altogether.

The outlook for Singapore is already deteriorating, and we think a recession is on the cards. The question is whether the average person will have the confidence to invest in long-term commitments given the uncertainty in the system.

There is a very real danger of a breakdown in trust in the financial system. I hope it doesn't come to that and it will be important for the Monetary Authority of Singapore (MAS) to do something about it.

A culmination of the global credit crunch and the hike in commodity prices in recent months had made policy decisions a lot harder. But with the oil shock dissipating somewhat, policymakers now have more response options.

I think the Government and the MAS will have to respond as in previous recessions. Part of the adjustment may come next month when the MAS will probably loosen exchange rate policy and shift to a neutral bias, or even re-centre the exchange rate band. The Government may also have to come up with a Budget that will ease the pressure on the lower-income segment.

My guess is that this contraction will be over by the early part of next year. Looking at previous downturns and bear market cycles, the average bear market lasted about 21 weeks. We are currently in week 49 of the sub-prime crisis. So it is possible to imagine this bear in the equity markets will end by the second quarter of next year.'

By Robin Chan

TAN KIN LIAN

Consumers need protection

Mr Tan Kin Lian, former chief executive of NTUC Income. He is now a consultant and pens a blog (at tankinlian.blogspot.com) to educate the public about financial matters

'I was shocked to learn about the high risks taken by the investment banks. It appears that they have short-term loans that are many times more than the shareholders' funds.

These short-term loans have to be rolled over every few months. What happened to the risk management practices of these financial institutions?

It is also highly risky for AIG to take on so much of credit default swaps, especially as the risk of failure is likely to hit many insured credit lines at the same time.

There was an unsound accumulation of risks that could cause catastrophic losses, which is what has now happened.

Regulators have asked firms to strengthen their risk-management practices in recent years. There has been a lot of lip service, but the real issues have still not been addressed.

It is time for the regulators to rethink their failed approach of leaving issues to be sorted out by the market.

In the meantime, the markets will continue to be highly volatile over the next few months.

Many investors will lose confidence in the financial markets and the financial institutions and it will take several years for the confidence to be regained.

Singapore will have to suffer retail investors' loss of confidence in the financial markets and the integrity of the financial institutions.

Many investors have been disappointed at the low interest rate on bank deposits for many years. Now, they have to suffer large capital losses from their investments, including structured products that were marketed to them as being safe alternatives to bank deposits.

This loss of confidence will have a negative impact on the economy for a few years.

In terms of lessons learnt, I think the financial markets need to be better regulated.

There has to be stronger protection of consumers. Regulators should disallow unsuitable products from being marketed to the retail investors.

Regulators also need to take stronger action against financial institutions that fail in their duty to provide good advice to their customers.'

By Fiona Chan

SELENA LING

Crisis of confidence poses huge challenge

Ms Selena Ling, head of treasury research & strategy, OCBC Bank

'The initial turmoil has had investors switching to panic mode. People are thinking if AIG can go under, then frankly, nobody's safe. So everyone's looking over his shoulder and wondering who will be next.

We can expect consolidation to take place in the financial sector. I don't think it's the end of the bad news yet. Going forward, it is really more a confidence crisis. I don't know how long this will last.

It will take a very big and positive piece of news to turn sentiment around because people are just nervous now.

Some coordinated and concerted action by central banks needs to take place. So far, we have seen domestic market injections. But if we had something similar to a G-7 format where central banks say this is what we are going to do, then it will help to eliminate the uncertainty.

We are already one year into the sub-prime crisis. I am slightly and cautiously optimistic that we are not going to end up with a situation similar to the Asian financial crisis that occurred over a two- to three-year timeframe.

Asia is being pulled down because of its dependence on exports to developed countries as end consumers, but Asia is no longer as leveraged up as it was prior to the Asian financial crisis.

If you look at medium-term fundamentals, in terms of the health of the economy, we are generally in a much better place than we were 10 years ago. So I'm not that bearish on Asia in the medium term.

The International Monetary Fund's revised forecast has growth in Asia slowing from the 5 per cent range to the 4 per cent range, which is nothing like the Asian financial crisis when growth plunged from 7 to 8 per cent to negative numbers.

The main threat to Singapore's economy is still going to be from manufacturing.

The risk of a technical recession this quarter has definitely grown. I would put it at a 50 per cent chance, up from 30 per cent.

Export numbers are down, growth in financial services is going to slow down and construction will begin to come off a little bit in the future.

We are loath to change our forecast for 2009. We have predicted 4.4 per cent growth for next year on the assumption that there will be some stabilisation in the second half of next year.

We have learnt a few commonsensical things from the week's events. One, don't be greedy. Two, if it sounds too good to be true, then it probably is.

On the part of the regulators, addressing sentiment requires very timely reactions and conventional policies may no longer be able to do the trick. The US Federal Reserve is entering uncharted waters by bailing out AIG.'

By Robin Chan

This article was first published in The Straits Times on September 21, 2008.