SINGAPORE (Nov 19): As the US Federal Reserve continued on its tightening path, rising borrowing costs and currency fluctuations have had a wide-reaching effect on Asia-Pacific markets. Against this backdrop, Singapore’s third-quarter corporate earnings failed to deliver positive surprises and, as a result, the benchmark Straits Times Index fell to an almost two-year low of 2,961 in end-October. A moderate decline in growth forecast amid escalating trade frictions further dampened the macroeconomic outlook in the region, especially with China facing slowing growth as the country tries to tackle its debt burden via deleveraging reforms.
On the positive side, most blue chip companies have yet to observe a material impact from the escalating of trade tariffs, although top executives remain cautious against any trade headwind in the coming months. Rising interest rates are a positive catalyst for banks’ margins, while the highly leveraged property and real estate sector is exposed to rising borrowing costs in the years to come, although the impact is gradual and limited in the short term. Currency volatility has generally negatively impacted companies with a large exposure to foreign markets, with Singapore Telecommunications (Singtel), Jardine Cycle and Carriage (Jardine C&C), ComfortDelGro and several agriculture companies affected the most.
Astra International, the Jardine C&C group’s main revenue engine, has a strong presence in Indonesia’s automotive, heavy equipment and financial services markets. Astra reported a 21% profit jump in local currency terms for the nine months ended Sept 30 under Indonesian accounting standards. The net profit was adversely hurt, however, by a nearly 10% year-to-date depreciation of the rupiah against the US dollar and Singapore dollar. Astra contributed US$582 million ($805.1 million) to the group’s underlying profit, up 17%, modestly dampened by the weakening of the rupiah. Interestingly, on the asset-liability front, the weakening local currency could turn out to be a positive factor on earnings. Jardine C&C posted a US$28.8 million net exchange gain for the three months ended Sept 30, which relates mainly to the weakening of the rupiah and Sing dollar on US dollar-denominated monetary assets and liabilities.
Singtel, once Singapore’s largest listed company, has posted its lowest quarterly earnings in more than a decade as the group faces several headwinds, including negative currency impact, intensified competition in its core business and lower associates’ contributions. Its 2HFY2019 (the company has a March year-end) earnings per share of four cents fell short of consensus forecast of 5.1 cents. On the currency front, Singtel’s revenue was mainly hurt by the 7% y-o-y drop in the Australian dollar versus the Sing dollar, as its Australia business, mainly through Optus, contributes to 52% of group revenue. Revenue for its latest quarter was flat at $4.27 billion, but would have grown 3.9% in constant currency terms.
ComfortDelGro, with around 24% of its revenue from the UK, 13.5% from Australia and 4% from China, suffered from a $1.2 million negative forex impact in 3QFY2019 owing mainly to the unfavourable foreign currency translation from the weaker Australian dollar. It posted a 2% decline in 3QFY2018 earnings to $78.5 million compared with a year ago despite an 8.5% increase in revenue.
The Australian dollar has lost nearly 5% against the Sing dollar year to date, following the divergence of the monetary policies of the two economies. The Australian currency is viewed as more vulnerable to the escalating China-US trade spat because Australia’s economy is commodity-dependent. The Reserve Bank of Australia has kept its key interest rate unchanged at 1.5% since August 2016, whereas the Monetary Authority of Singapore has tightened twice this year by steepening its Sing dollar net effective exchange rate (NEER) band, paving the way for a steady appreciation in the Sing dollar against its major trading counterparts.
As for rising interest rates, Singapore real estate investment trusts with gearing ratios (debt versus total asset) of between 30% and 35%, with their varied debt tenor and funding costs, are perceived to be more vulnerable to interest-rate headwinds. The fact is that many REITs adopted fixed-rate borrowings to mitigate short-term interest-rate fluctuations, and most local REITs have yet to experience an adverse impact from rising rates. In the long run, however, rising interest rates are probably an inevitable risk, as REITs have a relatively short average loan tenor compared with a long credit cycle, and the refinancing costs are likely to rise along with benchmark rates.
CapitaLand Mall Trust’s average cost of debt is at 3.1% with an average term to maturity of 5.2 years. Both gauges have remained relatively stable over the past few years owing partly to its strong credit rating and accessibility to sources of funds. Ascendas REIT had a relatively shorter average debt tenure of 3.4 years as at end-September, and its average cost of debt is at 3%, stable from a year ago. Nearly 85% of its borrowings are on fixed rates; therefore, the impact of an interest rate rise on distribution per unit is probably insignificant in the near term. CapitaLand Commercial Trust’s borrowing cost is among the lowest of its peers, with average cost of debt at 2.6% and average term to maturity of 3.6 years, with 92% of borrowings on fixed rates. Therefore, its debt portfolio is well-hedged against short-term rate hikes. Property developer City Developments’ average borrowing costs climbed 0.1% to 2.3% from a year ago. The group has adopted a natural hedging strategy by balancing a mixed-currency debt portfolio and increased fixed-rate borrowings to mitigate rate hikes. Its fixed-rate debt now accounts for 53% of its total borrowings, up from 42% a year ago. For the developers, cooling measures and a rising mortgage burden have kept homebuyers away from the market, raising concerns among investors.
The three-month Singapore Interbank Offered Rate, or Sibor, climbed to 1.76% recently, up 63bps from a year ago.
Banks are probably the only sector that actually benefits from rising borrowing costs, as wider net interest margins helped to underpin their earnings despite lower contribution from non-interest items. Both DBS Group Holdings’ and Oversea-Chinese Banking Corp’s NIMs have risen steadily over the 1½ years, whereas United Overseas Bank has seen its NIM decline over the last two quarters.
Margaret Yang is a market analyst with CMC Markets Singapore