Experiences and track records are critical for a company in making smart business and financial management decisions. Indeed, financial forecasts are based not only on the best assumptions of the core business development and the financial data projected in the future, it is also a continuation of the past performances, except when it intends to abandon all its current and past businesses for a completely new line of business.
In my last blog on financial forecast published a month ago, we noted that the US Federal Reserve (FED) and the European Central Bank (ECB) have a different projection of their respective inflation rates using similar analytic tools. In this blog, I would like to show how past experiences of central banks are shaping their policy responses and actions.
Since USD is a popular offshore funding currency, its supply or withdrawal of supply will affect many other currencies and in different ways. For instance, Singapore's monetary policy focuses on its foreign exchange policy, monitoring SGD against a basket of her major trading currencies. When USD's lending cost trends upward, SGD's will be impacted because borrowers can choose to borrow USD or SGD denominated debts, depending on the real cost after inflation and expected exchange rate if borrowers have to buy USD to pay for the principal and interests. Of course, borrowers may choose to hedge their positions now to avoid unexpected surge in USD exchange rate when they pay the debts in USD (assuming borrowers' income is in SGD) when they are due.
Euro zone comprises 19 member states with different economic strengths and fiscal disciplines. In 2013 when the FED started to taper the purchase of its assets under the Quantitative Easing (QE) program, Greece, Cyprus, Spain and Italy were badly hit as USD had become expensive and they were caught when USD liquidity pulled out. ECB had to lower its interest rate and inject huge liquidity to stabilize these economies then. In face of the recent FED tapering measures, ECB has adopted a more flexible and optionable strategy. While ECB will complete its own QE in March 2022, it retains its flexibility to continue injecting liquidity for its member states. The recent ECB monetary policy statement actually mentioned that it would continue to provide liquidity for Greece's economic recovery.
China had suffered from "cash crunches" during the 2013 tapering as Chinese corporates sought to borrow local currency loans to pay off USD loans. However, PBOC (Chinese central bank) had to raise its benchmark interest rate and declined to inject liquidity to satisfy businesses then. As a result, it had increased the default risks of local corporates that had been heavily indebted with offshore USD loans. This time round, PBOC has squeezed its property developers that have huge "cheap" USD debts long before the FED had announced its tapering. Instead of raising its interest rate, PBOC had lowered its Loan Prime Rate (LPR) by 50 basis point on 20 December 2021.
Likewise, experiences help a corporate to make smart financial management decisions, yet there will always be circumstances and factors that are new to the current situations, and we have to adapt the learnings from our experiences based on the latest data collected.
I would like to share my experiences with you. Please call me at +65-8825 6627 for a chat.
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