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The Federal Reserve Plans To Raise Interest Rates – How Might This Affect Investors In Singapore?

U.S. Federal Reserve chair Janet Yellen had indicated on Wednesday that the U.S.’s central bank is on track to raise interest rates this month. This comes after improvements were seen in the US economy and job market.

In theory, the rise in interest rates should be easily absorbed by businesses in the U.S. given the improvement in the economy there. Since the reduction in interest rates was mainly to help kick-start the American economy again after the global financial crisis, it does make sense to raise rates now that the economy is showing signs of sustainable growth.

However, the decisions of the U.S. Federal Reserve have the potential to impact businesses globally. What would a U.S. rate hike mean for companies in Asia? In particular, given that interest rates in Singapore are loosely correlated to that in the U.S., are Singapore businesses ready for a rate hike?

I think an increase in interest rates should be a real source of concern for investors here in Singapore.

This is because even though the interest rates on local debt have links to those in the U.S., many companies in Singapore have businesses that are based in Asia predominantly. With the economy in Asia having a weaker outlook – impacted by a slowdown in growth in China – companies here might have to face the risk of higher interest rates just when their businesses are slowing down.

Blue chip stocks such as Global Logistic Properties Limited (SGX: MC0) and Wilmar International Limited  (SGX: F34) both count China as one of their largest markets. Both also hold significant debt on their balance sheets and that’s apparent when looking at the following numbers: GLP and Wilmar had interest coverage ratios (EBIT/Interest expense) of 4 and 3, respectively, in their last-completed fiscal years.

In my opinion, those are not very healthy ratios. If GLP and Wilmar have to face higher interest expenses on their borrowings going forward, while being unable to grow their businesses, challenging times may lie ahead.

Do you know of any other companies that might be negatively impacted by an interest rate hike? Fire away in the comments section below!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns Wilmar International Limited.