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Why A Hike In Interest Rates Would Be Tough On SMEs In Singapore

In November this year, the DP Information Group released its 2016 SME Development Survey. The findings included one of the key emerging challenges for small and medium-sized enterprises (SMEs) in Singapore: Rising financing costs.

The survey showed that financing conditions were looser in 2015 as compared to 2016 for SMEs. Only 6% of SMEs cited financing costs as an issue last year compared to 22% currently. Financing costs is also now the fourth biggest cost issue experienced by our local SMEs.

The interest rate environment in Singapore is heavily influenced by what goes on in the US. The US’s central bank, the Federal Reserve, sets benchmark interest rates there.

In its latest meeting held in November, the Fed had decided to hold rates steady. But, interest rates in the US have nonetheless been creeping up after the country’s presidential election that month; for instance, the US 10-year Treasury yield has increased from 1.83% to 2.40% over the past month.

This has led to rates here in Singapore climbing as well; as an example, the yield of a 10-year government bond with the code (NX16100F) has stepped up from 1.93% at the start of November to 2.45% last Friday.

The 2016 SME Development Survey also mentioned that SMEs in Singapore have started to experience higher interest rates when they borrow and banks have been asking for more collateral. Meanwhile, suppliers to SMEs are also tightening their credit terms.

Weakness in the oil and gas industry have negatively affected the banks in Singapore and it is possible that this could have led to banks here being more cautious when they lend to SMEs.

Coming back to the Fed, the central bank will be holding its next policy meeting for interest rates next week. Nothing’s set in stone yet when it comes to the Fed’s decision. But, some market observers expect the Fed to raise rates at the upcoming meeting given signs of improvement in the US economy.

My colleague David Kuo had wrote recently that a hike in rates in the US would be positive for banks in Singapore such as United Overseas Bank Ltd (SGX: U11). But, it would be tough on SMEs in Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool has recommended shares of United Overseas Bank. Motley Fool Singapore contributor Ong Kai Kiat doesn't own shares in any companies mentioned.