Sub-prime woes could drag on for 18 months, says analyst

Sub-prime woes could drag on for 18 months, says analyst
Bangkok Post (9 October 2007)

Problems in the US sub-prime housing market could put the world economy at risk for at least 18 months, says Cheng Tai Hui, chief economist for Southeast Asia for Standard Chartered Bank. Defaults by US sub-prime mortgage borrowers are expected to surface over the next 12-18 months when loans are up for renewal. Tighter lending standards by financial institutions and new supplies of foreclosed collateral assets entering the market could harm the US housing market, Mr Cheng said. ''What we saw over the past six months was probably the first wave of the problem. Default rates will rise when the sub-prime loans' 'teaser points' end and interest rates have to increase,'' he said. The downturn in the US housing and job markets would cause consumption to fall to a four- or five-year low and lead to a slower economy in 2008. ''The housing market will remain weak in 2008, considering prices and inventories. The job market is softening. Two out of three factors that support US consumers, besides equities, will decline next year,'' he said. Mr Cheng said the US Federal Reserve was expected to reduce interest rates by 25 basis points each at the October and December meetings, reducing the benchmark US rate to 4.25% by year-end and through 2008. However, a rise in food and oil prices and weak currencies could add pressure on inflation in Asian regional economies, causing central banks to resist reducing interest rates. Significant rises in asset prices in Hong Kong and Singapore this year could be a negative factor for rate cuts, he said. Regional economies would be affected by the slowdown in the US economy next year. South Korea, China and Vietnam have strong domestic demand that would help offset the impacts, he noted. He expected Indonesia, the Philippines and Thailand to cut interest rates further, while other East Asian countries would increase rates by year-end. The Bank of Thailand's Monetary Policy Committee (MPC) meets tomorrow to review its key rate, currently at 3.25%. Mr Cheng said the US dollar was expected to strengthen over the next few quarters as low interest rates improve economic sentiment. The Chinese central bank, meanwhile, is expected to let the yuan appreciate by 4-5% against the dollar in 2008 to cool the economy. Usara Wilaipich, the bank's senior economist, said the US slowdown would affect Thai exports, and that domestic demand was unlikely to offset the impact. The country's current account was expected to record a $2.5-billion deficit in 2008, compared with a $4.8-billion surplus this year. Exports were expected to grow 14-15% in 2007 and 8% in 2008. Consequently, she said, the baht was expected to weaken to 35 to the dollar by year-end and to 36.5 by mid-2008. ''The baht probably has already peaked at 33.2 in July in this year. It is very unlikely we will see the baht return to that level, considering the declining current account,'' Ms Usara said. She said the MPC was likely to reduce its interest rate by a quarter point to 3% by the end of the year.