The wealthy economies of Singapore and Hong Kong are perhaps not the first that analysts associate with instability, but according to international research house Capital Economics, they’re the ones most likely to be burned by U.S. Federal Reserve rate hikes.
Most analysts expect the Fed will raise interest rates in mid-2015 once it has finished winding down its tapering program. With their domestic interest rates tied to the Fed, Daniel Martin, emerging markets economist at Capital Economics, said Singapore and Hong Kong are particularly vulnerable to such moves.
“These countries are the only two countries that we cover that have the dual problems of rapid recent credit growth and a lack of exchange rate flexibility,” Martin told CNBC.
Singapore’s exchange rate is fixed to trade within a specified band, while the Hong Kong dollar is pegged to the greenback.
According to Martin, because Singapore and Hong Kong’s exchange rates lack flexibility, their interest rates – which currently sit at 0.21 percent and 0.41 percent respectively – are at risk of spiking sharply in the event of a Fed funds rate hike, which could cause problems for overextended borrowers.
“Borrowers in these countries have been used to very low interest rates for years, and the rise in interest rates over the next few years could catch them by surprise,” added Martin.
Other economists agreed. Seng Wun Soon, regional economist at CIMB bank, said many Singapore households would be particularly vulnerable to Fed rate hikes, considering that 70 percent of housing loans are on floating rate plans.
However, he added that the broad strength of the Singaporean economy, including its healthy banking sector should help it withstand the transition.