A few weeks ago, the Government took the bold step of guaranteeing all bank deposits in Singapore. This was to prevent the outflow of deposits to other countries that provided similar gaurantees. (Personally, I do not agree with this approach, as it continued to depress interest rate in Singapore).
Later, the Government provided some guarantee for banks to provide credits for business operations, subject to some due diligence. I remembered that the guarantee was for 50% of the lending.
I heard from a business friend that the guarantee had since been increased to 80 or 90 percent, but the banks are still reluctant to lend. (I have not verified this information). The unwillingness of banks to lend is causing some business failures - as they depend on credit to continue their operations.
In my view, it is a bad idea for business to depend on short term credit from banks for their operations. They should increase their capital or issue long term bonds that pay a higher rate of interest (say 4 to 7% p.a.). They can earn a higher return on their investment, so they can afford a higher and fairer payout to the bond holders.
To make these bonds attractive to long term investors, the guarantee can provide a guarantee on the principal and dividends and charge a guarantee fee to the issuer. This will allow the issuer to get a source of long term funding and do not have to worry about talking to the bank yearly.
This Government guarantee fee can be at a subsidised rate, to support the economy in its current phase. When the conomy stabilises, it can be done at the market rate, which depends on the risk. The Government can also set up a separate insurance company to provide the credit default insurance on commercial terms.
Summary: Encourage businesses to issue long term bonds to get a secure source of funds for their long term operations. The Government can provide a guarantee on these bonds (subject to due diligence and a guarantee fee), to help businesses to overcome the current economic turmoil.
3 comments:
To help the SME, the Govt should reduce the GST to a token of 1%. This will lower the prices of goods and services sold and stimulate demand. Credit obtained can be used up and what will the SME do if no more credit is available. Therefore SME should press the Govt to lower the GST and not wait for these little sweets like small children.
In good times, banks are very willing to lend to businesses short term credit for their operations. Why? Because the risk during those times is perceived as minimal and they can lend to many. If banks are strict, they may not be able to lend much or at all because most businesses in good times depend on short term credit for their operation. Banks hence can also make more profits. That's why it is called booming times because everybody benefit.
However, in a recession, the risk increases greatly. Banks perceive lending not as a profit business but risks of losses. Hence better lend less or be stricter for less or no profits, rather than losses. That explains the credit squeeze.
In a recession, many companies on short term credit will thus be exposed and this in turn will cause a deeper recession.
Banks, being banks will still be reluctant to lend, unless the Gahmen becomes the banker directly. But as we know Gahmen is not always the best entity to be a bank or in business.
That's why I think this recession will be very prolonged and deep for Singapore because the global business sentiment, which it depend upon is very bad. The gahmen can only do so much eg recruit more teachers and Home team officers for jobs. They cannot create many other jobs and businesses.
Our present govt is digging a deep hole for Singaporeans. Just look at the govt linked organisations who are only interested in their own KPIs. Your suggestion for companies to "issue long term bonds that pay a higher rate of interest (say 4 to 7% p.a.). They can earn a higher return on their investment, so they can afford a higher and fairer payout to the bond holders." may not really work because of the high rentals now worked into the system by govt linked org like Capitaland. Rentals keep going up profit margins for companies are getting razor thin, what with deflation coming and the squeeze on spending by the population in anticipation of the higher retrenchments and loss of earnings.
The recent announcement by MOE on the sudden increase of teaching vacancies and the blatant publication by our newspapers on S$4,300 teaching jobs are nothing but an attempt to paint a glossy picture, as usual, in support of the ruling party need to visibly show its "competence" to the electorate.
Many education experts have in the past highlighted the need for more teachers and lower teacher to student ratios and they have been constantly refuted. The sudden increase, in my opinion, is but a desperate attempt to shore up statistics to attempt to mitigate the negative effects of the looming mass retrenchments. After having lost billions of our savings in silly investments overseas, they probably reckon that it is lesser of two evil to spend another few billions on what so many education experts have called for all along as it serves two purposes. I am concerned because the effort is not so much a result of seeing the wise need to give our next generation the best in education but more of a kneejerk effect to shore up popularity in preparation for the next election as well as to polish up the manpower statistics for use later in a report card.
This recent attempt to take in more retrenched people will end up getting more people without the passion for teaching into the teaching line and we will eventually hear of more nonsense from the education fraternity in Singapore.
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