In Asia, Fed Rate Cut Means Lower Borrowing Costs (Update4)
By Yoolim Lee
Singapore, Feb. 1 (Bloomberg) -- Cameron Ong was half asleep, brushing his teeth this morning, when he heard a television report confirming that the Federal Reserve had cut its key lending rate half a point.
That was welcome news for the chief operating officer at Singapore-based The Ascott Ltd., the largest operator of serviced apartments in Asia by assets, because the company will benefit from lower borrowing costs.
``This is what we've been hoping for,'' Ong said. ``The bottom line is that any rate reduction by the Fed will be useful for us -- even a quarter percentage point reduction is a huge saving.''
The Fed's rate cut will help Asian companies by giving central banks more room to lower the cost of borrowing. Companies also hope the Fed's move will bolster sagging growth in the world's No. 1 economy and the biggest market for much of Asia.
For some countries, relief has already come. In Hong Kong, the Monetary Authority lowered its base lending rates to banks to 7 percent from 7.5 percent. The Philippines also matched Fed's the cut, lowering its key borrowing rate by 0.5 percent to 11.5 percent. Taiwan cut its key rate by a quarter point to 4.375 percent.
Australia is expected to cut its percent key rate at least a quarter point from 6.25 percent next week when central bank policymakers meet, according to 15 economists surveyed by Bloomberg News.
Elsewhere in Asia, companies welcomed the Fed's latest cut.
``It's a good preemptive move to halt any sharp slowdown in the economy,'' said Shue Wing Chan, a director at Thai Union Frozen Products Pcl, the world's second largest tuna canner. The Bangkok-based company owns Chicken of the Sea, the third-best selling canned tuna brand in the U.S.
``It will be good for us in terms of our operating costs,'' said Steve Li, an executive director at Yue Yuen Industrial Holdings Ltd., a Hong Kong-based footwear manufacturer which makes athletic shoes for Nike Inc. and Reebok International Ltd. More than half Yue Yuen's sales are to the U.S.
For Singapore-based Ascott, every 100 basis point drop in local interest rates leads to S$11 million ($6.3 million) interest savings. That's more than twice its net profit of S$4.8 million in all of 2000.
Stocks Fall
While companies welcomed the rate cut, investors sent share prices lower on concern the Fed has waited too long to avert a serious slowdown. The U.S. economy grew at its slowest pace in 5 1/2 years in the fourth quarter.
Singapore's Straits Times Index fell as much as 1 percent before closing 0.45 percent lower. Japan's Nikkei 225 index declined 0.5 percent, and Korea's Kospi index dropped 0.9 percent.
The cuts should also stoke commodity prices, helping Australian mining companies, such as Pasminco Ltd., the world's No. 1 zinc producer and refiner.
Raw materials sales make up almost two-thirds of Australia's export earnings. Zinc prices have fallen 10 percent since August last year.
``Cutting interest rates in the U.S. is likely to stimulate economic activity in the next six to nine months,'' said Pasminco spokesman Trevor Shard. ``That's certainly positive for commodity prices, including zinc.''
Asia to Pay Price
While rate cuts will help ease the burden for some companies in Asia, economists warned the Fed's action also reflected deteriorating conditions in the U.S economy, which have already started to affect demand. That meant Asian exporters already faced falling sales this year.
``The negative effect (of a slowdown in demand in the U.S.) is going to offset the positive effect,'' said Bijan Aghevli, head of Asian economic research at JP Morgan in Hong Kong.
Beyond the U.S. consumer market, a global slowing in demand for electronics will have a more adverse impact on countries such as South Korea, Singapore and Taiwan, whose economies rely heavily on components and equipment sales, said Aghevli.
Two of Singapore's biggest electronics companies, Chartered Semiconductor Manufacturing Ltd. and ST Assembly Test Services Ltd., said they expect sales to fall in the first quarter because of falling exports.
The rate cuts may have also come too late for some companies. In Japan, companies are scaling back spending plans, cutting sales forecasts and, in the case of Sega Corp., scrapping products as sales to the U.S. decline.
Japan's Exports Fall
Japan's exports to the U.S. by volume fell 4.5 percent in December from a year earlier. Overall exports, by value, fell 0.3 percent last month from November. That's bad news for companies which have invested in new factories and equipment to fill overseas orders.
Sanyo Electric Co., which provides two-fifths of the world's mobile phone batteries, said last month it will reduce its capital spending by almost half in the year beginning April 1.
Next year's spending is likely to be around 100 billion yen ($838 million), President Yukinori Kuwano said in an interview. That's 41 percent less than what Sanyo had earmarked for this year.
Fujitsu Ltd., Japan's No. 4 chipmaker, last week said profit in its chip division will fall short of earlier forecasts by as much as 15 billion yen in the year ending March 31.
One of the worst hit is Sega, which yesterday said it will stop making Dreamcast video-game consoles after almost four years of losses. The company will cut the U.S. retail price of the console to $100 from $150 to clear stock.
Sega sold 2.32 million Dreamcast sets worldwide between April 1 and Dec. 31 last year, 44 percent less than company forecasts.
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