Capital Controls and Safe Havens


 Illustration 1: ”Bank run” on AIA Singapore office in September 2008

Even in staid Singapore that is always seen as a safe haven, there was a ”bank run” on AIA Singapore office in September 2008 when news of its parent, AIG U.S. going bust on its derivatives portfolio broke.  This development back then was something that the Singapore government was not too pleased about given their zealousness in maintaining that aura of invisibility in charting the economic and financial success of Singapore.  In addition, those chaps upstairs were probably too busy with the plunging values of stakes in UBS, Citigroup and Merrill Lynch (bought just months earlier thinking that they were a white knight buying on the cheap).  Didn’t anybody ever tell them to never buy anything in the first round of any systemic banking crisis when banks’ capital adequacies are under threat? Closer to home, Indonesia, Thailand and Malaysian banks had gone through that same route during the 1997-98 Asian financial crisis and whoever steering that Singapore ”white knight” ship must be sleeping or totally ignored that and thought that ”this time is different!”.

Anyway, my point is whenever capital controls are imposed and the search for safe havens emerged, it is never different.   The latest development out of Cyprus is no different just that it is even more severe by restricting your ability to only take out a pittance of cash from your own bank account even for spending within Cyprus As such, do not be fooled if you do not see snaking queues around bank branches throughout Cyprus because there isn’t much that the man-in-the-street can do anyway as this is literally a form of pilferage by the state on savings.

The antithesis of the Cypriot mess wrought upon themselves by the Eurogroup are the trades and flows now looking for a safe-haven and many real money or speculative flow had been rushing into the short EUR/AUD, EUR/CAD and EUR/Asian (especially EUR/SGD) trades.  In the case of Singapore, Asianmacro is increasingly growing very sceptical of the rosy safe haven status accorded by Singapore Dollar (SGD) and Singapore hard and financial assets (properties to bonds and stocks).


 Illustration 2: Normalised price charts of Asian currencies over past 5 years

A safe haven is not a safe haven anymore when everybody thinks that it is one, with their grandmother and CNBC spouting that they must put their money there!  Not many people will remember when Singapore first started the government and corporate bond market post Asian financial crisis in 1999.  This was to build a sovereign and quasi sovereign – corporate benchmark curve so that other financial instruments and development can proceed from there.  In those early days 12-14 years ago, Asianmacro was involved in pricing a number of those issues from HDB (Housing Development Board), LTA (Land Transport Authority) and other global issuers tapping into the Singapore SGD denominated bond market.  The likes of HDB were priced at SGD SOR (swap offer rate) or LIBOR (if converted to USD terms) minus 10-25 bp representing the solid ”credit worthiness” of these quasi Singapore sovereign issuers.  So where are these HDB bonds priced at today?  From Illustration 3, they were as wide at SOR + 68bp in March 2013 recently.  We can see the same credit spread widening in Illustration 4 for LTA bonds as well.


Illustration 3: HDB 10-years asset-swapped credit spreads have widened significantly


Illustration 4: HDB bonds are not an anomaly as LTA bonds asset-swapped credit spreads have widened too

I will be cautious and remind everybody that Asia and especially Singapore will never decouple from any crisis especially if they are funding or banking related that emanates from the West.  Any relative value trades in shorting Europe and long Singapore for e.g. do not present a good risk-reward as this juncture.  If anything, in very niche segments like credit spreads in looking at Singapore via its statutory boards like HDB and LTA should make you worry.  In addition, where Singapore’s state investment agency, Temasek had been aggressively issuing debt as well in funding their investment portfolio and as such, a CDS price can be inferred on Temasek, it is probably as tight as it can get in the current new environment post 2008 financial crisis. (*please see Illustration 5).


Illustration 5:  Temasek CDS as proxy of Singapore Inc. reaching an expensive point ..  Singapore is not a safe haven anymore!

So where does all these leave us?  BUY USD (best via DXM3 Dollar Index futures) !!!  A safe haven despite all the proclamation is something that you can choose to put under your pillow, in a box under the ground in your garden, light enough for you to carry and buy your way out of any trouble, accepted by many as a form of exchange for services and goods and ultimately, must have a large enough float out there in the world in the real or black economies that cannot be controlled and confiscated by any government.  Only the good old USD fits all the above traits at this current juncture.  That is why the Chinese used to call it ”美金”  i.e. Mei-Jin or American Gold!

*Asianmacro is a beach bum managing his own wealth.  Besides deciding what to have for lunch (or hitting the gym sometimes), he is mostly found listening to loud music while trading and investing for himself.  While every care has been taken in preparing the information in and/or materials, such information and materials are provided “as is” without warranty of any kind, either express or  implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials. The opinions expressed do not constitute investment advice and independent advice should be sought where appropriate. In no event will Asianmacro be liable to you for any direct or indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials attached herewith.  Asianmacro may already have or intend to have a trading or investment position in the financial instruments or products referred to in this communication.  This is not intended as an offer or solicitation for the purchase or sale of any financial instrument and Asianmacro may also have interests different from or adverse to your interests.