Down Playing the SGD … For The Right Reasons : SGD Corporate Bonds and USDSGD

This year’s Financial Stability Review seems slightly more gloomy than last year’s. With headings like “When The Music Fades” and “When The Tide Goes Out”, are they sending out subtle hints ?

I had a laugh because I was reading Bill Gross’s monthly newsletter at the same time and his comment on central banks as follows.
“Deep in the bowels of central banks research staffs must lay the unmodelable fear that zero-bound interest rates supporting Dow 16,000 stock prices will slowly lose momentum after the real economy fails to reach orbit, even with zero-bound yields and QE.”

MAS probably knows this ?

Banks are all coming out with their 2014 outlooks and not a single one of them is anything but bright and optimistic. Now we wonder what sort of models they are using, if central banks models are urging caution and banks have become cheerleaders ?

There are some takeaways for us from the 91 pages.


Singapore Corporate Bonds

“Our analysis found that the record bond issuance by Singapore companies in 2012 was unlikely to have increased risks to bond issuers significantly: the bonds issued were mainly investment-grade, had maturity periods above five years, and were denominated in SGD or USD. In contrast, bond issues in 2013 warrant closer monitoring. A smaller share of the bond issuance in 2013 was of investment grade and the average term to maturity of the bonds also declined.”
>> My pet topic and yes, it has been noticed not just by me but by MAS too ! The next step would be an investigation in prudent lending practices by banks on bond issues with “higher risks”.
Household Debt : When the Tide Goes Out 
“The household debt-to-income ratio has risen, from a low of 1.9 times in 2008 during the Lehman crisis to 2.1 times in 2012. In addition, household debt has grown more quickly than household assets since Q2 2011.”
>> It still looks good on paper. New housing loans are more prudent and of shorter loan tenures and slower pace of growth of second mortgages etc. The trend is just more indebtedness.
Nothing much has changed from the 2012 statement.
” While the aggregate Singapore household balance sheet remains resilient, individual household credit exposures warrant close monitoring. Expectations of continued low interest rates could lead to some households over extending themselves. Should interest rates rise in future or the unemployment rate increase, households that are highly leveraged and affected by retrenchments would come under pressure. Lower income households, especially those with small financial buffers, could be adversely affected”
“With household leverage continuing to rise in a low interest rate environment, certain segments of households, especially those with lower incomes and /or higher debt-servicing burdens, could be more vulnerable to adverse shocks. The various measures MAS has recently taken aim to encourage greater financial prudence among households on three fronts – housing loans, motor vehicle loans, and unsecured credit.”
Banking Sector : When The Music Fades
“Looking ahead, should advanced countries start normalising policy, interest rates in Singapore could rise from the low levels which they have been at.

An unexpectedly sharp increase, especially if it comes earlier than expected, could strain the debt-servicing ability of over-extended borrowers.”
>> Same song and tune as 2012 when they said “There is a risk that expectations of low interest rates will become entrenched.” and that “there is a material risk of bank loan quality deteriorating”. They noted the trend of higher household and corporate sector leverage again too but added an extra line “With the economic outlook still uncertain but interest rates increases looking more likely, the risk of banks’ asset quality deteriorating cannot be discounted.” All this in addition to the comments on increasing local banks exposures to China and India.
There is special mention of S-Reits.
“A sharp increase in interest rates could also pose specific challenges for real estate investment trusts listed in Singapore (S-REITs). As S-REITs are required to distribute 90% of any taxable income to unit-holders, they have limited retained earnings, and are dependent on capital markets and banks to meet their financing needs. Based on MAS’ estimates, if interest rates were to rise by 300 bps, the median interest cover for S-REITs would decline from 6.8 to 3.5 times”
>> This is in line with their higher rates emphasis. Yet, what are the chances of rates rising 3% ? And what are the alternatives to investing in Reits ?
Overall, we have the usual uncertain global economic outlook disclaimer but the message appears to be that Singapore will be alright in her slow and steady way. Yet what does it bode for the USDSGD ?
1. MAS notes that there is potential room for outflows from EM and South east asia.
2. Inflation is likely to be domestically generated and imported inflation will be benign.
The only sensible solution is to keep the SGD strong, isn’t it ? So no outflows and Singapore remains favourably positioned for the Taper ? Policy status quo.
The loophole in the past would be to over strengthen the SGD and challenge MAS’s resolve but we do not have inflation on our side now and MAS’s call for higher rates is applicable to the long end because their duty is only to maintain daily liquidity.
The conclusion I am drawing is that USDSGD will probably remain in its own world but the rates picture would be highly correlated to the happenings in America and Treasury yields. Whilst higher rates would have attracted hot money onshore in the past, the appeal has waned as EM falls out of favour.
And my biggest worry ? The corporate bonds.