Asian Sovereign Ratings Safe Despite Deposit Guarantees

Moody's says the fiscal positions of Hong Kong, Singapore, Malaysia, and Taiwan are secure and their moves to extend bank deposit guarantees should reassure depositors

"Larger deposit guarantees do not affect sovereign ratings in Asia," says Aninda Mitra, a vice-president at Moody's Investors Service, who published a report last week on the major regional banking systems and the effects of government guarantees on the fiscal positions of Asian countries.

"The decisions by authorities in Hong Kong, Singapore, Malaysia and Taiwan to extend bank deposit guarantees were precautionary in nature, and should reassure depositors. It is better to do it this way, rather than have to react if a sudden panic were to take place," he told FinanceAsia.

In the cases of Hong Kong and Singapore in particular, domestic banks are strong, rated B and B-minus respectively, according to Moody's Bank Financial Strength Ratings, so they should withstand the downward shift in the cycle. Mitra also points out that in both countries the guarantees are explicitly backed by fiscal reserves.

Hong Kong's previous Deposit Protection Scheme covered about 80% of retail deposits up to HK$100,000 ($12,900). The new scheme, introduced last month, will cover 100% of such deposits, plus deposits in some institutions which were previously not part of the scheme. The incremental amount of covered deposits will be about HK$118 billion, bringing the total amount of guaranteed deposits to approximately HK$550 billion (about 34% of GDP). The expanded guarantee will last until the end of 2010.

In Singapore, deposit guarantees previously covered 80%-90% of qualifying retail deposits up to a limit of S$20,000 (US$13,360). The Singapore government now backs all local and foreign currency deposits of individuals and non-bank customers at all financial institutions licensed and supervised by the Monetary Authority of Singapore. The guarantee is expected to last until 2010 and currently amounts to about S$700 billion or 270% of GDP.

However, the substantial assets held by Hong Kong and Singapore, mean that, "as in the past, even a period of [fiscal] deficits would not require sizable government debt issuance". Overall, Moody's does not believe that the call on the financial resources of the governments of Hong Kong and Singapore, resulting from the recent bank support measures, will be significant and, thus, the outlook for their ratings remains stable.

Malaysia's old deposit insurance framework covered 95% of retail customers with an upper limit of M$60,000 ($17,000). Now, all ringgit and foreign currency deposits with commercial, Islamic and investment banks, as well as deposit-taking development financial institutions regulated by Bank Negara Malaysia, will be fully guaranteed by the government through Perbadanan Insurans Deposit Malaysia (PIDM) until December 2010. The guarantee amounts to approximately M$984 billion or 138% of GDP.

In Taiwan, deposit guarantees were previously limited to NT$1.5 million ($45,700) for each account. Now the Central Deposit Insurance Company is authorised to guarantee all local and foreign currency deposits and inter-bank placements at registered institutions. This amounts to almost NT$23 trillion or 200% of Taiwan's GDP, and will last until the end of 2009.

The weaker intrinsic strengths of the Malaysian (rated C-minus) and Taiwanese (rated D) banking systems and a lack of committable fiscal resources to back the recently instituted blanket bank deposit guarantees, may result in a modest weakening of general government finances. But, although Malaysia and Taiwan may be "subject to incrementally higher fiscal risk", the expected weakening in government finances in these two countries "is hypothetical, should be mild and temporary; and, as a result, do not adversely impact their sovereign ratings or outlooks," Moody's says.

According to the report, "amidst exogenous liquidity shocks, the guarantee schemes are designed to instil confidence and ensure a level playing field". They are expected to forestall any volatile or destabilising deposit flows between or within banking systems from weaker toward stronger, or state-owned, banks. "A less prompt or a more ad hoc approach might have run the risk of heightened banking sector and economic instability," it concludes.

Macroeconomic data are also supportive. All four countries have current account surpluses and are net creditor nations with substantial foreign currency reserves, and their banking systems' net foreign asset positions are sizable. "As a result, they are unlikely to be severely impacted by prolonged deleveraging," Moody's says. It warns, however, that this does not imply that their financial systems are immune to a prolonged tightening of US dollar liquidity for instance, none of these countries has 'reserve' currencies that allow a powerful money creating ability.

But, their monetary frameworks are flexible enough to manage domestic liquidity, and the provision of US dollar swap lines to the Monetary Authority of Singapore by the US Federal Reserve provides further liquidity support. In addition, intra-Asian swap lines under the Chiang Mai initiative may also potentially provide limited amounts of assistance, should this arrangement be activated.

In fact, Mitra says that "the main risks to regional banking systems are moral hazard", that is, if banks start to lend irresponsibly because they feel protected by these measures; and secondly, if the regional economic downturn is far worse than expected.

In contrast to the four countries examined, Korean banks have net liabilities. However, Korea's deposit guarantees and swap lines introduced last month "offer a substantial level of credit comfort". Moody's plans to publish reports on the banking systems and their vulnerability to the global liquidity crisis for Korea as well as for Southeast Asian countries not included in last week's paper.