Singapore Dollar Losing Luster to Higher Returns: Southeast AsiaYumi Teso and Lilian Karunungan
Singapore’s dollar will underperform most regional counterparts this year as a pickup in the global economy and faster growth among its peers reduces demand for the republic’s top-rated securities, according to HSBC Global Asset Management and Mizuho Asset Management Co.
Interest in the slowest-growing nation of Southeast Asia’s five-biggest economies will diminish in 2013 as returns waver, Gordon Rodrigues, investment director at HSBC Global Asset in Hong Kong, said in a Jan. 14 interview. Prime Minister Lee Hsien Loong said on Dec. 31 that the $240 billion economy will expand 1 percent to 3 percent this year, less than the past decade’s 6 percent average.
Gross domestic product in the Philippines, Thailand and Malaysia may rise at almost double the pace of Singapore in 2013, official forecasts show, where 10-year bonds offer yields that are more than twice those in the city-state. The baht, ringgit and peso are among the best-performing currencies in Asia this year, as the U.S. fiscal agreement and Europe’s easing debt crisis, bolstered demand. Singapore’s dollar has weakened.
“From a point of view of potential in the region, other currencies have potential for more appreciation,” said Rodrigues, whose company oversees $32 billion of Asian fixed income. “If the market is in a risk-taking mode, given the low-growth outlook for the Singapore economy, there’ll be less interest in money flowing to Singapore.”
The republic’s currency strengthened 5.8 percent in the first three quarters of 2012, the best performance in Asia, as investors sought the relative safety of Singapore’s AAA rated assets before the resolution to the proposed U.S. tax increases and spending cuts that threatened to tip the world’s biggest economy into recession. It reached S$1.2152 on Oct. 17, 2012, within 1.3 percent of a record-high of S$1.1992 on July 27, 2011.
In the past three months, the currency has weakened 0.6 percent against the dollar, the third-worst loss in Asia after the yen and Indonesia’s rupiah, data compiled by Bloomberg show. The baht has appreciated 3.4 percent, the peso 1.8 percent and the ringgit 1.2 percent. Indonesia’s rupiah dropped 0.9 percent. The Singapore dollar traded at S$1.2287 against its U.S. counterpart today, compared with S$1.2277 on Jan. 18.
The Philippines $225 billion economy may expand by a maximum of 7 percent in 2013, compared with 5 percent in Thailand and as much as 5.5 percent in Malaysia, according to government estimates.
Philippine 10-year sovereign bonds yield 4.53 percent, while Thailand’s offer 3.69 percent and Malaysia’s 3.49 percent, data compiled by Bloomberg show. Singapore, which is rated at least six levels higher than its peers in Southeast Asia, pays 1.33 percent on similar-maturity local-currency debt.
The city-state’s notes have returned an average 0.3 percent in the past six months, trailing gains of 0.8 percent for baht-denominated securities, 1.7 percent for ringgit bonds, 5 percent for peso debt and 5.9 percent for rupiah securities, according to indexes compiled by HSBC Holdings Plc.
Investors should use the Singapore dollar as a funding conduit to buy other Asian currencies, taking advantage of its lower yields and limited scope for further currency appreciation, according to research reports released by HSBC, Oversea-Chinese Banking Corp. and Skandinaviska Enskilda Banken AB last week.
In a so-called carry trade, investors make money by borrowing in a country with low interest rates and converting the funds into a currency where returns are higher. Singapore uses its dollar to guide monetary policy. It’s currently trading at the stronger end of the band in which it’s allowed to move, the lenders noted.
“One of our best recommendations is to sell the Singapore dollar and buy the Thai baht,” David Bloom, the global head of foreign-exchange strategy in London at HSBC, Europe’s largest bank, said in a media briefing in Singapore on Jan. 15. “We don’t particularly agree that the currency is going to be particularly strong at all.”
Akira Takei, head of the international fixed-income department in Tokyo at Mizuho Asset, is maintaining a “neutral” position on Singapore assets, meaning his holdings are in line with the benchmark he uses to track performance.
“Singapore is losing its attractiveness as a safe haven in Asia amid the risk-on sentiment,” Takei, whose company oversees about $39 billion, said in an interview on Jan. 15. “It’s a stable currency, but you probably won’t see much profit.”
A government push to limit the intake of foreign labor has led to a rising shortage of workers and higher business costs. That’s contributed to price pressures that led Singapore to tighten monetary policy last year by allowing currency gains. Hiring constraints, coupled with weak growth in advanced nations, damped last year’s expansion. Exports fell by the most in 14 months in December, dropping 16.3 percent after a revised 2.6 percent decline the previous month, official data showed Jan. 17.
The Monetary Authority of Singapore, which also uses the currency to manage inflation, said in its twice-yearly review in October that it would maintain a modest and gradual appreciation of the dollar. The island state guides the exchange rate against a basket of currencies within an undisclosed band and adjusts the pace of appreciation or depreciation by changing the slope, width or center.
The central bank forecasts inflation will be in a 3.5 percent to 4.5 percent range this year, after averaging an estimated 4.5 percent in 2012.
Policy makers will probably maintain the current policy stance when they meet in April, said Joey Chew, a Singapore-based economist at Barclays Plc, the best forecaster for the city-state’s dollar based on six quarterly predictions through December 2012, according to Bloomberg Rankings.
“They are still concerned about inflation and growth is weak,” Chew said in an interview on Jan. 14. The currency is “still on the strong side of the band but it’s no longer at the top end,” she said.
The economy grew 1.2 percent last year, less than a quarter of 2011’s pace, official data showed on Jan. 2. The island is in a “new phase” of growth where it must adjust to a slower expansion than it has become accustomed to, Prime Minister Lee said last month.
“Singapore plans to reduce its reliance on foreign workers, and that could pose a headwind for the economy in the near term,” Wee-Ming Ting, the Singapore-based head of Asian fixed income at Pictet Asset Management, which oversees $27.5 billion in emerging-market debt globally, said a Jan. 11 interview. “We expect it to underperform against other regional currencies for a while.” He declined to disclose specific investment strategy.