Singapore has one of the most developed capital markets in Asia—with the marked exception of its corporate bond market.
The city state’s corporate bond market has lagged behind the region’s heavyweights of Korea, Malaysia and Hong Kong.
Bond issuance by Singaporean companies remains low, while its banks have been able to rely on a strong deposit base and equity markets have been a reliable provider of capital.
Yet Singapore’s borrowers should be flooding to the international capital markets to secure funding. The nation’s position as one of the shrinking pool of ‘AAA’-rated nations means demand would be high and yields low.
The UK is certainly taking advantage of its top-ranked status and lower interest rates, with chancellor George Osborne considering the launch of 100 year gilts, or government bonds.
However Singapore’s tepid approach to its bond market looks set to change. The Monetary Authority of Singapore (MAS), the city state’s financial regulator, has sent a strong message that is it determined to forge a much stronger debt capital market.
Firstly it has launched a consultation paper on creating a regime to create covered bonds for Singapore banks. Under the initial proposals, banks can use up to 2% of their assets to issue covered bonds. Qualifying securities include residential mortgages with a loan-to-value of no more than 80%. The cover pool of assets must be at least 103% of the face value of the bonds.
Covered bonds are important funding diversification tool for banks, but are limited in their scope. But the MAS has not forgotten the wider bond market. It also plans to provide swap liquidity to primary dealer banks arranging Singapore debt offerings for foreign corporates.
This is a targeted move by the regulator and in part is a response to the large volume of deals which have seen non-domestic names issue Singapore dollar bonds and swap the proceeds into US dollars.
International borrowers have done this to lock in cheaper funding costs. Credit spreads have been tighter in Singapore dollars and an appealing basis swap rate allows them to raise funds that are as much as 30 basis points cheaper than equivalent US dollar-denominated deals, according to some reports.
The funding arbitrage opportunity has led Singapore dollar-denominated issues on a year-to-date basis to more than double over the same period last year, according to data provider Dealogic.
Bonds in the currency totalled US$6.6 billion by March 14, up from US$3 billion over the same period last year.
However this flurry of has had a knock on effect to the USD/SGD cross-currency market, reducing the liquidity. Providing US dollar liquidity will hopefully attract more foreign issuers to Singapore’s debt market, creating a more robust cross-currency market.
This should help the domestic bond market too, as Singapore credits look to swap their US dollar proceeds into Singapore dollars. This is surely the real point of the MAS action—helping the borrowers on its own turf.
Singapore’s regulators must have watched with a mixture of the awe and envy the development of the offshore renminbi (CNH) bond market in Hong Kong. That market has gone from zero to US$23 billion since 2009 and is running alongside Hong Kong’s own well engrained onshore market.
The success of Hong Kong is particular pertinent to Singapore, which would like to position itself as a second CNH centre, but lacks the bond infrastructure of London, its key rival for Beijing’s attention.
The MAS is right to take action to develop the country’s bond issuance. If it wants to be Asia’s premier financial markets hub, a deep, liquid and buoyant corporate bond market is a priority. Deepening the swap market is a good first step.