US downgrade a boost for Singapore

US downgrade a boost for Singapore

While grey clouds loom in the global economy, the Republic’s AAA rating could give it competitive advantages

by Richard Hartung 04:46 AM Aug 12, 2011

Singapore is now rated as safer for investors than America. While the United States had its credit rating downgraded to AA+ by Standard & Poor’s (S&P) late last week, Singapore has retained its higher AAA rating. S&P says that this highest means an “extremely strong capacity to meet financial commitments”.

Not only is Singapore as a whole ranked AAA, but local institutions and companies are rated highly by S&P too. Temasek Holdings is also ranked AAA, for example, as is Singapore Technologies Engineering.

Its banks are also well regarded on a global basis. Bloomberg rated Singapore banks among the strongest in the world in June, saying that OCBC “ranks as the world’s strongest bank”; DBS and UOB also placed in the top six.

While US politicians are wringing their hands in anguish, and while the risk of a global economic downturn may have increased, Singapore could gain relative benefits from the downgrade in the US rating.

Already earlier this year, Singapore’s bankers were travelling to the US to make pitches to American companies to move their funds and their transactions to Singapore. Companies may feel that placing all their deposits in a lower-rated US bank with a negative outlook from the ratings agencies is too high a risk, so moving funds to a Singapore bank could help to diversify the risk.

Now that Singapore has a higher rating than the US, companies and individuals alike may find moving their banking relationships here more compelling.

Mr Matt Huang from Macquarie Group told Bloomberg, too, that after the downgrade “there really is a global need for a reallocation and rebalancing”, and Singapore will be a beneficiary of that trend.

With US companies alone holding over US$1.9 trillion (S$2.3 trillion) in cash or the equivalent according to Reuters, getting even just a little piece of that pie could lift local deposits significantly.

You might ask, just how seriously do investors take such ratings?

Ratings agencies have been much maligned, in the US since S&P’s latest downgrade, and more widely before that when downgrades came late in the game during the 2008 global financial crisis. Yet investors still do use them for their investment decisions.

As US brokerage giant Schwab says, even though a rating is an opinion, “credit ratings do matter. Investors use them to compare the risks of various issuers and securities, just as banks often use credit scores to assess the risk of an individual borrower. A rating is only one of many metrics investors use when analysing bonds, but it is an important one”.

With the latest developments, Mr Peter Cohan explains on Forbes that “some public pension funds and mutual funds may be required to sell US Treasuries” since these funds can only hold AAA securities; he estimates that sales could amount to 3 per cent of their US Treasury holdings. Foreign investors may similarly reassess whether they want to invest in now-lower-rated US Treasuries.

In short, some organisations will now be looking for another place to park their money. Singapore’s AAA rating means it could be one of the destinations for investors’ funds.

Of course, investors could also consider putting their money in other countries with an AAA rating. Switzerland or Australia are alternatives. Marketing Singapore more proactively in the Middle East, Europe or the Americas, whether companies are looking at building a factory or simply placing excess funds, could help to increase investors’ comfort with Singapore as an attractive destination.

LOWER MORTGAGE RATES?

While the broader trend of the US downgrade could raise interest rates there and perhaps globally, interest rates here may eventually decrease a little as money flows in.

Banks that receive deposits and pay low rates to companies or individuals who are focused primarily on Singapore as a safe haven for their funds, may be able to loan out the money at lower rates. This means borrowers could eventually see lower interest rates on their mortgages or other loans.

Singapore and the region could also become a more attractive destination for foreign direct investment (FDI). While acknowledging that the turmoil following the US rating downgrade could have a negative impact on exports, ASEAN secretary-general Surin Pitsuwan also told the Wall Street Journal that if companies are “looking for a safer haven, this is it”. FDI in ASEAN could rise, and AAA-rated Singapore could be a prime destination for some of those investments.

Singapore companies could benefit from the changes as well. Along with the high ratings for Temasek and ST Engineering, Singapore Post has an AA- rating and SingTel is rated A+.

If companies like these need money to build new facilities, make an acquisition or conduct other activities, having a high rating while also being located in a highly rated country could give them a competitive advantage over other borrowers. While S&P downgrades to American companies following the US ratings drop did not occur solely because they are located in the US, Singapore-based companies could still be perceived as being less risky.

These advantages do not mean that everything is rosy. Singapore has reduced its GDP growth forecast for the year to 5-6 per cent, while some analysts have reduced their forecasts even further. Exports could fall if economies abroad grow more slowly, which could negatively affect the overall economy and employment.

Given that the change in the US credit rating is new and has not occurred before, it is difficult to forecast exactly what will happen next. But on a relative basis, it could give Singapore competitive advantages.

Richard Hartung is a management consultant who has lived in Singapore since 1992.

Source : TODAYonline – MediaCorp Press Ltd’s copyright

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