SGD and SGS in global stage; some considerations
- Our analysis finds attractive risk-reward from SGD assets
- Wider collateral eligibility of SGD cash and bonds for market purposes is a positive development
- There are fewer geopolitical considerations compared to the USD
- The long duration green SGD bond issuance pipeline is a major potential draw
- Singapore’s high credit rating and a favourable issuance pipeline make a strong case for investors
Varieties of cyclical, geopolitical, and structural developments have exacerbated USD volatility lately. There has been no shortage of crises in the US and beyond, causing periods of risk aversion that invariably leads to flight to USD safety. Strong dollar phases are not permanent by any means; protracted periods of weakness have also been seen.
Through these ups and downs, USD has remained as the dominant reserve currency globally. Despite its large public debt overhang and persistent external imbalances, the deep US financial market, the fact the USD is the currency of invoice for global trade, and attractive risk/reward have kept global investors and savers holding on to the greenback through the decades.
But USD volatility, frequent instances of weaponisation of the currency, growing China-US rivalry, and other geostrategic considerations are causes for concern. Currency risk management, always critical, has taken on added importance.
Often currency market volatility goes hand in hand with dissipation of hard currency liquidity. This year, even as USD holders have gotten handsome returns, FX volatility has been substantial and dollar liquidity has steadily tightened. Against this backdrop, a case can be made that for traders and corporates, especially those with emerging markets exposure, there could be benefit from currency risk diversification.
The case for SGD and SGS
With a triple-A rating, boosted by a wide range of league table-leading fiscal, financial, competitiveness, and governance indicators, there is little question about the worthiness of the currency and paper issued by the government of Singapore. We believe that a series of evolving demand, supply, and structural factors are aligning that may mark the beginning of a wider holding of Singapore’s cash and bonds in the global financial stage.
On the demand side, purely from a financial angle, our analysis shows that there are attractive returns on investing in SGD cash and bonds from the perspective of investors based in USD, EUR, JPY, and CNY jurisdictions.
On the supply side, Singapore’s debt stock, with no question on its sustainability, is slated to grow in the coming years, with a chunk of the issuance targeted to finance green infrastructure and green transition. With fiscal structural factors pointing to greater issuance needs in the coming decades, the SGD and SGS market will deepen steadily.
A market structure related development adds to SGD cash/bond story. In late-2021, London Clearing House extended the range of eligible collateral accepted as initial margin to include SGD-denominated government bonds, treasury bills, and cash. This has come at an opportune moment as this year’s spike in market volatility has brought the spotlight back on liquidity risk. At times like these, eligible collateral becomes an important binding constraint.
From the perspective to Singapore’s policy makers, greater interest in SGD cash and bonds may not be a free lunch. It could bring in greater flows, but also there could be outsized outflows in response to global and local developments, causing returns and liquidity volatility. Since virtually all developed markets deal with this type of phenomena, we don’t see it as major impediment to macroeconomic management.
To read the full report, click here to Download the PDF.
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.