US downgrade to benefit Malaysia: Macquarie

Singapore and Malaysia will be the main beneficiaries of inflows into the region as global funds step up diversification into non-dollar assets after the US lost its top credit rating, according to Macquarie Group Ltd.

International investors will add to holdings of Singapore bonds, the only economy in Southeast Asia with a top rating from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings, the bank said in a research note dated Aug. 6. Malaysia, which has the world’s largest Islamic debt market, will become more attractive to investors in the Middle East, according to Australia’s biggest investment bank.

S&P cut its rating on the US by one level to AA+ on Aug. 5, with a negative outlook, saying this month’s agreement among lawmakers in the world’s largest economy to raise a US$14.3 trillion debt limit and spending cuts fell short of what would be necessary to stabilize the government’s medium-term debt dynamics. Moody’s re-affirmed its top rating on the US on Aug. 2 and kept the outlook negative.

“The downgrade solidifies Singapore as the new safe-haven in Asia,” Singapore-based strategist Matt Huang wrote in the report. “Despite offering a lower yield to the US, expected currency appreciation will likely more than compensate investors.” He confirmed the content of the report in an e- mail.

Fund Inflows

The local currency rallied 0.6 per cent to S$1.2121 against the greenback as of 9:55 a.m. local time. It may reach S$1.19 by the end of the year, according to Macquarie. That would be the strongest level since at least 1981, when Bloomberg data began.

The Singapore dollar has rallied 5.8 per cent this year, the biggest advance among Asia’s 10 most-used currencies excluding the yen. The city-state’s government bonds handed investors a 5.91 per cent return, on course for their best year since 2002, according to HSBC Holdings Plc. Local 10-year notes yield 1.81 per cent, compared with 2.56 percent on similar-maturity US Treasuries.

Global funds plowed more than US$1 billion into emerging- market bonds in the week to Aug. 2 and handed local-currency bond funds their best inflows in more than a year, EPFR Global said in a statement on Aug. 5.

International funds boosted their ownership of Malaysia’s local-currency debt to a record RM184.6 billion (US$61.6 billion) in June, up 53 per cent from the end of last year, according to data published by Bank Negara Malaysia on July 29. Malaysia is ranked A- by S&P and Fitch, while Moody’s has it at A3.

Middle-East Factor

“The Middle East is becoming increasingly comfortable with Malaysia’s capital markets, which may lead to increasing their global bond allocations into the ringgit,” Huang said in the report. “It is a natural investment destination as part of a portfolio re-allocation away from the US.”

The ringgit will appreciate to 2.91 per dollar by the end of the year, according to the median of 20 forecasts in a Bloomberg News survey. The currency climbed 0.5 per cent to 3.005 per dollar in Kuala Lumpur, capping a 2.1 percent gain this year. It reached a 14-year high of 2.9335 on July 27.

Ringgit-denominated government bonds advanced 2.83 per cent this year through Aug. 5, compared with 3.45 per cent in the year-earlier period, according to HSBC. Ten-year bonds have rallied in the past two weeks, pushing yields to this year’s low of 3.72 per cent, according to Bursa Malaysia.

“The larger market implication of the US downgrade will likely be in markets outside the U.S.,” Huang said. “Forced selling of US Treasuries will likely be limited.” -- Bloomberg