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The govt must be broke to issue a $4billion worth of bonds in a shaky market with depressed property prices. Other govts would have injected money into the system to jump start it. But MAS is sucking money out and investing it overseas. Taking money out of the system will mean higher interest rate to borrowers.
Singapore Savings Bonds: Good intent, bad timing, say analysts
Banks, economists fear move will push interest rates up, such cash from anaemic economy
SINGAPORE — Singapore’s plan to launch a savings bond to encourage long-term retail savings is unsettling domestic banks and economists who fear this bond will push interest rates up and suck cash out from an already anaemic economy.
The Singapore Savings Bonds (SSB), which will begin selling in October, will have a term of 10 years. It will offer the same yields as government bonds or 10 times the returns on bank deposits, and can be redeemed without penalty at any point. Such a juicy proposition could cause a flight of cash from bank deposits into these bonds and force interest rates higher as banks compete to attract savers.
The government says it will issue a maximum of S$4 billion worth of bonds this year, which is still more than a fifth of deposit growth last year.
The timing of these bonds, which are aimed at meeting a long-felt need for long-term investment options in the low-yielding economy, couldn’t be worse. The economy contracted sharply in the second quarter as manufacturing slumped and is at risk of tipping into technical recession. Price pressures are subdued and expectations are building for the central bank to ease policy once again at a twice-yearly review in October.
“Launching a retail savings bond now is almost like reverse QE,” said Bank of America Merrill Lynch economist Chua Hak Bin referring to the unorthodox quantitative easing (QE) policies the United States and other major economies have pursued in the years since the 2007 financial crisis.
Mr Chua points to the already slowing deposit growth in the Singapore banking system, with just S$3.8 billion of deposits being added in the first five months of this year, just 20 per cent of the total growth last year. He suspects the government would invest the savings bond flows overseas. That would further pressure loan growth, by tightening available cash and triggering a rise in deposit rates, he said.
“So, the timing is not ideal. The economy has stagnated in the first half and this will worsen the situation,” Mr Chua said.
Citibank analysts expect that of a total S$559 billion of deposits in the banking system, 36 per cent are savings deposits held by households. If on average the MAS issued about S$6 billion worth of bonds each year, S$30 billion would flow from the deposit base into bonds over five years, they estimate.
The Monetary Authority of Singapore (MAS) has set a cap of S$100,000 on individual investments in the bond.
MAS managing director Ravi Menon played down fears the bonds will cannibalise bank deposits. “The savings bonds issuance numbers pale in significance compared to the total size of the banking deposits,” he said at a news conference on Tuesday.
Yet, there is little doubt the bonds will draw savers from banks. Government bonds yield about 0.95 per cent for one-year and 2.6 per cent for 10-years. Bank deposits fetch around 0.25 per cent for a year and just double that for 24 months. “The Singapore Savings Bond is bending the risk-reward paradigm in investors’ favour,” said Mr Zal Devitre, head of investments at Citibank Singapore.
Mr Devitre believes retail investors and consumers will be keen to buy the bonds, and yet thinks it is premature to be projecting the impact that will have on rates and banking system liquidity. REUTERS
Singapore Savings Bonds: Good intent, bad timing, say analysts
Banks, economists fear move will push interest rates up, such cash from anaemic economy
SINGAPORE — Singapore’s plan to launch a savings bond to encourage long-term retail savings is unsettling domestic banks and economists who fear this bond will push interest rates up and suck cash out from an already anaemic economy.
The Singapore Savings Bonds (SSB), which will begin selling in October, will have a term of 10 years. It will offer the same yields as government bonds or 10 times the returns on bank deposits, and can be redeemed without penalty at any point. Such a juicy proposition could cause a flight of cash from bank deposits into these bonds and force interest rates higher as banks compete to attract savers.
The government says it will issue a maximum of S$4 billion worth of bonds this year, which is still more than a fifth of deposit growth last year.
The timing of these bonds, which are aimed at meeting a long-felt need for long-term investment options in the low-yielding economy, couldn’t be worse. The economy contracted sharply in the second quarter as manufacturing slumped and is at risk of tipping into technical recession. Price pressures are subdued and expectations are building for the central bank to ease policy once again at a twice-yearly review in October.
“Launching a retail savings bond now is almost like reverse QE,” said Bank of America Merrill Lynch economist Chua Hak Bin referring to the unorthodox quantitative easing (QE) policies the United States and other major economies have pursued in the years since the 2007 financial crisis.
Mr Chua points to the already slowing deposit growth in the Singapore banking system, with just S$3.8 billion of deposits being added in the first five months of this year, just 20 per cent of the total growth last year. He suspects the government would invest the savings bond flows overseas. That would further pressure loan growth, by tightening available cash and triggering a rise in deposit rates, he said.
“So, the timing is not ideal. The economy has stagnated in the first half and this will worsen the situation,” Mr Chua said.
Citibank analysts expect that of a total S$559 billion of deposits in the banking system, 36 per cent are savings deposits held by households. If on average the MAS issued about S$6 billion worth of bonds each year, S$30 billion would flow from the deposit base into bonds over five years, they estimate.
The Monetary Authority of Singapore (MAS) has set a cap of S$100,000 on individual investments in the bond.
MAS managing director Ravi Menon played down fears the bonds will cannibalise bank deposits. “The savings bonds issuance numbers pale in significance compared to the total size of the banking deposits,” he said at a news conference on Tuesday.
Yet, there is little doubt the bonds will draw savers from banks. Government bonds yield about 0.95 per cent for one-year and 2.6 per cent for 10-years. Bank deposits fetch around 0.25 per cent for a year and just double that for 24 months. “The Singapore Savings Bond is bending the risk-reward paradigm in investors’ favour,” said Mr Zal Devitre, head of investments at Citibank Singapore.
Mr Devitre believes retail investors and consumers will be keen to buy the bonds, and yet thinks it is premature to be projecting the impact that will have on rates and banking system liquidity. REUTERS
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