Singapore Condo Drop Makes City Carry-Trade Source: Asean Credit

By Lilian Karunungan and Pooja Thakur

Photographer: Bryan van der Beek/Bloomberg

Prime Minister Lee Hsien Loong’s curbs on property-market speculation have pushed... Read More

Singapore’s slumping property market is slowing inflation (SICPIYOY) and weakening the city-state’s dollar, making it attractive for funding Southeast Asian carry trades.
Traders who sold Singapore’s currency against a basket of Indonesia’s rupiah, Malaysia’s ringgit, Thailand’s baht and the Philippine peso earned 2.2 percent since June 30, data compiled by Bloomberg show. That compares with a loss of 1.7 percent selling the U.S. dollar and a gain of 1.4 percent using Taiwan’s currency. In carry trades, investors borrow in a country with low interest rates and park funds in higher-yielding markets. The risk is that exchange-rate swings erase those gains.
“Given our bearish outlook on the Singapore dollar, we think it is quite attractive as a funding currency for initiating long positions on high-yielding currencies,” Divya Devesh, a
foreign-exchange strategist at Standard Chartered Plc in Singapore, said in a Nov. 12 e-mail interview. The U.K. lender forecasts a 2.4 percent loss for the city’s dollar against the greenback by June 30.
Prime Minister Lee Hsien Loong’s curbs on property-market speculation have pushed prices for luxury condominiums on Singapore’s resort island of Sentosa to near the cheapest since 2006 and contributed to inflation easing to 0.6 percent in September from as high as 5.7 percent in late 2011. Indonesia, where 10-year sovereign bonds yield 5.60 percentage points more than Treasuries, remains a popular investment destination for carry trades.

Foreign Buying

Singapore’s efforts to prevent a property bubble, which started in 2009 and include stricter lending criteria and higher taxes on foreign buyers, have contributed to overseas purchases of residential real-estate dropping to 8.7 percent of total transactions last quarter from 18 percent in the same period three years ago, according to data from the Urban Redevelopment Authority.
That’s put downward pressure on the city’s dollar, which fell 2.7 percent this year in Southeast Asia’s worst performance. Singapore’s currency, which dropped 0.5 percent today, is the most expensive in Asia after China’s yuan in inflation and trade-weighted terms, while Japan’s yen is the cheapest, an index compiled by the Bank of International Settlements show.
The Singapore dollar’s six-month implied volatility, a measure of expected exchange-rate swings to used to price options, is 5.26 percent. That compares with 9.69 percent for the rupiah and 6.62 percent for the peso. The city-state’s five-year sovereign bonds yield 1.47 percent, less than the 1.62 percent for similar-maturity Treasuries and 3.66 percent for Malaysian government notes, data compiled by Bloomberg show.

‘Most Efficient’

“The combination of low implied volatility and low yield renders the Singapore dollar the most efficient funding currency for high-yielding Asian currencies,” Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong, wrote in a Nov. 7 research report. “We see scope for further underperformance based on poor domestic fundamentals.” The city-state’s currency will drop 1.6 percent to S$1.32 against the greenback by end-2015, Trinh forecasts. That compares with the median forecast for a gain of 0.6 percent to S$1.29 in a Bloomberg survey.
The Monetary Authority of Singapore guides the local dollar against a basket of currencies within an undisclosed band and adjusts the pace of appreciation or depreciation by changing the slope, width and center of the band.
The Singapore dollar is trading marginally above the mid-point of its trade-weighted band, according to calculations by State Street Global Markets.

Rents Falling

“Depreciation potential from this point is limited, as would thus be the attractiveness of the currency as a funder,” Dwyfor Evans, a Hong Kong-based macro strategist at State Street, said in an e-mail interview yesterday.
More restrictive government policies on hiring expatriates has damped demand for real-estate, while the supply of residential units is still increasing, Ong Teck Hui, the national director of research at Jones Lang LaSalle Inc. in Singapore, said in an interview yesterday.
Prime residential rents will drop 6 percent to 7 percent this year and probably by the same amount in 2015, Ong said. The urban authority’s private residential rental index of prices fell 2.5 percent in the 12 months through September.
Singapore’s economy expanded 2.4 percent year-on-year in the second and third quarters, slowing from 4.8 percent in the first three months of the year. Inflation is expected to stay low because of the outlook for falling rents, with the MAS predicting a range of 1 percent to 1.5 percent this year and 0.5 percent to 1.5 percent in 2015.
Saktiandi Supaat, head of foreign-exchange research at Malayan Banking Bhd. in the city-state, said that he plans to downgrade his S$1.29 end-2015 forecast for the Singapore dollar.
“The weakness in the property sector has slowed construction activity, affecting Singapore’s growth prospects to some extent,” he said in an interview yesterday. “External macroeconomic developments remain key for the Singapore economy but if construction activity remains weak, it could weigh on the Singapore dollar in the near term.”