Singapore rates unlikely to stay negative, but may remain low till 2021

Singapore rates unlikely to stay negative, but may remain low till 2021

Fri, May 29, 2020

Vivien Shiao


SINGAPORE'S one-month Swap Offer Rate (SOR) fell briefly below zero last Wednesday for the first time since 2011, raising the spectre that the Republic could be following in the footsteps of other countries with persistent negative rates.

But analysts tell The Business Times that negative rates - a rare occurrence here - are unlikely to persist, even as both SOR and Singapore Interbank Offered Rate (Sibor) are expected to remain low till 2021.

Negative rates have generally been associated with issues such as asset market distortion, worsening inequality and amplifying risks of misallocation of capital, even as proponents say that they can help boost the economy. In Germany, for instance, some banks are charging customers negative interest rates for corporate and retail deposits.

Victor Yong, interest rate strategist, United Overseas Bank (UOB), said: "Negative interest rates are an oddity but they are no longer a surprise given that countries such as Japan and Germany have had negative rates for an extended period of time."

In Singapore, the 1M SOR was back in positive territory at 0.13 per cent as of May 28, but its brief drop to -0.01 per cent on May 20 was the lowest since August 2011.

The SOR is a commonly referenced benchmark for business loans here, representing the cost of borrowing SGD synthetically through borrowing USD for the same maturity, and swapping out the USD in return for the SGD.

However, analysts said that the rationale behind the collapse in rates this time is quite different compared with the situation back then.

Previously, it was the large swings in exchange rate expectations that drove the negative SOR forays - in contrast, it is Libor expectations that have dominated SOR movements this time, said Vishnu Varathan, head of economics and strategy of Mizuho Bank. The fall in SOR last week mainly reflected a corresponding drop in the 1-month USD Libor - one of the key components of determining SOR, he said.

"A large shift downwards in USD Libor expectations, presumably driven by speculation of negative rates policy to be adopted by the Fed, has tipped the SOR downwards and in doing so, fleetingly into negative territory," he told BT.

UOB's Mr Yong concurred that present dynamics driving negative SOR differ from 2011, with the current decline unlike the acute experience previously.

In 2011, all three tenors - 1M, 3M and 6M SORs - went below zero to hit record lows, mostly due to the European Sovereign crisis and its impact on the European banking sector. Comparatively, the decline in 1M SOR last week was a more modest drop, with the 3M and 6M tenors still positive at this juncture, noted Mr Yong.

This time, it was the combination of liquidity injections as well as aggressive policy rate cuts by central banks globally in response to the impact of the Covid-19 pandemic that were the main factors pressuring SOR lower, he said.

Analysts that BT spoke to say that SOR is unlikely to stay below zero, but it will ultimately depend on the US Fed as Singapore is generally a price-taker of rates.

Mr Varathan noted: "The more pertinent, and certainly consequential, question is whether the US will head the way of Japan and Europe with negative rates."

Similarly, while future episodes of negative SOR fixings cannot be ruled out, Mr Yong said that a persistently negative SOR is not in his base case scenario unless the US Fed decides to cut its monetary policy rate to negative. He is expecting SOR and Sibor to "remain low" for the rest of 2020.

Meanwhile, DBS strategist Eugene Leow is forecasting SOR to hover just above zero through to end-2021, in line with US rates.

According to Mr Leow, dips below zero should not occur too often as he expects the Monetary Authority of Singapore (MAS) to remove excess liquidity from the system.

This can be done through a variety of instruments but the most commonly used include increased issuances of MAS bills and the use of swaps, he said.

However, there is still a lack of clarity on several issues that could drive SOR higher, which includes a ratcheting up of China-US tensions or a second wave of Covid-19 infections, he noted.

Another possibility is that the SGD would strengthen in the coming months as the global economy shows signs of recovery, he added.

Even as a significant proportion of business loans is still pegged to SOR, this will soon change as Singapore is on track to make the shift to the Singapore Overnight Rate Average (Sora) over the next year.

This comes as the Libor will be discontinued by end-2021.

Analysts say that Sora is expected to be less volatile and less inclined to go below zero compared to SOR. This is because eligible financial institutions have the option to deposit their excess SGD funds at the MAS Standing Facility on an overnight basis at 0 per cent, said Mr Yong.

"These days, I don't like to use the word 'impossible'," he quipped. "I would just say that it is highly unlikely for Sora to turn negative."