Singapore watching tightness of USD amid higher demand
Wed, May 13, 2020
Natalie Choy
Singapore
SINGAPORE's position as a financial centre backing trade flows in emerging Asia speaks to the urgency of securing ample access to the greenback here, amid global dollar tightness in recent months.
While funding strains here have largely eased for now, the Monetary Authority of Singapore (MAS) cautioned that market stress may re-emerge amid global volatility, Singapore's central bank said in response to queries from The Business Times.
The MAS had on March 19 set up the US$60 billion swap facility with the US Federal Reserve.
This came against the backdrop of a global pandemic that spurred a sharp spike in demand for dollars globally, as concerns over economic contraction and constrained financial markets brought fears to the fore.
On March 15, six central banks - including the Fed, the European Central Bank and the Bank of Japan - announced the enhancement of the standing US-dollar liquidity swap line arrangements to ease strains in global USD funding markets. The Fed then extended the USD liquidity swap line arrangements to more central banks, including the MAS.
For Singapore, the MAS USD facility was launched within a week after MAS entered into the swap arrangement with the Fed, a MAS spokesperson said.
"Given the stressed market conditions, we had to get more USD liquidity out to the market urgently."
Since the establishment of the USD swap line in Singapore, BT understands that USD funding cost has fallen to about 0.3 per cent across the various short-term tenors at recent auctions. Banks here can obtain USD funding via auctions at the USD facility.
MAS said it has seen "quite strong interest" from banks looking to draw on this USD facility so far, which will be in place for at least six months. And with the Fed swap line continuing to be in place, "this will support USD (funding conditions) in Singapore and the region in the months ahead", even if market stresses emerge again, the spokesperson said.
Latest data released by the Fed suggested that the swap arrangement has been well utilised. MAS has so far accounted for close to 2 per cent of the Fed's total USD lending to 14 central banks globally via the dollar swap lines. By comparison, Singapore did not tap the swap line with the Fed during the global financial crisis (GFC). Of the 14 central banks, the Bank of Japan soaked up the most dollars via the recent swap lines, followed by the European Central Bank, checks by BT showed.
The implications of tighter greenback liquidity have been particularly acute in Asia, amid surging dollar-denominated activity in the region since the global financial crisis.
Singapore, serving as a key financial hub in intermediating credit from advanced economies to emerging Asia markets, has also felt the sting when the greenback rose sharply in March over escalating Covid-19 concerns.
Overnight USD funding cost here was about north of 1 per cent in late March, even as the Fed's policy rate had been cut to 0-0.25 per cent.
This was also despite the MAS's existing efforts to provide additional USD liquidity to the market, by injecting an additional US$1 billion per day.
Singapore's growing use of USD comes as the bulk of cross-border lending by banks in Singapore is denominated in USD, MAS told BT.
Globally, total USD-denominated cross-border lending to emerging Asia markets jumped almost three times: from about US$760 billion in 2007 to US$2.1 trillion in 2019.
BT understands that around 50 per cent of non-bank loans issued by banks in Singapore are to emerging Asia markets; mainly Asean, China and India.
MAS said the shift of funds to emerging Asia is generally attributed to stronger regional growth relative to advanced economies, as well as the search for yield in the current low interest-rate environment.
The bilateral swap arrangement allows MAS to borrow USD from the Fed and, in return, pledge the equivalent amount in Singapore dollars to the Fed as collateral. Both central banks then agree to swap back these quantities of their two currencies at a specified date in future.
Singapore's largest lender DBS is among the banks that have participated in the auctions amid the global pandemic.
DBS head of treasury and markets Andrew Ng told BT the undersubscription and average bidding prices so far are "good and reliable" indicators of Singapore's underlying USD liquidity and funding condition, which remains "strong and resilient".
As at May 11, 13 auctions for USD funds have been held since March 27, MAS data showed. The MAS has set a floor price of US$10 million that banks have to bid above. Seven-day, 28-day and 84-day loan tenors are currently being offered.
The highest allotted amount so far stood at US$4.27 billion on March 27 for a seven-day tenor. The auction round drew eight bidders, with the lowest successful bid rate at 0.35 per cent. This is followed with US$3.15 billion allotted on April 13 for a 84-day tenor. The round had 10 bidders, with the lowest successful bid rate at 0.33 per cent.
Mr Ng said that while DBS's liquidity "continues to be strong", it is prudent to be prepared for any contingencies, especially in such unprecedented times. "MAS's USD facility serves as an added layer of comfort by providing ready access to additional term funding at reasonable rates," he noted.
Standard Chartered global head of treasury markets Daniel Koh told BT the improvement in general USD funding conditions has "positively contributed" to StanChart's ability to support the local banking community and its customers' needs at this time.
With the easing in USD funding going into Q2, the bank's franchise corporate clients with trade requirements and structural balance sheet needs will likely be the primary beneficiaries of improved pricing and access to USD liquidity, Mr Koh added.
StanChart participated in the seven-day and 84-day USD auctions.
"Ongoing actions by policy makers in Singapore - and globally making it clear they are 'ready to act' throughout this period - will help to ensure the ongoing functioning of the Singapore financial market to the benefit of all of our clients," said Mr Koh.
Reply With Quote
