Wednesday, July 17, 2013

The Moody Rate Cut

As rating agency Moody cut the rating of Singapore’s 3 home-grown banks to "negative", Singapore’s reaction has been almost immediate. The Monetary Authority of Singapore (MAS) has come out to defend the banks, stating that the banks have the highest average credit ratings among banking systems worldwide.

In a further step, the MAS all but guarantee that low interest rates are here to stay in Singapore. They said that while some borrowers are at risk, especially when interest rates rise as a result of a tightening of US monetary policy, "the local banks are not at risk". This statement directly referred to Moody's statement that cited mounting domestic household debt and rising property prices in Singapore and in countries where the three banks are active.

However the statement by the MAS has not swayed anyone and most people believe Moody’s rate cut to be the correct move. The reason for this is simple; the rate cut has nothing to do with Singapore! The reason for Moody’s rate cut is because of the deflating 200 pound gorilla in the middle of the room; China.

See the statement by Moody and note the part that state “in countries where the three banks are active”. The “countries” refer to in the statement is frankly just 1. China has come in with some bad numbers recently and our banks, with their heavy exposure to China, are getting the rate cut as a result. It’s no coincidence that banks in Australia, another country with heavy China exposure, are now also under pressure.

With China undergoing a slowdown, frankly it comes no surprise that banks with big exposure to China are under the microscope. Singapore got another problem because most of our trade is with the US and with a tightening of US monetary policy looming, our banks are facing faced a potential double whammy.

Thus the downgrade by Moody. The MAS can come out with as many statements as they want, but it won’t change a thing because the problem for Singapore banks lies not in Singapore, but in China.  

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