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SINGAPORE BUDGET 2018

Singapore Budget 2018: Infrastructure bond financing could turbo-charge Singapore debt market

Observers say government backing could deepen the debt market through participation by foreign and local investors, and lower borrowing costs

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The idea of government-linked entities funding major infrastructure projects by issuing bonds is not new. Government-linked agencies in South Korea, Japan and China have issued bonds in both local and G3 currencies for the last two decades, said Samuel Chan, Standard Chartered Bank's head of capital markets in Singapore. Changi Airport (above) is to look into borrowing to build Terminal 5.

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Clifford Lee of DBS Bank said that if the supply of bonds is increased gradually, the SGD bond market should be able to absorb it.

Singapore

THE just-announced policy for statutory boards and government companies to issue bonds to fund infrastructure projects is likely to turbo-charge the Singapore debt market.

Fixed-income bankers are excited by the transformational development, which they hope will deepen the local debt market.

The government is considering providing guarantees for long-term borrowings made by statutory boards and government-owned companies to build critical national infrastructure, Finance Minister Heng Swee Keat had said on Monday, when he unveiled the Budget in Parliament.

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The move could help lower financing costs, while also making sure that Singapore does not draw directly on its reserves to fund major infrastructure spending; this spreads the cost of major investments over a longer period and helps boost Singapore's bond market, he said.

Samuel Chan, Standard Chartered Bank's head of capital markets in Singapore, noted that, until now, much of the supply of bonds from statutory boards and government-linked companies (GLCs) has been absorbed by banks and a small pool of local institutional investors.

Statutory boards and GLCs are already using bonds to finance infrastructure projects. For example, statutory boards like the Housing & Development Board (HDB), the Land Transport Authority and the Public Utilities Board have issued bonds to finance public housing, rail and water infrastructure.

"By increasing the supply in the market, the short-term impact may be an increase in cost of funding for the issuers, but in the mid- to long term, by correcting pricing to fair-market valuations, the SGD bond market could potentially see a quantum leap in broad-based participation from both local and international investors," said Mr Chan.

"Standard Chartered Bank's recent engagement with international investors has indicated a huge appetite for SGD-denominated Singapore government-related securities, but the lack of liquidity has created a false barrier to their participation."

The outstanding SGD bond market is a mere S$155 billion, compared to local assets under management of S$2.7 trillion, indicating plenty of room for this market to grow, especially with participation of international investors, he added.

Clifford Lee, DBS Bank head of fixed incomes, said that whether the SGD market is deep enough to absorb the added supply initially would depend on the pace of increase of this said supply.

"If it's done gradually - which I suspect will be the case as it will be tough to churn out so many projects at one time - the SGD bond market should be able to absorb it.

"Otherwise, the bigger USD bond market will well be able to take up any excess amount, as the supply of USD bonds out of Singapore still falls short of proven international demand."

The idea of government-linked infrastructure project funding is not new. Government-linked agencies in South Korea, Japan and China have issued bonds in both local and G3 currencies for the last two decades, noted StanChart's Mr Chan.

The longer-term nature of infrastructure financing will not only provide higher yields, but also offer options for institutional investors such as insurance companies, to match their long-dated liabilities.

Infrastructure-backed bonds tend to be longer-termed in any case due to the nature of their cash-flow profile, so they bode well for Singapore bond investors, particularly insurance companies, said DBS' Mr Lee.

The infrastructure sector has attributes that are suited to institutional investors' strategic objectives, in that they offer investment opportunities with long asset lives that match their long-dated liabilities, said Ray Tay, Moody's Investors Service vice-president and senior credit officer.

"Also, the credit risk performance of infrastructure debt is generally more stable than that of non-financial corporates," he said.

Kelvin Tay, UBS Wealth Management regional chief investment officer, said: "Statutory boards are not particularly highly leveraged, and with rates still low from a historical perspective, these entities will be able to lock in long-term funding at reasonable rates."

Andrew Wong, a credit analyst at OCBC Bank, said the government guarantee will mean lower borrowing costs. Even though HDB has a "AAA" rating from Moody's, it is based on Moody's expectation of support based on HDB's close linkage with the government and the key policy role that the housing agency plays for the government, he said.

"This is weaker than any contractual support that would be extended via a guarantee. As an example, even though HDB has the same rating as the government, its bonds trade at a higher spread then government-issued bonds," he said.

"But, with a guarantee, this difference in spread should be removed."

Private-sector funding should also benefit from the move.

Spending by the government could also be a trigger for infrastructure-service companies (construction companies and heavy-equipment suppliers, for example) to plan on increasing their capital expenditure through additional borrowings, said Shamalee Vanderpoorten, emerging markets fixed income analyst at Credit Suisse private banking research.

"The multiplier impact could be meaningful," she said.

Another impact is that, assuming the size is meaningful, these infrastructure bonds could serve as benchmarks against which private-sector issuers priced their SGD bonds, she added.

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