Don’t rank Singapore with delinquent debtors, Temasek tells S&P

S&P’s new credit rating framework gives rise to "serious concerns".

Singapore’s investment fund Temasek has slammed Standard & Poor’s proposed new rating framework for government-related investment holding companies (IHCs), stating that the framework gives rise to "serious concerns" because it departs from the core principle that credit ratings should be based on an individual company’s underlying credit quality.

S&P’s new framework puts countries into equity market groups (EMGs), which grades an IHC’s asset liquidity based on the 30-year volatility of the country’s main stock index, where the majority of an IHC’s assets are listed.

“We believe that long term volatility is not an appropriate indicator of the actual liquidity of stocks in a country, and of the actual liquidity of a portfolio, at a particular point in time. Instead, the liquidity of an IHC’s portfolio should be assessed based on the number of days needed to divest assets listed on the respective stock exchanges, i.e. the time needed to liquidate the portfolio, to meet non-discretionary payments,” Temasek noted in a comment dated February 2.

Temasek’s statement particularly targeted the fact that the new framework puts Singapore in EMG 3, the same group as Greece, Cyprus, and Latvia, countries with a history of debt defaults.

According to Temasek, the framework does not take into account the recent size and liquidity of the markets for the purpose of determining asset liquidity.

"Further, regions such as Asia-Pacific and Southeast Asia are in EMG 2, while countries like Hong Kong, Singapore, Malaysia and Indonesia are in EMG 3. This mixing of regions and countries is confusing. More importantly, the proposed EMG methodology imposes a cap of ‘3’ on the Asset Liquidity score regardless of the IHC’s share of listed companies, if the majority of its listed assets (by value) trade on stock exchanges in countries that are classified in EMG 3 or 4. This means IHCs in Singapore and Hong Kong would automatically be capped at ‘3’, alongside IHCs in countries such as Trinidad and Tobago or Suriname, while an IHC in smaller markets like the Slovak Republic does not have a cap,” Temasek stated. 

Temasek currently has an S&P rating of “AAA”, the highest possible rating which indicates an “extremely strong capacity to meet financial commitments”.