There seems to be a consensus among the fixed income research community that Asia has had a lot of upgrades recently and next year will see fewer. Is that your sense?
We gave an investor seminar yesterday and said exactly the same thing.
The one sovereign credit where some thought there would an upgrade was Malaysia.
That theme is largely driven by momentum trading in the market place. One always has to discount - as an outsider - what people may be pushing at the moment. There may be money riding on it from their perspective. It's not a perspective we share, judging by the fact the our outlook for Malaysia is 'stable'. We can't see anything in the near term that makes us think another upgrade is warranted.
Do you still maintain the view that Petronas should not pierce the sovereign ceiling?
The proposition that Petronas is more creditworthy than the government is a position we find difficult to defend. We think this based on fundamental analysis. Petronas is owned by the government of Malaysia. It has been the handmaiden of numerous financial engineering enterprises by the government over many years.
Moody's has said that Petronas is more creditworthy than the government and that's a proposition we cannot accept. We'll let the market be the judge of that question.
[Moody's had previously upgraded Petronas beyond the Malaysian sovereign. When it later upgrade the Malaysian sovereign, the two once again had the same rating.]
This issue has become hopeless muddled. It is not about the sovereign ceiling. It is really about whether you believe the Malaysian state oil company is anuthing other than the creature of the government. And this has been argued about in places like Venezuela too, where lots of people used to make the same argument about the Venezuelan state oil company. Of course, this has all been blown out of the water by President Chavez's highly publicized replacement of senior management over the past year and the politicization of the organization.
Another point that some analysts make is how can Taiwan be double A when the banking system is basically double B.
They should read our analysis and then they would understand why. The government in Taiwan is coming round much quicker than the Japanese government to the proposition that the banking system is undercapitalized and will require expenditure of public money to be recapitalized.
When you consider the balance sheet implications of this to Taiwan versus Japan, it is perfectly consistent with our rating. We expect the banks will be recapitalised but the rating is secure. The exact cost of the recap will be 20% of GDP. If you factor that into the government's existing debt burden, then it is perfectly consistent with the rating.
One thing which is hard to gauge about sovereign ratings is that aside from the numerical input, how do sentiment issues kick-in. For example, the bomb in Bali?
We have a triple C plus rating on Indonesia, which is the lowest of any rating agency. You'll recall that maybe a month ago there were lots of people on the sellside who were talking up Indonesia's improving credit story. We think that the capacity of the central government to manage the heterogeneous pressures is a big challenge and political risk is a factor in the rating, and is capping the rating.
The risk in Indonesia is that the fledgling democratic institutions of the country are ill-equipped to deal with the economic and financial and political and security challenges.
You can't ignore issues like that when thinking about a credit rating.
Japan: do events there have the power to impact ratings across the rest of Asia?
Not in the way we view it. Japan would be best characterized as a slowly deteriorating credit story, which it is the power of the government to arrest and slowly reverse.
The Japanese economy has been stagnating for a decade and the rest of Asia has been going in different directions. They haven't been dragged down by Japan.
But Japan is a growing economic cost to the rest of the world.
Singapore's government has no meaningful foreign debt, but if the economy continues to deteriorate, does that put the triple A under pressure?
First, Singapore's government has a balance sheet that puts even Switzerland to shame. Additionally, this immense financial flexibility that the government has built up means there is no pressure on the rating.
Let us suppose that Singapore grows no faster than Switzerland; that is not inconsistent with a triple A rating.
This is not the first time people have asked questions about Singapore. We feel there is a capacity for change in the Singapore economy and that they will adapt and keep their competitiveness as they go up the value chain.
