For a healthy bond market, Asia’s policymakers must avoid capital controls: Temasek

A Temasek Holdings signage at their office in Singapore.
Munshi Ahmed | Bloomberg | Getty Images

Policymakers in Asia must stick with consistent practices if they want to continue to attract foreign capital, Michael Buchanan, senior managing director and head of strategy at Singapore sovereign wealth fund Temasek, said.

"If you're going to have a more important bond market and you're going to get more of your financing from abroad, that's a good thing," Buchanan said at the Emerging Asia Economic Forum hosted by Insead in Singapore on Tuesday. "But then you have in place the policies through the whole cycle that can support that."

He noted that some countries in Asia reacted "quite strongly" to sharp currency depreciation in the market turmoil following Donald Trump's surprise win in the U.S. election, which saw the dollar surge.

Temasek's portfolio was valued at around 242 billion Singapore dollars ($170.02 billion) at the end of March.

Malaysia shouldn't intervene after ringgit drop: Expert

Buchanan didn't specify any particular country in his comments.

But Malaysia's currency, the ringgit, took it on the chin in the market's Trump tantrum, plunging to a year's low of 4.4640 ringgit against the dollar, flirting near levels last seen during the Asian Financial Crisis in 1997.

That led Malaysia's central bank to intervene in the market to support the ringgit and to issue a warning to banks to restrict trading in offshore non-deliverable forwards (NDFs) on the currency, which fell further than the spot rate as a result.

The central bank's clamp-down on NDF trading may have been aimed at tighter enforcement of existing regulations against offshore ringgit trading.

But the jawboning spurred fears of capital controls. Markets tend to be more sensitive to tea-leaf reading over capital controls in Malaysia because the country was the first to impose them in 1997, during the Asian Financial Crisis.

Buchanan expressed concern over how markets are signaled, without specifically mentioning Malaysia.

"You want to make sure you have a consistent approach to policy. If people fear that if the currency depreciates more than a couple of percent, you're going to start imposing quasi-capital controls or some other sort of measure like that, they're obviously going to rush for the exit," he said.

"If foreign investors can't feel comfortable getting their money out, can't hedge their currency exposure, they're probably not going to put their money in or if they do, it won't be at the same price," Buchanan said.

What's causing the plunge in the ringgit?

Countries must maintain some degree of open capital markets if they want their companies and their infrastructure projects to get the lowest cost of capital, he said.

Buchanan praised Indonesia's approach when faced with Trump tantrum-inspired sharp currency depreciation as "very sensible." Indonesia intervened in the currency market to support its currency, but otherwise stuck to its existing policies.

Other investors have taken a similar view on Indonesia's relatively steadfast policy approach to market turmoil.

Omar Slim, a fixed income portfolio manager at Pinebridge Investments, which has $82.6 billion under management, said this week that he remained positive on Indonesian fixed income.

"Fundamentally, we still like the Indonesia story and we don't feel what happened in the last three or four weeks since the U.S.elections fundamentally changed our view," he said. "We think that yields will go lower and that's driven by attractive valuations."

Slim also cited positive reform momentum in the country as well as "appropriate appointments" to economic decision-making positions.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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This report has been updated reflect that Michael Buchanan's title is senior managing director and head of strategy at Temasek.