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Singapore.
Asias second financial hub: Opportunities in Hongkong exodus?
Although Kuala Lumpur has stolen some of its thunder, Singapore is in no
danger of losing its unofficial title of Southeast Asia's answer to
Hongkong. The question is whether Singapore can join New York, London,
and Hongkong as a truly global, full-service financial center. More to
the point, will Singapore's government surrender enough control to let
the island republic fulfill its potential?
The fact that Singapore is known as the "Switzerland of the East" is
testimony to the machinelike efficiency with which it has pursued
success. Entrepreneurial flair has never been a selling point. Even so,
what Singapore does, it does exceptionally well. It is unquestionably
the world's most user-friendly financial hub: The quality of its
physical infrastructure, telecommunications capabilities, and work force
is simply unparalleled. As a result, the Lion City has been a magnet for
investment banks and commercial banks alike. This, together with the
growing interest in emerging market currencies, has enabled Singapore to
challenge Tokyo as Asia's top forex center. And it is already the
region's premier derivatives hub, as strong in over-the-counter products
as it is in exchange-traded ones. The fact that the Barings debacle
originated on the Simex floor has done little to dent Singapore's
repution or dampen its appeal. But Simex is itself a reflection of
Singapore's cautious approach. Although the exchange does a brisk
business in eurodollar, euroyen, and Nikkei stock index futures, not one
Singaporean product is traded. Similarly, while the Singapore dollar
could well serve as a safe-haven currency, the government has resisted
calls to
internationalize it. Nor does it display the least desire to innovate in
even the most innocuous areas. For example, the government has ignored
suggestions that it follow Hongkong's lead and try to establish a yield
curve by issuing long-term bonds. On the other hand, there plainly isn't
much need for a bond market Singapore runs big budget surpluses and
most major companies are also cash-rich.
Regulation is a source of concern, as well. To be sure, Singapore has no
shortage of rules; the 1985 Pan-Electric scandal, which closed the stock
market for four days and put a number of brokers out of business, saw to
that. But bankers complain that the Monetary Authority of Singapore, the
central bank, doesn't always explain what is permissible and what is
not. Requests for clarification often go unanswered for months. The
financial services industry thus operates in a climate of fear,
particularly since the MAS tends to deal swiftly and harshly with most
infractions. "There is such a history of strong control here that
reducing it is difficult," says one Singapore-based ana-
lyst. "They are determined to manage the liberalization process."
Competition may induce the government to relax. As much as they fear the
idea of a freewheeling financial sector, Singaporeans are more fearful
of losing market share to regional rivals. Indeed, now that Malaysia has
declared its desire to make Kuala Lumpur a fund management center,
Singapore is taking steps to boost its allure. The recently announced
1998 budget was notable mainly for tax breaks and other concessions
directed at the investment community.
And even if the authorities refuse to loosen their grip, circumstances
may yet lift Singapore. Now that Hongkong is under Chinese rule, any
misfortune that it suffers will clearly benefit Singapore. The
city-state is the escape route of choice for nearly every major
investment and commercial bank that presently makes Hongkong its Asian
hub. Bob Mckee of Independent Strategy, the London-based research
boutique, expects to see more than a few banks set up shop in Singapore
over the next decade. "In our view, the decisive factor in Singapore's
favor is that Hongkong is going to be taking a few steps back," Mckee
says. "Hongkong eventually will be just one of many gateways to China."
SINGAPURE AT A GLANCE
Population 3.14 million
Stock Exchange of Singapore market capitalization (end, 1996) $206.6
billion
Stock market decline during 1996 -1.8%
National 1996 GDP $941 billion
Largest domestic commercial bank DBS (Development Bank of
Singapore)
Largest domestic investment bank SBS
Largest foreign commercial bank Citibank
Largest foreign investment bank Jardine Fleming
As markets and currencies plunged across Southeast Asia last month,
Singapore remained an island of relative stability.
Asias Safe Haven.
By Russ Arensman
Investment analyst Robert Zielinski was feeling shell-shocked by the end
of August after several weeks of watching Asian currencies and stocks
plunge, seemingly with no end in sight. Not only were fund managers and
investors comparing the Asian markets' late-summer decline with the
Latin American crash following Mexico's 1994 peso collapse, many were
nearing the point of despair. Said Zielinski, head of Asian banking
research for Jardine Fleming Securities in Singapore: "I think people
are just throwing in the towel on Southeast Asia, and I think it's sort
of correct."
How bad was the situation? In Thailand, whose July 2 currency
devaluation triggered the regional slump, the already hard-hit Stock
Exchange of Thailand Index dropped a further 20% in the two weeks ending
August 29. Indonesia's Jakarta Composite Index fared the next worst,
crashing 11% in just two days of trading at month's end. Hongkong's Hang
Seng Index collapsed 5% in a single day and Malaysia's Kuala
Lumpur Composite Index was gripped by panic selling that drove the
market to a four-year low and prompted the government to halt
short-selling. Meanwhile, Singapore's normally placid Straits Times
Industrials Index lost almost 6% over two days of trading, sinking to
levels not seen since 1993.
Yet despite the carnage unfolding around them, Zielinski and other
Singapore investment professionals remain relatively upbeat about the
island-state's economic prospects. Most, in fact, give the Lion City
credit for maintaining one of the region's strongest economies, as well
what arguably is Asia's best investment climate.
"I certainly feel more confident in Singapore than Thailand or
Malaysia," says Zielinski. "If you look around the region, you see the
exact same trends of property price appreciation, overbuilding of new
hotels and condominiums, and bank exposure to real estate. Here in
Singapore there's been much less excess. The property market is quite
controlled by the government. It's not like in Bangkok, where everybody
can put up a building. I also think there's greater recognition here of
the problemsthe necessity to react and change policies."
Koh Foong Yin, vice president of economic research for Singapore's
Overseas Union Bank (OUB), says Singapore's economic outlook is
encouraging despite the recent market plunge. The economy has recently
shown signs of rebounding from two years of slowing GDP growth (10.5% in
1994, 8.8% in 1995, and 7.0% in 1996) caused mainly by a worldwide slump
in electronics prices. Koh, after seeing a surprisingly strong 7.8% gain
in this year's second-quarter GDP, had been projecting growth of about
6.6% for all of 1997, and 6-7% growth again in 1998. "Now it may be
closer to 6% for next year," she says. "But I think we can maintain that
type of growth."
Ironically, the unsettled markets may actually benefit Singapore's
financial industry, says Koh. "Because of the currency turmoil and
falling share prices, turnover has been quite active," she says.
"Although the stock market is down, volume is up, and therefore I think
the financial sector did well." Koh notes that the financial services
sector grew strongly in 1997's first half, up almost 15% over the
previous year. "We think that this will probably be maintained in the
second half as well," she adds.
Jim Walker, Singapore-based chief economist for Credit Lyonnais
Securities Asia, agrees that Singapore's economy seemed on the verge
of recovering its lost momentum before last month's market plunge. "That
[recovery] actually is probably still in place, but I think people are
looking more 12 months out now rather than the next three months or even
the next two quarters," he says.
Although there clearly has been some element of "hysteria" in the
markets recently, Walker says that at least some of Singapore investors'
fear has been well-founded. "Part of it is a reflection of Singapore
companies, including the banks, which have a very big exposure to other
countries in the region," he says. "What happens in the rest of
Southeast Asia does have a material impact on Singapore."
Indeed, Singapore's links to the rest of Asiapreviously a growing
source of regional pride and solidarityare now among the island
republic's biggest economic concerns. "In recent years the
intra-regional trade has been very strong," says OUB's Koh. "About 27%
of our trade now goes to Southeast Asia, and almost 9% goes to Japan.
And Japan's economy is looking very dangerous, as though it may tip back
into recession."
Nonetheless, there are bright spots for Singapore. One is the relative
strength of its currency, which admittedly has fallen about 7% against
the US dollar since the start of this year, after years of steady
appreciation. "But considering the US dollar's strength in the world
economy as well as the strength of US financial markets, that's not
something to be concerned about," says Koh. Nor is she worried that
Singapore may fall prey to the speculators who have helped drive down
other regional currencies. "We've got very strong reserves, almost
[US]$81 billionthe sixth-largest in the world. And we've got current
account surpluses," she notes. "The economy is slowing down, but it's
not an unhealthy slowdown. So I think the fundamentals are fairly
supportive of the Singapore dollar."
Zielinski believes Singapore could have held its currency even with the
dollar, but the price was too high. "Singapore could not afford to allow
its currency just to hang in there with the dollar," he says ."There was
enough money to do it, and the economy's small enough, so they could
have maintained it at that exchange rate. But they had to worry about
competitiveness vis-a-vis Malaysia and other Asian countries."
As it stands, Singapore's relative currency strength is already hurting
it in terms of regional competitiveness, says Credit Lyonnais's
Walker. "Singapore is running up against constraints on its cost sidein
its ability to attract manufacturers," he says. "Other countries have
become much cheaper in comparison with Singapore, if these currency
levels stick."
Rising costs have long been a painful thorn in Singapore's side, forcing
much of its labor-intensive manufacturing abroad and drawing complaints
from even well-heeled investors in the finance and service industries.
Pricey or not, Singapore's modern infrastructure and quality of life are
quick to draw praises from Zielinski and others. "As it currently
stands, Singapore is, I think, the only livable city in Asia," he says.
Singapore's attractions, plus one of Asia's most aggressive industrial
recruitment and incentive programs, are still strong enough to lure many
of the world's largest multinational companies, which committed 17.6%
more in foreign investment in 1996 than the previous year. Singapore has
attracted more than $3 billion in new semiconductor investment alone
recently. It also has become Asia's undisputed capital for foreign
exchange trading and a major fund management center.
OUB's Koh says manufacturing, finance, transport, and commerce each
contribute roughly one-fourth of the island state's economic activity.
That "broad-based economy," she says, is a key reason for her long-term
optimism. Therefore she expects the current situation to be temporary.
"This is just a short-term hiccup, I think. A painful one no doubt, but
temporary."
But Credit Lyonnais's Walker sounds a more cautionary note about the
time required for a regional recovery. Moreover, he adds that Asia may
not have seen the worst yet. "It took the effects of Mexico three months
to work through Latin America. So it's difficult to imagine that it's
going to be any less than that here. We're only really six or seven
weeks into it, so there's probably still a way to go."
Currency Crunch Asian currencies VS. THE US$ (% Decline From Jan 2 to
Aug. 26)
