Singapore’s ongoing commitment to a liberal external regime has figured importantly in its development. A capital account almost completely free of restrictions has fostered investment flows. In addition, international trade has been promoted by the absence of quantitative restrictions and low tariff levels (5 percent or less). As a result of this approach, fully two thirds of the domestic output of goods and services are exported. In fact, Singapore ranks 12th in the world in total exports and 15th in total imports, despite having a population of only 3 million.
Balance of Payments Developments
Overview
With the exception of small deficits in 1964-65, the overall balance of payments has been in surplus throughout Singapore’s history. As a result, official international reserves, which were at a relatively modest level of about US$115 million (equivalent to about one month of imports) in 1960, have grown steadily, especially during surges in capital inflows in the late 1970s and from the late 1980s to date. As of end-1993, international reserves stood at US$48 billion (equivalent to about nine months of retained imports) (Chart 6-1 and Table A5).
Singapore has always had a significant merchandise trade deficit that has been financed, in part, by a surplus on the services account, mainly from travel and shipping receipts. The external current account was in deficit in the years following independence and reached 30 percent of GDP in the early 1970s. However, on the strength of rapid growth in exports since the early 1980s as a result of industrialization, the current account deficit was steadily reduced and has been in surplus since 1988.
The capital account has on average been in surplus. While monetary capital has fluctuated depending on trends in interest rates in Singapore vis-à-vis the rest of the world, nonmonetary capital inflows have consistently been large, averaging about 10 percent of GDP since 1970. These capital inflows have consisted primarily of foreign direct investment; net portfolio investment has consistently been negative despite increasing foreign participation in Singapore’s stock exchange, reflecting outward investment by Singapore in other stock markets (for a further discussion of the role of FDI, see “Foreign Investment” below).
Changes in the Pattern of Trade
The development of Singapore’s industrial base beginning in the 1970s has had a large impact on the composition of exports. In the early 1960s, Singapore’s trade was primarily of an entrepôt nature, with re-exports representing about 90 percent of total exports. Domestic exports began to grow rapidly in the late 1960s, and the relative importance of re-exports has declined to about 35 percent of total exports since the early 1980s. The initial growth in domestic exports consisted primarily of petroleum refining and light manufacturing activity. However, over time, in response to the economic restructuring program, the composition of exports has shifted dramatically in favor of higher-value-added products (Chart 6-2).
Structure and Pattern of Trade
Sources: Singapore authorities; and IMF staff estimates. Data for 1993 are estimates based on actual trade data for the first three quarters of the year.1 Includes office machines and other electrical machinery, generators, telecommunications equipment, ships, and oil rigs.2 Includes furniture, textiles, construction materials, pipes and fittings, scientific instruments, watches, games, and coys.3 Includes estimated trade with Indonesia derived from IMF. Direction of Trade Statistics.4 Excluding Japan and the ASEAN countries.The trend toward higher-value-added products developed during the 1980s and was particularly strong in the area of electronics and electronic components including personal computers and disk drives, automated office machines, and telecommunications equipment. The combined exports of machinery and equipment increased from about 25 percent of total domestic exports in the early 1980s to 58 percent in 1992, and an estimated 61 percent in 1993, resulting from an increase in production and exports by U.S. and Japanese multinationals. At the same time, the importance of mineral fuel exports has fallen dramatically following the decline in world market prices for petroleum products since the early 1980s.
The change in the composition of exports was also reflected in a changing composition of regional trade. In the 1980s, the United States and Japan gained in importance because they represented the markets for exports of electrical machinery and components. Since 1990, however, trade with the Association of South East Asian Nations (ASEAN) countries and with other Asian countries has also begun to pick up, reflecting the strong regional growth rates in Asia. This increase in intraregional trade has also been driven by the relocation of investment from Japan and the Asian newly industrialized economies (NIEs) into the lower-cost economies of Southeast Asia, leading to increased regional servicing of capital equipment and intermediate goods.
Trade Liberalization
Overview
In its early history as a British Crown colony, Singapore developed as a free port. During that period, entrepôt trade accounted for a significant share of domestic value added. After self-government in 1959, the new Government embarked on a strategy of industrialization in order to solve the problem of high unemployment. The cornerstone of the strategy was to supply labor-intensive goods to Malaysia within a common market protected by high tariff barriers. The strategy of import substitution, however, proved to be relatively unsuccessful and ended with Singapore’s formal separation from Malaysia in 1965.
After its separation from Malaysia, and particularly after the withdrawal of British forces in 1967, Singapore became increasingly committed to a growth strategy based on free trade and export promotion (Table 6-1). To that end, beginning in 1965, the commodity groups subject to quantitative restrictions were dramatically reduced and eventually eliminated. In most commodity groups, quotas were replaced by tariffs. Even early on, however, the levels of protection were quite moderate by international standards. In 1967, for example, the majority of ad valorem rates and equivalents were below 25 percent, and the average nominal and effective rates of protection for the manufacturing sector were estimated at 3 percent and 6 percent respectively. Tariffs began to be lowered in the late 1960s with meaningful reductions coming in 1973, 1980, and 1981.
Key Steps in the Liberalization of Singapore’s Trade and Exchange System
Key Steps in the Liberalization of Singapore’s Trade and Exchange System
| 1959 | Import quotas are introduced in support of an industrialization program. |
| 1965-69 | Quantitative restrictions are replaced with tariffs. |
| 1967-73 | Tariff levels are progressively reduced. |
| 1968 | First Asian currency unit (ACU), an international banking facility, begins operations. |
| Singapore accepts the obligations of IMF Article VIII. | |
| 1970 | Entry of foreign banks into Singapore is liberalized. |
| 1973 | Singapore dollar is allowed to float. |
| Stock Exchange of Singapore (SES) opens. | |
| Dealings in the gold market are completely liberalized to allow resident participation. | |
| 1975 | Cartel system of determining interest rates is abolished. Banks are free to quote their own rates of interest. |
| 1977 | ASEAN Preferential Trading Arrangement is formed. |
| 1978 | Exchange control is completely liberalized. Residents are free to borrow and lend in all currencies as well as deal freely in foreign exchange. |
| Gold Exchange of Singapore begins operations as the first gold futures market in the Asia-Pacific region. | |
| 1981 | Monitoring of the Singapore dollar against a trade-weighted basket of currencies is initiated with inflation as the policy target. |
| 487 protective duty rates are lowered to 5 percent from 15 percent. | |
| 1984 | Singapore International Monetary Exchange (SIMEX) introduces trading in the International Gold Futures Contract. |
| Financial futures trading is launched with a mutual offset link between the SIMEX and the Chicago Mercantile Exchange. | |
| ACUs are allowed to issue negotiable certificates of deposit denominated in Japanese yen. | |
| 1987 | SES allows foreign entities to own up to 49 percent of the share capital of local stockbroking companies. Foreign shareholders may be allowed to increase their shareholdings to 70 percent after three years. |
| 1989 | Singapore becomes one of the founding members of the Asia-Pacific Economic Cooperation Forum (APEC). |
| 1990 | A “growth triangle” initiative with Indonesia and Malaysia is launched. |
| 1993 | Common Effective Preferential Tariff (CEPT) scheme for the ASEAN free trade area is initiated. |
Key Steps in the Liberalization of Singapore’s Trade and Exchange System
| 1959 | Import quotas are introduced in support of an industrialization program. |
| 1965-69 | Quantitative restrictions are replaced with tariffs. |
| 1967-73 | Tariff levels are progressively reduced. |
| 1968 | First Asian currency unit (ACU), an international banking facility, begins operations. |
| Singapore accepts the obligations of IMF Article VIII. | |
| 1970 | Entry of foreign banks into Singapore is liberalized. |
| 1973 | Singapore dollar is allowed to float. |
| Stock Exchange of Singapore (SES) opens. | |
| Dealings in the gold market are completely liberalized to allow resident participation. | |
| 1975 | Cartel system of determining interest rates is abolished. Banks are free to quote their own rates of interest. |
| 1977 | ASEAN Preferential Trading Arrangement is formed. |
| 1978 | Exchange control is completely liberalized. Residents are free to borrow and lend in all currencies as well as deal freely in foreign exchange. |
| Gold Exchange of Singapore begins operations as the first gold futures market in the Asia-Pacific region. | |
| 1981 | Monitoring of the Singapore dollar against a trade-weighted basket of currencies is initiated with inflation as the policy target. |
| 487 protective duty rates are lowered to 5 percent from 15 percent. | |
| 1984 | Singapore International Monetary Exchange (SIMEX) introduces trading in the International Gold Futures Contract. |
| Financial futures trading is launched with a mutual offset link between the SIMEX and the Chicago Mercantile Exchange. | |
| ACUs are allowed to issue negotiable certificates of deposit denominated in Japanese yen. | |
| 1987 | SES allows foreign entities to own up to 49 percent of the share capital of local stockbroking companies. Foreign shareholders may be allowed to increase their shareholdings to 70 percent after three years. |
| 1989 | Singapore becomes one of the founding members of the Asia-Pacific Economic Cooperation Forum (APEC). |
| 1990 | A “growth triangle” initiative with Indonesia and Malaysia is launched. |
| 1993 | Common Effective Preferential Tariff (CEPT) scheme for the ASEAN free trade area is initiated. |
At this juncture, the Singapore economy is effectively a free trade regime (Table A6). Ninety-six percent of all imports enter free of duty or other restrictions. There are no import quotas, variable import levies, minimum import prices, tariff quotas, or import surveillance, and the maximum ad valorem tariff rate is 5 percent. Exports are also traded freely except where limited for health, safety, or security reasons. Singapore accords most-favored-nation treatment to both General Agreement on Tariffs and Trade (GATT) and non-GATT members, except for preferences in the ASEAN context (see below).
There are 5,799 tariff items, or lines, of which about 91 percent are duty free. Duties are levied on a small number of products for health, social, and environmental purposes. These products include liquors, tobacco, perfumes, petroleum products, clothing, confectionery sugar, certain furniture items, and motor vehicles. Most of these duties are at the ad valorem rate of 5 percent except for per unit taxes on alcohol, tobacco, and petroleum products, and ad valorem rates of 45 percent on motor vehicles and 15 percent on motorcycles. There are no export taxes. However, an elaborate system of textile export quotas is maintained to give effect to bilateral commitments under the global Multifibre Arrangement. A few other trade controls are maintained to fulfill international commitments or to ensure access to restricted technology.1
It has been estimated that the value-added weighted average rate of assistance to manufacturing production through import protection is less than 1 percent. Nontariff barriers to imports are also virtually nonexistent. At the same time, the number of fiscal concessions granted contributed to a large increase in foreign investment (see below), which, given the small size of the domestic market, resulted in an increasing focus on export production. Thus, the rapid growth of the Singapore economy has been led by exports, particularly since the late 1970s.
Exchange System
From 1973 to 1981, the exchange rate of the Singapore dollar was freely determined in the foreign exchange market. Since 1981, however, the MAS has monitored the external value of the Singapore dollar against a trade-weighted basket of currencies, with the objective of promoting non-inflationary sustainable growth, and the Authority sets its intervention policy accordingly. Foreign currency futures are traded on the Singapore International Monetary Exchange (SIMEX) and there is an active short-term currency swaps market among banks in the domestic money market. There are no formal exchange controls, restrictions on current account transactions, or foreign exchange surrender requirements. Moreover, there are no restrictions on capital transfers or on direct or portfolio investment either by nonresidents in Singapore or by Singapore residents abroad. However, financial institutions granting loans in excess of S$5 million to nonresidents, or to residents for use outside Singapore, must consult the MAS.
Singapore and Regional Initiatives
Singapore was a founding member of both ASEAN, formed in 1967, and the Asia-Pacific Economic Cooperation Forum (APEC), formed in 1989.2 Two major regional initiatives involving Singapore have resulted from these groupings so far: the agreement to form the ASEAN free trade area (AFTA) and the regional “growth triangle” of Indonesia, Malaysia, and Singapore.
Singapore and the ASEAN Free Trade Area
In addition to a limited range of preferences granted under a previous preferential trade agreement, ASEAN member countries entered into an agreement to form a free trade area. The aim of the Common Effective Preferential Tariff (CEPT) scheme, which officially took effect on January 1, 1993, is to achieve a common preferential tariff within ASEAN of 0-5 percent on manufactured and processed agricultural goods within 15 years (by January 1, 2008). Quantitative restrictions and other nontariff barriers are also to be eliminated. Within these maximum periods, each member is free to determine the timing of its tariff reductions. Accordingly, the implementation schedule varies considerably among member countries, with those members with higher levels of protection tending to have a more back-loaded program of proposed reductions. Singapore, with its low level of tariffs, had already met the 0-5 percent target for all included products. In addition, Singapore completely eliminated duties on trade with other ASEAN countries with the exception of about 120 tariff lines that are permanently excluded under the terms of the CEPT scheme. At the ASEAN economic ministers’ meeting in Singapore in October 1993, agreement was reached to speed up the implementation of the CEPT scheme by other ASEAN members, with tariff cuts to begin in January 1994.
While the AFTA agreement will provide opportunities for increasing intra-ASEAN trade, it is also expected to improve the climate for foreign direct investment in the region, particularly for U.S. multinationals. Hence, it is unlikely that ASEAN countries would replace the United States as Singapore’s major export market in the foreseeable future.
Johor-Riau-Singapore Growth Triangle
In addition to efforts to improve trade cooperation and trade liberalization, the desire to take advantage of the resource complementarity and geographic proximity among countries in the region led to the emergence of the growth triangle concept. The southern growth triangle linking Singapore with adjacent areas of Malaysia (Johor) and Indonesia (Riau) was proposed by then Deputy Prime Minister Goh Chok Tong of Singapore in 1989.3
There is no formal trilateral agreement for this arrangement. The “triangle” remains primarily a set of bilateral agreements with Singapore as the growth pole; the Johor-Riau side of the triangle is the least developed. Two agreements have been worked out between Singapore and Indonesia outlining Singapore’s role in the development of the Riau province, and Indonesia’s undertaking to supply water to Singapore as well as guaranteeing investments in Indonesia. The idea behind the growth triangle was that Singapore would benefit from the reduced pressure on land and labor, and Johor and Riau would gain from increased investment inflows from Singapore. While economic linkages between Singapore and Riau were limited prior to the initiative, the relaxation of regulations governing foreign direct investment in Indonesia, and the consistent support of the Singapore Government, have begun to overcome the early reluctance of foreign multinationals based in Singapore and have led to a surge of Singapore investments in Riau. Johor has also benefited from its proximity to Singapore and the relaxation of Malaysian foreign investment rules and regulations.
The impact on Singapore can be seen mainly in the outward investment in Johor and Batam Island (Riau Province). Foreign equity investment in Johor from Singapore more than tripled, to US$200 million in 1990, and has remained high. From 1990 to 1992, approved Singapore investments in Johor amounted to about US$500 million in 272 projects. Singapore and Indonesian companies are also jointly involved with industrial estates in the Riau islands of Batam, Bintan, and Karimun. As of end-1991, Singapore was the largest investor (representing 50 percent of total foreign investment) in the industrial development of Batam.
Foreign Investment
As has been discussed earlier, Singapore’s development has relied heavily on foreign direct investment. The considerations that attracted foreign capital to Singapore have been covered in Section III. The aim of this section is to provide an insight into the size of the flows, their origin, and their sectoral destination.
As to the size of the inflows, foreign investment averaged about 2 percent of GDP in the 1960s before increasing to about 5 percent of GDP in the early 1970s. They tapered off somewhat in the mid-1970s as a result of the international oil crisis, global recession, and regional political uncertainty but recovered later in the decade, for an average of 8 percent of GDP through the mid-1980s. Beginning in 1987, investment flows have surged, averaging 13 percent of GDP a year through the early 1990s. This surge in investment has in part been due to a relocation of global production to Southeast Asia.
The United States and the European Community have traditionally been the most important sources of funds. Recently, however, inflows from Japan and some of the other newly industrializing countries have assumed greater importance (Table A7).
As to the destination of equity flows, investments have taken two avenues: export-oriented manufacturing and financial and business services (Table A8). In the early years, a large portion of the manufacturing investment was in the petroleum sector, followed by electronics, chemicals, transport equipment, textiles, and shipbuilding and repair. Since the 1970s, inflows have shifted gradually to more capital-intensive, skill-intensive, and higher-technology industries. Investment in electric and electronic products outpaced those in the petroleum sector, while new investments emerged in the manufacture of computers and computer-related equipment. Investments in lower-value-added industries like textiles, leather, rubber, and wood products have declined.
Reflecting the concentration of inflows, the share of manufacturing in GDP increased from 13 percent of GDP in 1960 to 24 percent in 1981 and 28 percent in 1992. This expansion was due almost entirely to foreign investment. In 1962, only 33 manufacturing establishments were 100 percent foreign owned, and they accounted for 32 percent of gross manufacturing output. By 1991, wholly foreign owned establishments accounted for over 60 percent of the output of the manufacturing sector, and including joint ventures in which foreigners retained the majority share, accounted for 84 percent of output. During the same period, the level of manufacturing output generated by wholly locally owned establishments fell from 46 percent of gross output to 16 percent of gross output.
Singaporean Investment Overseas
In addition to continually high levels of foreign investment in Singapore, the levels of investment by Singaporean companies (both locally owned and foreign owned) abroad have also risen. The increasing importance of Singaporean investment abroad can be seen by the increase in the level of net factor income from abroad in the national accounts statistics: it rose from 7 percent of the total value added of all Singapore-based companies in 1966 to 15 percent in 1992 (see MAS (1993)).
The actual stock of Singaporean investment abroad has increased from S$7 billion in 1981 to S$33 billion in 1991 (Table A9), split almost equally between local companies and foreign companies located in Singapore. The annual investment outflows fluctuated during this period but have picked up substantially in recent years, averaging 11 percent of GDP from 1989-91. During this same period the stock of investment abroad increased by an average of 37 percent a year.4
In 1993, the Government introduced a number of incentives to promote investment overseas. These measures included: (i) tax credits for dividend income remitted from other countries; (ii) extending to the export of services the double tax deduction for approved expenses incurred in export promotion; (iii) introducing a double tax deduction for approved expenses incurred in exploring and developing overseas investment opportunities; and (iv) initiating the Overseas Enterprise Incentive to provide a tax exemption for qualifying income from approved kinds of overseas investments for periods of up to ten years. While it is too early to judge the impact of these incentive programs, major investment projects are currently under way in China, India, Indonesia, and Viet Nam.
International Financial Center
The development of the financial sector in Singapore has, in addition to being an important ingredient in industrial development, also provided a direct source of employment and income growth. The attractiveness of Singapore as a financial center has been aided by its geographic location in a fast-growing area that also bridged the gap between the time zones of the North American and European financial markets; political and financial stability; a skilled labor force; and significant government incentives.
The financial sector grew rapidly from the late 1970s to the mid-1980s when the share in real output accounted for by financial and business services increased to 27 percent of GDP from 9 percent of GDP. It is estimated that finance constituted more than half of the entire financial and business services sector during this period and that banking accounted for about 35 percent. This growth was aided by specific measures and incentives adopted by the Singapore Government, including measures designed to promote the development of “offshore” banking (Table 6-2).
Measures Related to the Development of a Financial Center
Offshore banking licenses in this context refer to foreign banks that are permitted to operate in the domestic market on a restricted basis. Thus, they are distinct from ACUs.
Measures Related to the Development of a Financial Center
| 1968 | Withholding tax on interest income of nonresidents is abolished, leading to the creation of the first Asian currency unit(ACU). |
| 1972 | 20 percent liquidity ratio for ACUs is abolished. |
| 1973 | Offshore banking licenses are issued to seven foreign banks.1 |
| Corporate tax of ACU on interest earnings from overseas loans is reduced to 10 percent from 40 percent. | |
| Interest received by nonresident holders of approved Asian dollar bonds is exempted from tax. | |
| 1976 | Nonresident deposits with ACUs and approved Asian dollar bonds held by nonresidents are exempted from Singapore estate duty. |
| 1979 | Income earned from offshore general reinsurance business is granted a 10 percent concessionary tax rate. |
| 1980 | Stamp duty on ACU offshore loan agreements and Asian dollar bond certificates is abolished. |
| 1983 | ACUs are granted a five-year tax holiday (extended in 1985 to ten years ending in 1993) for all income derived from syndicated offshore loans arranged in Singapore. |
| Offshore income earned by nonresidents is made tax exempt if their funds are managed by ACUs or by other fund managers in Singapore approved for this purpose. | |
| Tax concessions are initiated to encourage stock fund managers to base operations in Singapore. | |
| 1984 | Tax holiday scheme for syndicated offshore loans is extended to cover the syndication of other credit facilities. |
| 1986 | Operational Headquarters Incentive Scheme to encourage multinational corporations to locate regional headquarters in Singapore is initiated. |
| 1988 | Tax exemption is granted on interest received from investments in Asian dollar bonds by nonresidents even if they carry on a business or have permanent establishments in Singapore. |
| Tax exemption is granted on income derived from unit trusts that are domiciled in Singapore and owned by nonresidents provided they are managed by approved fund managers in Singapore. | |
| 1989 | A concessionary 10 percent tax rate is granted on income from international oil trading activities. |
| Withholding tax is exempted on swap transactions denominated in currencies other than Singapore dollars provided the transactions are carried out between ACUs and nonresidents. | |
| 1990 | Monetary Authority of Singapore (MAS) raises the ceiling on foreign ownership of shares in local banks to 40 percent from 20 percent. |
| Scripless trading on new share issues takes effect. | |
| 1992 | Stock Exchange of Singapore (SES) grants membership to seven foreign brokerage houses, allowing them to trade directly on the local market. |
| MAS raises the Singapore dollar lending limit for offshore banks to S$70 million from S$5O million. | |
| 1993 | SES launches options trading with the establishment of a scrip bank. |
Offshore banking licenses in this context refer to foreign banks that are permitted to operate in the domestic market on a restricted basis. Thus, they are distinct from ACUs.
Measures Related to the Development of a Financial Center
| 1968 | Withholding tax on interest income of nonresidents is abolished, leading to the creation of the first Asian currency unit(ACU). |
| 1972 | 20 percent liquidity ratio for ACUs is abolished. |
| 1973 | Offshore banking licenses are issued to seven foreign banks.1 |
| Corporate tax of ACU on interest earnings from overseas loans is reduced to 10 percent from 40 percent. | |
| Interest received by nonresident holders of approved Asian dollar bonds is exempted from tax. | |
| 1976 | Nonresident deposits with ACUs and approved Asian dollar bonds held by nonresidents are exempted from Singapore estate duty. |
| 1979 | Income earned from offshore general reinsurance business is granted a 10 percent concessionary tax rate. |
| 1980 | Stamp duty on ACU offshore loan agreements and Asian dollar bond certificates is abolished. |
| 1983 | ACUs are granted a five-year tax holiday (extended in 1985 to ten years ending in 1993) for all income derived from syndicated offshore loans arranged in Singapore. |
| Offshore income earned by nonresidents is made tax exempt if their funds are managed by ACUs or by other fund managers in Singapore approved for this purpose. | |
| Tax concessions are initiated to encourage stock fund managers to base operations in Singapore. | |
| 1984 | Tax holiday scheme for syndicated offshore loans is extended to cover the syndication of other credit facilities. |
| 1986 | Operational Headquarters Incentive Scheme to encourage multinational corporations to locate regional headquarters in Singapore is initiated. |
| 1988 | Tax exemption is granted on interest received from investments in Asian dollar bonds by nonresidents even if they carry on a business or have permanent establishments in Singapore. |
| Tax exemption is granted on income derived from unit trusts that are domiciled in Singapore and owned by nonresidents provided they are managed by approved fund managers in Singapore. | |
| 1989 | A concessionary 10 percent tax rate is granted on income from international oil trading activities. |
| Withholding tax is exempted on swap transactions denominated in currencies other than Singapore dollars provided the transactions are carried out between ACUs and nonresidents. | |
| 1990 | Monetary Authority of Singapore (MAS) raises the ceiling on foreign ownership of shares in local banks to 40 percent from 20 percent. |
| Scripless trading on new share issues takes effect. | |
| 1992 | Stock Exchange of Singapore (SES) grants membership to seven foreign brokerage houses, allowing them to trade directly on the local market. |
| MAS raises the Singapore dollar lending limit for offshore banks to S$70 million from S$5O million. | |
| 1993 | SES launches options trading with the establishment of a scrip bank. |
Offshore banking licenses in this context refer to foreign banks that are permitted to operate in the domestic market on a restricted basis. Thus, they are distinct from ACUs.
In Singapore, offshore banking is performed by separate bookkeeping entities known as Asian currency units (ACUs), which are typically run by banks that also have domestic operations, or domestic banking units (DBUs).5 ACUs do not have the right to incur assets and liabilities in Singapore dollars but can engage in all types of banking transactions in other currencies. Various incentives have been set up to encourage the development of ACUs. The most important of these are that ACUs face a tax on profits of only 10 percent (compared with the standard corporate rate of 27 percent), and they are not subject to reserve and liquidity requirements. Since 1980, the assets of DBUs have increased by 360 percent, while the assets of ACUs have increased by a factor of seven. The first ACU was set up in 1968. As of end-1993, there were 195 ACUs, with total assets of US$386 billion, about seven times the GDP of Singapore (Table 6-3).
Growth of the Asian Dollar Market
Growth of the Asian Dollar Market
| Number of Asian Currency Units | Total Assets/ Liabilities (In US$ millions) | Annual Growth Rate (In percent) | |
|---|---|---|---|
| 1970 | 16 | 390 | 216.9 |
| 1975 | 66 | 12,597 | 21.6 |
| 1980 | 108 | 54,393 | 42.5 |
| 1985 | 174 | 155,374 | 21.3 |
| 1988 | 190 | 280,477 | 14.5 |
| 1989 | 191 | 336,582 | 16.0 |
| 1990 | 199 | 390,396 | 16.0 |
| 1991 | 198 | 357,725 | -8.4 |
| 1992 | 196 | 355,379 | -0.7 |
| 1993 | 195 | 386,100 | 8.6 |
Growth of the Asian Dollar Market
| Number of Asian Currency Units | Total Assets/ Liabilities (In US$ millions) | Annual Growth Rate (In percent) | |
|---|---|---|---|
| 1970 | 16 | 390 | 216.9 |
| 1975 | 66 | 12,597 | 21.6 |
| 1980 | 108 | 54,393 | 42.5 |
| 1985 | 174 | 155,374 | 21.3 |
| 1988 | 190 | 280,477 | 14.5 |
| 1989 | 191 | 336,582 | 16.0 |
| 1990 | 199 | 390,396 | 16.0 |
| 1991 | 198 | 357,725 | -8.4 |
| 1992 | 196 | 355,379 | -0.7 |
| 1993 | 195 | 386,100 | 8.6 |
ACUs have functioned in the region primarily as a center for routing capital from markets in Europe, North America, and the Middle East to the fast-growing regions of Asia. ACUs’ net foreign assets are heavily concentrated in the Asia-Pacific region (excluding Singapore), reaching US$51 billion in 1993. In addition to attracting funds from the primary markets mentioned above, ACUs have generally also had a liability position with respect to DBUs in Singapore, reflecting the high rate of domestic saving.
While actively promoting the development of offshore markets, the authorities have also taken steps to regulate certain activities so as to promote financial stability and maintain control over domestic monetary policy. ACUs are prohibited from doing business in Singapore dollars; DBUs cannot lend to nonresidents in Singapore dollars in amounts exceeding S$5 million, or to residents for use outside Singapore, without obtaining prior permission from the MAS; and offshore-license banks cannot engage in Singapore dollar lending in amounts exceeding S$100 million.6
The growth in financial services in Singapore includes the development of other important institutions also. The financial sector has evolved into an important interbank market (the Singapore interbank offer rate—SIBOR—is one of the most widely quoted in the world), an international center for foreign exchange trading (second only to Tokyo in Asia), an international monetary exchange (SIMEX) with trading in futures and options, an Asian dollar bond market, and an important regional stock market.
SIMEX was formed in 1983 and financial futures trading began in 1984. Since then trading has increased dramatically, from 500,000 contracts in 1985 to nearly 3 million in 1988 and 15.7 million in 1993 (Table 6-4). The Stock Exchange of Singapore (SES) was established in 1973. Prior to that, Singapore shared a common stock exchange with Malaysia. The joint stock exchange was dissolved after the termination of currency interchangeability between the two countries. This historical linkage survived, however, in the form of dual listings for many companies on the two exchanges until 1989, when the cessation of dual listings effectively halved the capitalization of the Singapore market. Following the delisting of Malaysian companies, the SES established an over-the-counter market, known as CLOB International, for trading in shares of foreign companies. Despite the disruption caused by the delisting, the stock market soon resumed its rapid growth.
SIMEX Trading Volume
(Number of contracts)
SIMEX Trading Volume
(Number of contracts)
| Futures | Options | Total | |
|---|---|---|---|
| 1985 | 538,829 | - | 538,829 |
| 1986 | 875,556 | - | 875,556 |
| 1987 | 2,130,020 | 11,963 | 2,141,983 |
| 1988 | 2,789,333 | 83,335 | 2,872,668 |
| 1989 | 6,256,770 | 14,157 | 6,270,927 |
| 1990 | 5,645,430 | 75,180 | 5,720,610 |
| 1991 | 5,981,380 | 86,664 | 6,068,044 |
| 1992 | 11,818,786 | 361,388 | 12,180,174 |
| 1993 | 14,768,322 | 961,465 | 15,729,787 |
SIMEX Trading Volume
(Number of contracts)
| Futures | Options | Total | |
|---|---|---|---|
| 1985 | 538,829 | - | 538,829 |
| 1986 | 875,556 | - | 875,556 |
| 1987 | 2,130,020 | 11,963 | 2,141,983 |
| 1988 | 2,789,333 | 83,335 | 2,872,668 |
| 1989 | 6,256,770 | 14,157 | 6,270,927 |
| 1990 | 5,645,430 | 75,180 | 5,720,610 |
| 1991 | 5,981,380 | 86,664 | 6,068,044 |
| 1992 | 11,818,786 | 361,388 | 12,180,174 |
| 1993 | 14,768,322 | 961,465 | 15,729,787 |
In 1990-92, the growth of real output in the financial services sector slowed considerably, to an annual rate of about 6 percent, thus continuing a decline relative to GDP from the peak achieved in the mid-1980s. During this period, growth in the number and total assets of ACUs and in SIMEX trading volumes leveled off. However, growth in financial services picked up again in 1993 owing, in part, to strong growth in stock market activity following a surge in domestic and foreign investor participation in the Singapore market. While the slowing of growth in the financial services sector during 1990-92 may have been part of the natural maturation of a market that was an industry leader for the Asian region during the 1970s and 1980s, the rebound in 1993 indicates there is still room for growth. Although there is some increased regional competition from other southeast Asian countries that have established their own offshore markets, these facilities are not yet in direct competition with Singapore and are designed to be regional financial centers for areas of new growth in southeast Asia—the regional states of Sabah and Sarawak for Malaysia, and the emerging economies of Cambodia, Laos, and Viet Nam for Thailand.7 Given the rapidly expanding demand for financial services in the region, the Singapore market—with its large pool of skilled and experienced financial professionals—should continue to be a leader in sophisticated financial services, particularly in the areas of risk management, fund management, and corporate advisory services.
Standards and standard-setting procedures are in line with those practiced internationally, while stringent sanitary regulations are maintained with a view to safeguarding the sanitary status of the country.
ASEAN’s other founding members were Indonesia, Malaysia, the Philippines, and Thailand. Brunei joined in 1984. APEC consists of the six ASEAN members plus Australia, Canada, China, Hong Kong, Japan, Korea, Mexico, New Zealand, Papua New Guinea, Taiwan Province of China, and the United States.
Two other growth triangles have been initiated within ASEAN; a northern triangle linking Indonesia, Malaysia, and Thailand, and an eastern triangle linking Indonesia, Malaysia, and the Philippines.
Other measures also indicate the increasing levels of overseas investment: the proportion of equity capital of Singapore companies deployed overseas increased from 15 percent in 1980 to 22 percent in 1990, and the number of companies established abroad increased from 1,042 in 1981 to 2,308 in 1990.
The term “offshore banking” is used here to refer to international banking facilities (ACUs) that are constrained to operating in the Asian dollar market (ADM), in which transactions are permitted only in currencies other than the Singapore dollar. There are three categories of banks: those with full, restricted, and offshore licenses. The distinction among them lies in the various restrictions on their domestic banking business. All local banks are full-license banks. Full-license and restricted-license banks typically have both DBUs and ACUs.
Several foreign banks were granted offshore licenses beginning in 1973.
Malaysia established an offshore market on Labuan in 1991, and Thailand established the Bangkok International Banking Facility (BIBF) in early 1993.
