Singapore
Selected Issues
Author: International Monetary Fund
Publication Date:
09 Oct 2001
eISBN:
9781451834192
Language:
English
Keywords:
ISCR; CR; credit facilities; interest rate; government bond; banking sector; bond issue; currency swap; money market; S$ currency option
Download PDF (4.4 MB)

The major objectives of the banking system reform are twofold: first, to continue to gradually open domestic banks to greater competition from foreign banks, and second, for Singapore banks to retain significant domestic market share in this more open environment as well as to become significant participants in the regional market. The authorities have clearly stated that they see the process of mergers and consolidation of the local banks as inevitable, but that they do not intend to force the process.

Abstract

The major objectives of the banking system reform are twofold: first, to continue to gradually open domestic banks to greater competition from foreign banks, and second, for Singapore banks to retain significant domestic market share in this more open environment as well as to become significant participants in the regional market. The authorities have clearly stated that they see the process of mergers and consolidation of the local banks as inevitable, but that they do not intend to force the process.

I. Overview

1. The recent cyclical peak in 2000 fueled by the strong global electronics demand, followed by the sharp slowing of the economy precipitated by the downturn in the electronics cycle and significant weakness in the US economy, highlights the importance of external demand in the business cycle of Singapore’s economy. Because of the small size of Singapore’s domestic market, external factors will undoubtedly remain a key determinant of its economic outlook. In a volatile external environment, an important challenge for Singapore has been to sustain strong long-term growth and dampen cyclical fluctuations.

2. Well aware of these challenges, Singapore has embarked on an ambitious program of structural reforms in the last two decades aimed, to a large extent, at diversifying the manufacturing base and moving it up the value added chain, and liberalizing and strengthening the financial sector. This paper examines the structural change in Singapore’s manufacturing industry during 1980–99, analyzes the key recent developments and reforms of Singapore’s financial sector, and traces the evolution of the policy on noninternationalization of the Singapore dollar.

3. Chapter II examines the extent to which the structure of the manufacturing sector has changed in Singapore over the period 1980–99. In particular, the focus is on two questions: did the manufacturing sector move up the value added chain and has the manufacturing base became more diversified during the period 1980–99? The analysis strongly supports the view that the Singaporean manufacturing sector has continued its fast pace transformation from low/medium value added sectors to high tech and high value added sectors during the last two decades. The continuous upward shift along the value added chain in the manufacturing sector coupled with the diversification effort has contributed to both enhancing long term-growth and significantly reducing cyclical fluctuations in real output.

4. Chapter III provides an update on the reforms implemented over the past year and outlines the remaining tasks and priorities. In early 1998, the Singapore authorities unveiled a program of comprehensive reforms aimed at positioning Singapore at the forefront of financial sector innovations in a global economic environment. The overarching objective of the reforms were to overcome the disadvantage of the small size of the domestic market in Singapore and to compensate for the lack of a natural hinterland unlike other Asian financial centers such as Hong Kong and Tokyo. The strategy involved an active role for the government in promoting the industry, including through tax and other incentives, and reforms of the regulatory environment in a manner that maintained a robust financial system while at the same time encouraging innovation. As a result, the financial sector landscape has now come close to the vision set out in early 1998. The institutional environment is already at par with the international best practice in most areas, and continues to be reviewed and upgraded. Activity has also picked up sharply in a number of segments including the bond market and asset management. Challenges ahead are continued growth in the capital market and improved efficiency and international competitiveness in the banking sector, while completing the transformation of the supervisory framework to a more progressive risk-based regime.

5. Chapter IV traces the evolution of the policy on noninternalization of the Singapore dollar since the 1980s and assesses its effect on Singapore’s integration with the international financial market. Singapore has long maintained several restrictions against the international use of its currency, generally referred to as the policy of “not encouraging the internationalization of the Singapore dollar.” The policy has been liberalized in stages since the late 1990s, and the most recent and significant liberalization was announced in December 2000. Even before the recent liberalization, the policy posed few impediments to international trade and capital flows, for the policy was intended not to inhibit free flow of bona fide capital but to limit speculative activities in Singapore’s financial markets. The non-internationalization policy needs to be appraised from the perspective of overall macroeconomic policy framework of Singapore as it is difficult to disentangle the effects of the measures on insulating Singapore from speculative attacks from the overall macroeconomic policy track record. The noninternationalization policy clearly has had a strong signaling effect in deterring potential speculative activity against the S$. However, without the strong and credible policy record, the noninternationalization policy is not likely to have been defensible for over two decades under the highly open regime for capital and financial accounts.

II. Structural Change In Singapore’s Manufacturing Industry During 1980–991

A. Introduction

1. This chapter will examine the extent to which the structure of the manufacturing sector has changed in Singapore over the period 1980–99. In particular, the focus will be on two questions: did the manufacturing sector move up the value added chain and has the manufacturing base became more diversified during the period 1980–99? The study uses annual census data for 4,007 establishments regrouped in 77 sub-sectors (corresponding to the 5-digit elements of the Singapore Standard Industrial Classification). The 77 sub-sectors will be further aggregated into 23 sectors. The data include the number of workers, output, value added, direct exports, and fixed assets. All value data are in nominal terms.2

2. The chapter is divided into nine sections. Section B covers labor reallocation across sectors. Sections C to G cover the evolution of: (i) sectoral shares in manufacturing value added; (ii) value added content; (iii) relative productivity; (iv) relative capital-labor ratio; and (v) export shares and degree of openness. Section H presents a few empirical results, and Section I concludes.

B. Labor Reallocation Across Sectors

3. Table II.1 shows the sectoral shares in manufacturing employment and their corresponding ranking among the 23 sectors in 1980 and 1999. In addition, the table shows the following statistics for the whole period: the mean, the standard deviation normalized by the mean share during 1980–99, and the minimum and maximum.

Table II.1.

Sectoral Shares in Manufacturing Employment, 1980–99

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Sources: Data provided by the Singapore authorities; and staff estimates.

4. While electronics was already the most important manufacturing sector in Singapore in 1980 in terms of employment share (25 percent), this sector has fundamentally changed during the last two decades. In 1980, semiconductors were the dominant employer within the electronics sector with 6½ percent of total manufacturing employment, while communication equipment was insignificant (with ¼ percent of manufacturing employment) and computing and data processing equipment was still in its infancy with 1¾ percent of manufacturing employment. In 1999, electronics strengthened its top position to 31 percent of manufacturing employment. Thus, roughly one-third of the manufacturing employment is in the electronics sector. Furthermore, the structure of the electronics sector has significantly changed. While the share of semiconductors has increased slightly from 6½ percent to 7 percent, communications equipment increased its share from ¼ percent to 1¼ percent, and more importantly, computing and data processing moved from 1¾ percent to 13½ percent of manufacturing employment becoming the most important sub-sector in electronics, dominating every other two-digit sector.

5. Interestingly, wearing apparel was the second largest sector with 10 percent of manufacturing employment and textiles represented 3 percent. These traditional sectors have weakened considerably during the last two decades and represented only 2½ percent and ½ percent of manufacturing employment, respectively. Chemicals only represented 2¼ percent of manufacturing employment in 1980 and was ranked 15th among the 23 manufacturing sectors. Its share in manufacturing employment more than doubled during 1980–99 (4½ percent in 1999) and is ranked ninth in 1999. The relative size of wood and wood products also declined significantly (from 3½ percent in 1980 to ½ percent in 1999).

6. In view of the size of the increase in their labor shares, it is not surprising that communication equipment and computing and data processing are among the sectors with the highest volatility, as measured by their normalized standard deviation, indicative of the fundamental transformation occurring in these sectors. The other sectors with high normalized standard deviations are the declining sectors: wood and wood products, textiles, refined petroleum products, and wearing apparels.

C. Evolution of Sectoral Shares in Manufacturing Value Added

7. The previous section shows that there have been important shifts in labor across manufacturing sectors. Is there a pattern in this labor reallocation process and, in particular, is there evidence of reallocation of labor toward higher productivity sectors? There is indeed strong evidence in the data showing a rapid upgrading of the Singaporean manufacturing sectors toward higher value added sectors as shown by the sectoral shares in manufacturing value added in Table II.2.

Table II.2.

Sectoral Shares in Manufacturing Value Added, 1980–99

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Sources: Data provided by the Singapore authorities; and staff estimates.

8. First, electronics more than doubled their share in manufacturing value added during 1980–99, starting with 20½ percent and ending with 43½ percent. This gain in value added share is much larger than the gain in the employment share (which only increased from 25 percent to 31 percent during the same period) corroborating the view that the economy has shifted toward higher value added sectors. Another important fact pointing in the same direction is that electronics produced 43½ percent of manufacturing value added with only 31 percent of manufacturing employment in 1999. Consistent with the labor reallocation analysis in the previous section, communication equipment and, especially, computing and data processing equipment account for the bulk of the increase in electronics share in manufacturing value added. The former increased its share from ¼ percent to 3 percent, while the later increased its share from 2½ percent to 24½ percent, becoming the dominant sector in manufacturing.

9. Second, chemicals and chemical products became the second most important manufacturing sector which produced 17½ percent of manufacturing value added with only 4½ percent of manufacturing employment in 1999. In this sector, pharmaceutical and bio-pharmaceutical products alone accounted for 12½ percent of manufacturing value added with merely ½ percent of manufacturing employment in 1999. Thus, electronics and chemicals accounted for more than 60 percent of manufacturing value added and 35 percent of manufacturing employment in 1999, versus 25 percent of manufacturing value added and 27 percent of employment in 1980.

10. Third, the relative importance of the more traditional sectors with low value added content such as textiles, wearing apparels, and wood and wood products declined substantially. All three sectors accounted for less than 1 percent of manufacturing value added in 1999 while they represented more than 5 percent in 1980.

11. An exception to this transformation of the economy toward higher value added sectors is the important contraction of refined petroleum which accounted for 18 percent of manufacturing value added and 1¼ percent of manufacturing employment in 1980, but only 4½ percent of value added and about 1 percent of employment in 1999. However, the decline in the relative importance of this sector is consistent with Singapore’s strategy to move progressively away from sectors that are intensive in physical capital—indeed, this sector is highly intensive in physical capital as discussed in Section F—and move toward a knowledge-based economy where human capital plays a crucial role.

12. Sectors that are in the middle of the value added chain, such as non-metallic mineral products, basic metals, machinery and equipment, electric machinery, and transport equipment all lost in terms of value added share but less than the low value added sectors.

D. Evolution of Value Added Content

13. Value added content is defined as the ratio of value added divided by output. Table II.3 shows the change in value added content from 1980–99 for the 23 sectors. The value added content has been generally quite low, reflecting the high dependence of the manufacturing sector on material inputs, of which a large share is imported. For the whole manufacturing sector, value added accounts for only 22 percent in 1980 and 26 percent in 1999. The sector with consistently the highest value added content has been pharmaceutical and bio-pharmaceutical products. Its value added content was 49 percent in 1980 and has increased substantially to achieve a remarkable 90 percent in 1999. Electronics had a small value added content in 1980 (27 percent) which declined even further to account for only 22 percent of output in 1999, reflecting the large share of imported components in the sector’s output. This is particularly true for the computing and data processing equipment whose value added content declined from 44 percent to 21 percent. However, fitting an exponential trend trough the whole sample (including all sectors) for the periods 1980–89 and 1990–99 shows that value added content declined somewhat for during 1980–89 but increased during 1990–99.

Table II.3.

Share of Value Added in Output, 1980–99

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Sources: Data provided by the Singapore authorities; and staff estimates.

E. Evolution of Relative Labor Productivity

14. The analysis of productivity across time is somewhat limited by the fact that all data are in current prices. Consequently, the traditional measure of productivity—value added in constant prices divided by the number of hours worked or employment—cannot be used here. However, it is possible to circumvent this problem by working with an index of relative productivity (which is unit free and therefore does not require constant price valuations), defined as value added per worker in current prices for a given sector divided by the same ratio for the whole manufacturing sector. A value less than one implies that labor productivity in the given sector is smaller than the labor productivity for the whole manufacturing sector. The opposite holds for a value larger than one. A value of one indicates that the sector is representative of the whole manufacturing sector.

15. This measure of productivity is presented in Table II.4. In 1980, the sector with the highest relative labor productivity3 was refined petroleum products with more than 15 times the productivity of the whole manufacturing sector. Interestingly, pharmaceuticals and bio-pharmaceuticals was second with 4½ times the average productivity. Note that electronics was below average, even though two of its components, semiconductors and computing and data processing equipment, were above average. As expected, the traditional sectors, including textiles, wearing apparels, leather, wood, and paper have the lowest relative labor productivity.

Table II.4.

Relative Labor Productivity, 1980–99

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Sources: Data provided by the Singapore authorities; and staff estimates.Note: The index of labor productivity index is computed as the share of a sector in manufacturing value added divided by its share in manufacturing employment.

16. The main changes in 1999 are: (i) pharmaceuticals and bio-pharmaceuticals, with a more than a fivefold increase in relative productivity, displaced refined petroleum products for the first place, bringing the chemicals cluster as whole to the second position after refined petroleum products; (ii) relative productivity in electronics increased by about 70 percent and is significantly higher than the manufacturing average (while it was significantly lower in 1980) with gains in all sub-sectors, particularly in communication equipments where relative productivity increased threefold; (iii) the significant gains in relative productivity for chemicals and electronics implies that the relative productivity of the other sectors has declined, including the traditional labor-intensive sectors but also the metal-based industries, machinery equipment, electric machinery and transport equipment; (iv) finally, pharmaceuticals and bio-pharmaceuticals are on a steep upward trend as the maximum relative productivity over 1980–99 occurred in 1999 and the minimum was recorded in the beginning of the period, while refined petroleum products, though with still relatively high labor productivity, followed the opposite path.

F. Evolution of Relative Capital-Labor Ratio

17. The usual capital-labor ratio cannot be used here because of the lack of constant prices. However, as in the case of productivity, we can define a relative capital-labor ratio as the sector’s capital-labor ratio normalized by the capital-labor ratio for the whole manufacturing sector. The capital stock is measured by gross fixed assets and labor by the number of workers. Table II.5 shows that refined petroleum has had, by far, the highest capital-labor ratio with more than 18 times capital per worker than the average for the whole manufacturing sector. In 1999, chemicals had the second highest capital-labor ratio (more than four times the manufacturing average). Electronics was labor intensive in 1980 but capital per worker has increased 2½ times faster than the manufacturing average during 1980–99. In particular, semiconductors was labor intensive in 1980 with 50 percent less capital per worker than the manufacturing average, but had close to 2½ times more capital per worker than the manufacturing average in 1999. Note that communication equipments and computing and data processing are much less capital intensive than semiconductors with about 50 percent the capital-labor ratio of the whole manufacturing sector. However, these sectors are likely to be intensive in human capital which is not measured here.

Table II.5.

Relative Capital-Labor Ratio, 1980–99

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Sources: Data provided by the Singapore authorities; and staff estimates.Note: The index of capital/labor ratio is computed as the share of a sector in manufacturing capital stock divided by its share in manufacturing employment.

G. Evolution of Export Shares and Degree of Openness

18. Table II.6, which shows sectoral shares in manufacturing exports, confirms the important transformation of the Singaporean economy during the last two decades. High-tech electronics and chemicals exports have gradually replaced exports of refined petroleum products and exports of traditional low value added sectors, such as food, wearing apparels, wood and wood products, and textiles. The share of electronics exports have increased from 23¾ percent in 1980 to 62¼ percent in 1999 while the chemicals share increased from 2¾ percent in 1980 to 13 percent in 1999. These share increases were to the detriment of refined petroleum, which moved from 40 percent of manufacturing exports in 1980 to 4 percent in 1999, and to the detriment of food, wearing apparels, wood and wood products, and textiles for which the combined share declined from 11¼ percent in 1980 to 2½ percent in 1999. Perhaps the most remarkable transformation is that of computing and data processing equipment, which increased its share of manufacturing exports from 1¾ percent in 1980 to 40 percent in 1999.

Table II.6.

Sectoral Shares in Manufacturing Exports, 1980–99

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Sources: Data provided by the Singapore authorities; and staff estimates.

19. Table II.7 shows the share of exports in output, and thus measures the degree of openness. For the whole manufacturing sector, exports accounted for 60 percent of output in 1980 and 64 percent in 1999. Pharmaceuticals and bio-pharmaceutical products is the most open sector with exports representing 98 percent of output on average during 1980–99. The two main sectors, electronics and chemicals, export 77 percent and 80 percent of output, respectively.

Table II.7.

Export Share in Output, 1980–99

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Sources: Data provided by the Singapore authorities; and staff estimates.

H. Some Empirical Results

20. What are the determinants of labor productivity? Solow’s growth model predicts that inter-sectoral differences in labor productivity reflect simply differences in the capital-labor ratio. A simple test would be to regress the relative labor productivity index (RLPit) defined in Section D on the relative capital-labor ratio (RKLRit) defined in Section E.4 The equation is estimated using fixed effects on a panel of 1,539 observations. The indices i and t refer to sector i and year t. The t-statistic are given below the coefficient estimates:

log⁡(RLPit)=−0.186+0.566log(RKLRit),(−36.53)(67.12)(II.1)R2=0.74.

As predicted, the relationship between these two variables is quite strong. Under constant returns to scale, the coefficient on log(RKLRit) should yield the share of physical capital in manufacturing value added (that is, 57 percent) which seems reasonable.

21. If the manufacturing sector in Singapore has moved up the value-added chain, factor inputs (labor and capital) should have been relocated to sectors with high productivity. This implies that variations in sectoral employment and variations in sectoral capital stocks should be positively correlated with relative labor productivity (RLP). The following two equations carry out this test, where the growth rate in the number of workers (Δlog(wit)) and the growth rate of the stock of capital (Δlog(kit)) are regressed on (RLPit), on a time trend, on the lagged dependent variable to take into account the adjustment process, real GDP to control for business cycle fluctuations, and fixed effects (not reported below) to control for other factors that are not explicitly introduced in the equation. The sample is a panel of 1,155 observations:

Δlog⁡(wit)=−0.0028(−6.88)trend−0.285(−6.78)Δlog⁡(wit−l)+0.708(14.58)Δlog⁡(GDPit)+0.0096(9.76)RLPit,(II.2)R2=0.17,
Δlog⁡(kit)=−0.0055(5.24)trend−0.340(−8.46)Δlog⁡(kit−l)+0.426(3.82)Δlog⁡(GDPit)+0.011(2.20)RLPit,(II.3)R2=0.15.

The regressions show a positive and statistically significant correlation between changes in factors of production and relative labor productivity suggesting that factor inputs have indeed moved toward sectors with higher labor productivity.

22. Another relevant question is whether the sectors which export a large share of their output are those with higher labor productivity as they face stiffer competition on international markets. To answer this question, RLP is regressed on the relative degree of openness (RDO) defined as the ratio of exports to output divided by the same ratio for the whole manufacturing sector. The equation is estimated using fixed effects on a panel of 1,540 observations:

RLPit=0.136(34.79)RDOit,(II.4)R2=0.84.

The relationship between relative productivity and relative openness is very strong and implies that a sector that has a degree of openness (that is a ratio of exports to output) 10 percent larger than the manufacturing average will have labor productivity 1½ percentage points higher than the manufacturing average.

23. A final question is whether the magnitude of the business cycle fluctuations of Singapore’s economy has changed significantly between the 1980’s and the 1990’s. Comparing the volatility of real GDP growth during the periods 1980–89 and 1990–99 shows that fluctuations in real activity have indeed dampened. The standard errors of the growth rates of real GDP over 1980–89 and 1990–99 were, respectively, 4 percent and 3.2 percent, a decline of 20 percent in the magnitude of fluctuations in real GDP growth.5 A similar exercise for real value added in the manufacturing sector yields a standard error of 8½ percent for 1980–89 and 4½ percent for 1990–99, a decline of more than 50 percent in the amplitude of fluctuations in the manufacturing sector. Clearly, it is difficult to fully attribute any observed change to the effort to diversify the economy. Other key factors that affect the business cycle include the volatility of external demand and the macroeconomic management framework. However, Singapore has always been an open manufacturing-based economy and the framework for economic management has not changed significantly during the last two decades. Thus, albeit not definitive, the reduction in the magnitude of fluctuations suggests that the diversification effort has paid off in terms of reducing cyclical fluctuations.

I. Conclusion

24. The analysis above strongly supports the view that the Singaporean manufacturing sector has continued its fast pace transformation from low/medium value added sectors to high tech and high value added sectors during the last two decades. Electronics and chemicals account for more than 60 percent of value added and 35 percent of employment in the manufacturing sector. The electronics sector, while well established already in 1980, has consolidated its position and moved up the high tech product chain through investment both in physical capital and skill-upgrade. Growth in chemicals has outpaced even electronics and has allowed the Singaporean economy to diversify its manufacturing base with still significant growth potential ahead. The diversification effort coupled with the continuous upward shift along the value added chain in the manufacturing sector has contributed to both enhancing long term-growth and significantly reducing cyclical fluctuations in real output.

III. Singapore’s Financial Sector: Key Recent Developments And Reforms1

A. Introduction

1. In early 1998, recognizing that the financial sector was undergoing rapid change in an increasingly global environment, the Singapore authorities unveiled a program of comprehensive reforms aimed at making Singapore a predominant financial center.2 The overarching objective of the reforms were to overcome the disadvantage of the small size of the domestic market in Singapore and to compensate for the lack of a natural hinterland unlike other Asian financial centers such as Hong Kong and Tokyo. The strategy involved an active role for the government in promoting the industry, including through tax and other incentives, and reforms of the regulatory environment in a manner that maintained a robust financial system while at the same time encouraging innovation.

2. The reform program is comprehensive but gradual. It covers all segments of the financial sector, comprising traditional banking activities, the fund management industry, the bond market, equity markets, the insurance sector, the overall regulatory environment. To ensure smooth transition under this extensive reform, the implementation is being phased in gradually. Important changes have also taken place in the long-standing policy of not encouraging the internationalization of the Singapore dollar (see Chapter IV of this paper for a fuller discussion of this issue).

3. The main aim of this paper is to provide an update on the reforms implemented over the past year and to outline the remaining tasks and priorities. The rest of the paper is organized as follows: Section B covers reforms and recent developments in the bond market in Singapore; Section C contains a discussion of reforms of the banking system, including regulatory changes; Section D contains discussion of the fund management industry; Section E outlines key changes affecting other key segments on the financial sector; and Section F concludes.

B. The Bond Market

4. The efforts to develop the debt market have been proven timely by the experience of the Asian crisis which exposed the structural weaknesses that could arise from over dependence on the banking system for financial intermediation. Significant growth has also taken place in bond markets across Asia thus helping these countries reduce their reliance on short-term foreign capital inflows.

5. During the last consultation discussions, several areas were identified as priorities for future reforms of debt markets in Singapore. These included: (i) regulatory treatment of repos that constrained the development of the repo market—seen as one of the key building blocks of a vibrant debt market; (ii) underdeveloped markets for hedging products; (iii) inadequate liquidity in the swap market, where activity tends to be dominated by the needs of nonresident issuers of S$ bonds to swap the bond proceeds into foreign exchange for use outside Singapore; (iv) accounting regulations that discourage secondary trading of SGS; and (v) reforms to banks’ liquidity management frameworks to relieve them of the requirement to hold 18 percent of liabilities in liquid assets, of which 10 percent is to be held as Singapore Government Securities (SGS).3

6. A key prong of the strategy to develop the bond market in Singapore was to encourage domestic issuers to fund themselves in the domestic bond market. Statutory boards (public sector organizations) have been at the forefront of domestic issuance activity. The second prong was to encourage the entrance of foreign issuers to the market.

7. Many important initiatives have recently been taken to ensure that these objectives are met.

  • With the aim of building large and liquid benchmark issues, the authorities announced in May 2000, that the size of the benchmark issue would be raised from S$1.5 billion to at least S$2–2.5 billion.

  • In November 2000, the Monetary Authority of Singapore (MAS) carried out its first repurchase of SGS aimed at re-channeling liquidity from off-the-run issues into larger and more liquid benchmark bonds.

  • When the SGS issuance schedule for 2001 was announced late last year, the MAS announced the planned issuance of a 15-year bond in September 2001, with the aim of extending the benchmark yield curve beyond the current 10-year maturity.

  • Further steps were taken in December 2000 to boost the bond market by liberalizing the access to Singapore dollar credit to nonresidents.4 Specifically, banks are now allowed to lend to nonresidents in any amount, if the proceeds of such borrowing are to be used for investment in Singapore dollar assets. If the underlying position is sold, the funds are to be repaid in Singapore dollars. Funds not utilized in Singapore must still be swapped into foreign currency.

  • From March 2001, banks are no longer required to set aside reserves for S$ swap transactions that are of less than one-year maturity. Also, cross-currency swap transactions undertaken by banks for the purpose of swapping out debt issued by nonresidents do not require capital to be set aside against the position.

  • Previously, an offshore bank was allowed to receive S$ funds from any non-bank resident of Singapore pursuant to a currency swap only where the funds were not less than $250,000 and were raised through S$ bond issue managed by the bank. In March 2001, offshore licensed banks in Singapore were allowed to accept S$ funds of any amount from non-bank residents through swap transactions, whether or not the swap transaction is pursuant to a bond issue, thus enlarging the number of bank participants in the S$ swap market.

  • As for boosting the repo market, key steps were taken in May 2000 aimed at generating secondary market trading activity. These included the announcement that all SGS obtained as a result of a repo transaction will be counted toward satisfying the minimum liquid asset (MLA) ratio, regardless of the tenure and the counterparty. This compares to the previous policy whereby only overnight borrowings of SGS were allowed to be counted towards the MLA ratio.

  • To provide players with hedging mechanisms to manage their risk, SGX will be launching a SGS Bond Futures contract on June 29, 2001.

  • A number of tax incentives were also provided to boost the bond market. There is no capital gains tax in Singapore, but interest on bonds was subject to withholding taxes at a rate of 15 percent. In 1998, tax exemptions began to be granted on interest earned by nonresidents from Qualifying Debt Securities (QDS).5 In the 1999 budget, this tax exemption was extended to nonresidents who have permanent establishments in Singapore.6 Primary dealers in the Singapore bond market are exempted from paying tax on any profits derived from trading in the bond market until February 2003 and financial institutions in Singapore that arrange, underwrite and distribute QDS are exempt from tax on their fee income. Finally to develop the local swap market, the 2000 budget announced that profits derived from swaps trading would be taxed at the concessionary rate of 10 percent.

  • The approved bond intermediary (ABI) scheme was introduced in February 1999. Under this scheme, the MAS will evaluate a financial institution’s debt origination and trading capabilities in Singapore on an overall basis. Deals arranged by financial institutions granted ABI status would be regarded as “substantially arranged” in Singapore, and would quality for tax incentives for interest and fee income from holding, arranging, underwriting and distributing QDS.

Table III.1.

Corporate Debt Market, 2000

(in S$ billion)

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Source: Data provided by the Singapore authorities.

8. Results to date have surpassed most expectations and, although the concept is difficult to define precisely, critical mass appears to have been achieved in the bond market. From 1999 to 2000, the amount of corporate issuance increased by 57 percent from S$9.2 billion to S$14.4 billion for S$ denominated debts, and by 250 percent from S$10.3 billion to S$36.1 billion for non-S$ denominated debts. Moreover, the composition of issuer and maturity has been diverse for both S$ and non-S$ denominated debts (Table III.1 and Figure III.1). In addition, the SGS was recently included in the JP Morgan Government Bond Index Broad (Box III.1), suggesting the possibility of greater demand in the period ahead.

Figure III.1
Figure III.1

Corporate Bond Market, 1995-2000

Citation: IMF Staff Country Reports 2001, 177; 10.5089/9781451834192.002.A001

Source: Data provided by Singapore authorities.

C. The Banking System

Liberalization and Consolidation

9. The major objectives of the banking system reform are two-fold: first, to continue to gradually open domestic banks to greater competition from foreign banks, and second, for Singapore banks to retain significant domestic market share in this more open environment as well as to become significant participants in the regional market. The latter objective is seen as critical to the ultimate survival of Singapore banks, because the domestic base is not large enough to support the growth of banks. The authorities have clearly stated that they see the process of mergers and consolidation of the local banks as inevitable, but that they do no intend to force the process. Rather they see it happening through competitive pressures in the market. Banks will have to make their own decision whether to consolidate, although the pressure on banks to consolidate and rationalise will grow. Alternatively, banks can choose to become niche players in specific segments.

Inclusion of Singapore Government Securities in the J.P. Morgan Government Bond Index1

J.P. Morgan Government Bond Indices are tools for measuring performance and quantifying risk across international fixed income markets. The index for developed country government debt markets is the Government Bond Index Global (GBI) that comprises government bonds from G-7 countries, Spain, Netherlands, Belgium, Denmark, Sweden, and Australia. The GBI Broad includes, in addition, government bonds of Finland, Ireland, New Zealand, Portugal, South Africa, Switzerland, and Austria.

As the Singapore Government Securities (SGS) market expanded over the past few years, Singapore was added to J.P. Morgan’s government bond index product line in November 2000, and included in the GBI Broad in April 2001 with estimated weight of ⅓ percent.

The SGS offer low yields—lower than the US Treasury bonds—but become an attractive instrument for portfolio diversification owing to the following covariance properties which help to expand the efficient portfolio frontier for bonds. The returns on the SGS have low cross correlations with returns from most other government bonds included in prototype investment portfolios. The very low volatility of returns in the SGS yields risk-adjusted returns that are higher than those from the UK and Japanese government bonds.

The MAS is also being proactive in promoting the SGS to international investors. The recent “nondeal” roadshow in London, Tokyo, New York and Boston, in which the authorities outlined their plans to issue a 15-year bond and bond futures, was well received. Also, the recently launched SGS web page provides a one-stop location which carries comprehensive information on the SGS market, including the issuance calendar, market statistics, relevant legislation, FAQs, and information on SGS primary dealers.

1This box draws on the following publications from J.P. Morgan, “J.P. Morgan Government Bond Indices,” September 30, 1997; “Introducing the Singapore Government Bond Index” November 27, 2000; and “Announcing the inclusion of Singapore in GBI Broad” March 22, 2001.

10. In May 1999, MAS announced a five-year program to liberalize the domestic banking market. The first phase of the banking liberalization program included new banking privileges and licenses for foreign banks granted over the period 1999–2001 and was aimed at increasing foreign bank participation and competition in the retail and the wholesale banking sectors. MAS is currently reviewing the experience with banking sector liberalization thus far and will decide on the next package of measures within 2001. Early indications are that the authorities may consider a more liberal definition of QFB privileges when the next phase is implemented.

11. The new privileges and licenses under the 1999 banking liberalization program comprise Qualifying Full Bank (QFB) privileges for up to six foreign banks, of which four QFB licenses were awarded in October 1999 and two more are expected to be issued in 2001. Banks with QFB privileges are allowed (i) up to ten locations (branches and ATMs) of which up to five can be branches. However, the actual setting up of branches or ATMs are to be phased over more than one year following the issue of the QFB privileges; (ii) existing branches can be freely relocated; and (iii) QFBs can share ATMs amongst each other, but not with the domestic banks.

12. As for the wholesale banking sector, the number of restricted bank licenses were increased from 13 in 1999 to 20 in 2000; and offshore licensed banks were allowed higher S$ lending limits of S$500 million (increased from S$300 million) and greater leeway to engage in S$ swaps. In particular, eight offshore banks were given Qualifying Offshore Bank (QOB) privileges which allowed them to increase lending in S$ to S$l billion from S$300 million. QOBs will also be allowed to accept Singapore dollar funds from nonbank customers through swap transactions.

13. Also in 1999, MAS lifted the 40 percent foreign shareholding limit for Singapore-incorporated banks and introduced an intermediate level of 12 percent of shareholdings as a new threshold requiring MAS’ approval. MAS’ approval is still required before a single shareholder can increase his/her shareholdings in a local bank above the already existing 5 percent, and 20 percent thresholds. This new threshold of 12 percent gives greater flexibility for the authorities to allow strategic partners and large institutional investors to cross the 5 percent shareholding level while retaining a way to check the growth of these shareholding before they approach the limit of 20 percent.

Regulatory Reforms

14. In addition to introducing greater competition, the reforms are aimed at making the regulatory and supervisory regime more progressive and clearly benchmarked to international best practice. The first of these changes is the revision to the capital adequacy framework. From September 2000, the minimum Tier 1 capital adequacy ratio (CAR) was lowered from 10 percent to 8 percent, while the total CAR was maintained at 12 percent. Furthermore, the definition of Tier 1 capital has been expanded to include innovative capital instruments with strong equity-like features up to 15 percent of Tier 1 capital. These changes will allow banks greater flexibility in their capital management. In line with the move away from a “one-size-fits-all” approach to one that is risk-focused and institution specific, MAS may, on the basis of its supervision of banks, require individual banks to maintain higher capital than the regulatory minimum when necessary.

15. Also, the authorities have announced that there will be a lower minimum paid-up capital requirement of S$100 million for banking subsidiaries of Singapore-incorporated banks, which have themselves met the S$1½ billion requirement. This would allow the setting up of Internet-only banks and other entities with new business models.

16. The second major change in the regulatory structure is the requirement that banks separate their financial and nonfinancial activities and to unwind cross-shareholdings. These changes are aimed at limiting the risks of contagion to banks from nonbanking activities, enhance market discipline, increase transparency and ensure that bank management focuses on the core business of banking and finance. Specifically, banks are required to group financial activities either under the bank itself or under a financial holding company structure. Nonfinancial activities must be segregated from the banking group and divested. The management of the financial entities and non-financial affiliates should be separate, and there should be no name-sharing. Although banks would not be allowed to actively undertake nonfinancial activities, they would be allowed to purchase noncontrolling stakes (10 percent or less) in the share capital of any company.

17. Since these changes will require local banks to undertake significant corporate restructuring, they will have a three-year grace period from the time the amendment to the Banking Act takes effect to comply with the new regulations.

18. As for key results to date, new QFBs have made use of the new privileges to relocate existing branches, and some have expanded their branch and ATM networks. However, foreign institutions’ share of domestic deposits and assets remain unchanged. Domestic banks have stepped up their efforts to extend their reach outside the region. Most recently, DBS has acquired a Hong Kong bank (Dao Heng Bank) and has issued capital for this purpose with great success. Also, moves are underway between the other domestic banks to consolidate through mergers and acquisitions.

D. The Fund Management Industry

19. A vibrant fund management industry is essential to broadening the investor base for Singapore capital market, and was appropriately identified as one of the key areas for development by a strategic review of Singapore’s financial sector undertaken in 1998. Several measures have since been undertaken to develop the industry.

20. Under the supportive policy environment, the fund management industry has grown at a remarkable pace. In 1999, total assets under management grew by 82 percent to S$273 billion at end-1999 from S$151 billion at end-1998, and increased ten-fold from about S$20 billion in 1990. The number of large fund managers who manage over S$5 billion has also grown from three in the early 1990s to eleven in 1999. Despite difficult market conditions in 2000, the industry remained resilient and total assets under management in Singapore continued to increase to S$276 billion at end-2000 of which some S$166 billion were discretionary assets and S$l 10 billion were nondiscretionary assets (Figure III.2 and Table III.2).

Figure III.2.
Figure III.2.

Fund Management Industry, 1995-2000

Citation: IMF Staff Country Reports 2001, 177; 10.5089/9781451834192.002.A001

Source: Data provided by Singapore authorities.
Table III.2.

Unit Trusts and Assets Under Management

(AUM)

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Source: Data provided by the Singapore authorities.

E. Other Segments of the Financial Sector

Equity Market

21. To support the continued growth of Singapore as an international financial center, the Singapore Exchange (SGX) aims at providing world-class capital markets infrastructure that mediate a free flow of capital across markets. This infrastructure will provide a variety of instruments, and serve both issuers and investors across time zones. More specific targets are: to bolster the Singapore-based business; to develop the business across borders through strategic alliances; and to extend the business portfolio to diversify the earnings mix.

  • The Stock Exchange of Singapore (SES) and Singapore International Monetary Exchange (SIMEX) were demutualized and merged into SGX in December 1999, to create a more vibrant exchange and to exploit synergies between securities and derivatives markets.

  • Alliances and cooperation with other exchanges have been expanded. In May 2000, SGX announced a joint venture with the American Stock Exchange to offer a series of exchange traded funds to investors across Asia. In June 2000, the SGX entered an agreement with the Australian Stock Exchange to create a cross-trading link for selected Singaporean and Australian listed equities, allowing investors mutual access to both markets. This link is expected to be active by end-2001. On the derivatives front, the GLOBEX Alliance, of which SGX is a member, extended its reach by having Spain’s Futures and Options Exchange as the sixth international partner in September 2000. SGX has also created an alliance with the National Stock Exchange of India Limited (NSE) and the India Index Services and Products Limited (IISL) for cooperation in areas relating to derivatives trading, market-information sharing, staff training and technical assistance.

  • Existing securities and futures legislation in Singapore is being rationalised, consolidated and updated through MAS’ proposed Securities and Futures Act (SFA). The impetus for the SFA is the introduction of some major policy reforms which would require a substantial rewriting the laws. These reforms include the revamp of the existing licensing framework, a redefinition of the scope of regulated activities, the importation of corporate fund-raising provisions and unit trust provisions from the Companies Act, and improvements in market enforcement. Further, with the merger of the SES and SIMEX into the SGX, there is a parallel need to consolidate and rationalize securities and futures legislation. Provisions in the Companies Act that relate to capital-raising by companies, as well as those governing unit trusts, will be migrated to the SFA to form a consolidated legislation.

  • The brokerage commission rates for SGX members were liberalized gradually, starting in January 2000, and culminating in the full liberalization in October 2000. Since then the commission rates have fallen significantly to average 40–50 bp for retail traders and 20 bp for institutional traders.

  • The trading and settlement system is being upgraded. In line with international best practice, the SGX shortened the settlement period to T+3 from T+5 in March 2000. The SGX has also embarked on a program to implement straight-through processing for stock trades by end-2002. In April 2001, the SGX launched SGX Access, an open connectivity platform for the SGX securities market, aimed at enhancing access to its marketplace, and giving its members the flexibility to employ their order management system of choice.

Insurance

22. The insurance industry was liberalized on the understanding that a more competitive insurance market is necessary to raise industry standards to the international best practice and place Singapore as a leading regional center for insurance services. In early 2000, the authorities announced an open-door policy on direct insurers and insurance brokers, and lifted aggregate foreign ownership limit on local direct insurers. The existing open policy admission to the reinsurance and captive insurance remains unchanged.

23. To improve the quality and efficiency of distribution, three broad strategies are being pursued. To lower cost and improve service, insurers are encouraged to adopt alternative distribution channels, including direct marketing, and the internet and tele marketing. To raise the professionalism of the agency system, the authorities are reviewing measures to encourage the growth of intermediaries that are qualified to provide a broader range of financial products. Finally, international best practice standards are recommended in the area of product and expense disclosure.

24. MAS is reviewing strategies to improve the risk responsiveness of the regulatory and supervisory regimes. Under consideration are risk-based capital models to determine the minimum capital that each life and general insurance company must maintain, as well as a risk-based supervisory approach in the inspection of insurance companies that will focus on areas of significant risk to each company.

F. Corporate Governance Reforms

25. In December 1999, the Ministry of Finance, together with the MAS and the Attorney-General’s Chambers, set up three private sector-led committees to review the corporate regulatory framework, disclosure standards and corporate governance in Singapore. Three committees are: the corporate governance committee, the disclosure and accounting standards committee, and the company legislation and regulatory framework committee.

26. The corporate governance committee produced the code of corporate governance, which was accepted by the government in April 2001. The code will prescribe a set of corporate governance guidelines for listed companies in Singapore. The disclosure and accounting standards committee is soliciting public comments on its second consultation paper. The company legislation and regulatory framework committee has been given the mandate to recommend revisions to the Companies Act, which can be accomplished only after the other two committees complete their activity and finalize the recommendations. In a related development, regulation on insider trading has been strengthened. The introduction of civil penalty regime for insider trading in March 2000 to complement the existing criminal regime has given MAS the power to undertake civil actions against insider trading. It also provides for contemporaneous investors to file a civil claim against a person who has engaged in insider trading. MAS has further proposed to tighten its insider trading laws, including a shift from current person-connected approach to an information-connected approach. MAS has also proposed to extend the civil penalty and civil claim regime to other forms of market misconduct such as market manipulation, the dissemination of false or misleading information and the employment of fraud or deceit in dealing.

G. Concluding Remarks

27. Steady liberalization of the financial sector in recent years has brought about a sea-change in Singapore’s financial sector, and the landscape has now come close to the vision set out in early 1998. The institutional environment is already at par with the international best practice in most areas, and continues to be reviewed and upgraded. Activity has also picked up sharply in a number of segments including the bond market and asset management industry.

28. Challenges ahead are continued growth in the capital market and improved efficiency and international competitiveness in the banking sector, while completing the transformation of the supervisory framework to a more progressive risk-based regime. The forthcoming FSAP (planned for late 2001/early 2002) will contribute to assessing the progress so far and planning for future development of the financial sector.

IV. Evolution Of The Policy On Noninternationalization Of The Singapore Dollar1

A. Introduction

1. Singapore has long maintained several restrictions against the international use of its currency, generally referred to as the policy of “not encouraging the internationalization of the Singapore dollar.” The policy has been liberalized in stages since the late 1990s, and the most recent and significant liberalization was announced in December 2000. Even before the recent liberalization, the policy posed few impediments to international trade and capital flows, for the policy was intended not to inhibit free flow of bona fide capital but to limit speculative activities in Singapore’s financial markets. However, the effect of this policy on protecting the Singapore dollar from speculative attacks is difficult to assess, as it cannot be disentangled from the impact of the solid policy track record and credibility. This note traces the evolution of this policy since the 1980s and assesses its effect on Singapore’s integration with the international financial market.

B. The Early Years: Notice 621

Access to the Singapore dollar is restricted for both residents and nonresidents.

2. The noninternationalization policy took root in the early 1980s. After lifting all exchange controls in the late 1970s, in line with efforts to develop offshore financial markets in Singapore, the Monetary Authority of Singapore (MAS) took the position that it would not encourage the internationalization of the Singapore dollar beyond the need to support bona-fide economic transactions. This position of the authorities was well stated in a parliamentary statement by the Minister of Finance in 1980.

The Singapore dollar has traditionally been used to finance some of our entrepôt and regional trade. There are no restrictions on the use, or international use, if you like, of our currency for this purpose. At the same time, there has also been no official encouragement for the wider use of our currency. It is not my intention to accelerate such use. If by “internationalization,” the Honourable Member means also the use of the Singapore dollar as a reserve currency, I have to say that like many more developed countries, such as Germany and Japan, this will not be welcomed.

3. The policy was codified into MAS Notice 621 in November 1983, which reads:

Banks should observe the Authority’s policy discouraging the internationalization of the Singapore dollar. Specifically, banks should consult with the Authority before considering Singapore dollar credit facilities exceeding S$5 million to nonresidents, or to residents where the Singapore dollars are to be used outside Singapore.2

The Notice allowed banks to freely extend credit facilities to nonresidents up to S$5 million, and required prior consultation for credit facilities exceeding S$5 million, without expressly prohibiting such transactions. The same consultation limit also applied to credit facilities to residents wishing to use the S$ proceeds overseas.

4. A major amendment was made to MAS Notice 621 in 1992. The consultation requirement was lifted for the extension of S$ credit facilities of any amount, where the S$ funds are used for the following activities that are closely tied to economic activities in Singapore.

  • Direct exports from and imports into Singapore

  • Forward sales of Singapore dollars to hedge receipts from exports to Singapore

  • Bond issuance for economic activities in Singapore in favor of Singapore parties

  • Guarantee of payments arising from construction or other economic activities in Singapore including guarantee for tax payments.

5. Banks were required to continue to consult with MAS on the extension of credit facilities exceeding S$5 million to nonresidents for purposes other than those listed above, or to residents for use outside Singapore. The intention was to limit the availability of S$ credits for speculative activities by nonresidents or for activities outside Singapore, which MAS stated in the Notice as:

We have no wish to facilitate external speculative activities in our financial or property markets by allowing credit facilities in Singapore dollars, for whatever amounts, to be extended to nonresidents. Banks must also not finance in Singapore dollars, activities which have no bearing on Singapore, e.g. third country trade or activities outside Singapore.

C. The New Era: Notice 757

All restrictions on residents lifted; several restrictions on nonresidents also lifted.

6. The regime under Notice 621 continued to serve the Singapore economy through the most of the 1980s and 1990s, until the recent wave of liberalization was launched in August 1998, together with the extensive program of financial sector liberalization. Concluding a review of the noninternationalization policy as part of the review of measures to develop the financial sector, MAS stated;

We concluded that the basic policy remains sound. However, some judicious relaxation of specific restrictions would foster the development of capital markets with minimal incremental risks.

In accordance, MAS issued Notice 757, which substituted for Notice 621. The liberalizations associated with subsequent versions of Notice 757 were intended to relax restrictions against various financial transactions, which have become more important for Singapore’s effort to develop its capital markets.

7. Notice 757 of August 1998 relaxed the consultation requirement that was maintained in Notice 621. The consultation requirement was lifted for a broader set of S$ credit facilities to nonresidents, for which prior consultation with MAS was required under Notice 621. Moreover, Notice 757 fully liberalized the extension of S$ credit facilities to residents. The consultation requirement was also lifted for arranging equity listing and bond issues by nonresidents intended for economic activities in Singapore, and for transacting in several derivative products. Specifically, banks could now engage in the following activities without prior consultation with MAS.

  • Banks could extend S$ credit facilities to residents for any purposes, domestic or overseas.

  • Banks could extend S$ credit facilities to or arrange S$ equity listings or bond issues for nonbank nonresidents if the S$ proceeds are used for designated economic activities in Singapore. Hedging of currency or interest rates from these economic activities could also be arranged without consultation with MAS.

  • Banks could extend S$ credit facilities to nonbank nonresidents for financial investments—shares, bonds, deposits, and commercial properties in Singapore—up to S$5 million.

  • Banks could extend S$ credit facilities up to S$20 million to nonresidents, via repurchase agreements of Singapore Government Securities (SGS).

  • Banks could engage in a limited list of derivative transactions, including hedging that was allowed above, and transacting S$ interest rate futures with nonresidents.

8. However, banks were required to continue to consult MAS for activities not permitted above, including extension of S$ credit facilities for financial investments, where the amount would exceed S$5 million. In particular:

  • Banks must consult MAS before extending S$ credit facilities of any amount to nonresidents for use in overseas projects.

  • Banks must consult MAS before transacting with nonresidents financial derivatives that are not pre-authorized, including S$ currency options, S$ forward rate agreements, and interest rate swaps and options.

  • The S$ proceeds from credit facilities extended to nonresidents, including S$ proceeds from bond issues for all overseas projects must be converted or swapped into foreign currency for use outside Singapore.

9. Finally, the extension of S$ credit facilities for certain purposes was explicitly prohibited. This, however, does not imply a tightening of the restrictions against such transactions, which are likely to have been declined by MAS previously in response to the consultation required under Notice 621. Instead, Notice 757 can be viewed to have made explicit the policy stance on such transactions for the first time in the MAS Notice. Specifically, banks were prohibited from extending S$ credit facilities to nonresidents for speculating in the S$ currency and interest rate markets; financing third-country trades; financing acquisition of shares of companies not listed on the Stock Exchange or Central Limit Order Book; and financing any activities outside Singapore, except when approved by MAS.

10. Notice 757 was further liberalized in November 1999, to contribute to the development of Singapore’s capital markets (see Annex for details on the 1999 version of Notice 757). Banks were now allowed to engage in an expanded range of activities without prior consultation with MAS, including transactions in S$ interest rate products with other banks or finance companies; extension of S$ credit facilities of any amount to nonresidents via repos of SGS or other S$ bonds; arranging S$ equity listings for nonresidents companies as long as the S$ proceeds are converted into foreign currency before being used outside Singapore; and extension of S$ credit facilities to nonbank nonresidents up to S$5 million for any purposes. However, the S$ proceeds from credit facilities extended to nonresidents for overseas projects were required to be converted or swapped into foreign currency for use outside Singapore. The commitment to the noninternationalization policy was reiterated through the MAS press release in November 1999 when “… the Authority reaffirmed the basic thrust of our noninternationalization policy.”

D. Virtual Internationalization: Notice 757 in December 2000

Only measures to limit access to S$ for speculative activity remain.

11. The third and most extensive liberalization measures were announced in December 2000, which have eliminated most hurdles against nonresident access to S$ credit facilities for economic and financial transactions in Singapore. The following have been major amendments to the requirement for prior consultation with MAS.

  • Banks can lend S$ to nonresidents for investment purposes—financial assets and real estate—in Singapore.

  • Banks can extend S$ credit facilities exceeding S$5 million to nonresidents to fund offshore activities, as long as the S$ proceeds are swapped into foreign currency. In this instance, banks are not allowed to convert the S$ proceeds into foreign currency via the spot or forward market.

  • Banks can transact in S$ currency options with other banks and financial institutions in Singapore.

  • Banks can transact with nonresidents in a broad range of derivative products, including cross currency swaps and currency options for hedging purposes, S$ interest rate derivatives, and equity derivatives.

12. The current Notice 757 imposes virtually no binding restrictions on capital market activities, a verdict also reached by market participants. The cross country comparison also confirms the lightness of restrictions under Notice 757 (Table IV.1). The legacy of the noninternationalization policy now boils down to the prohibition of extending S$ credit facilities for speculative activities in the S$ currency market and restrictions against outflow of S$ accounts above S$5 million—the swap/conversion requirement. These measures are intended, in the words of MAS, “to limit borrowing of S$ by nonresidents for currency speculation, and to discourage the development of an offshore S$ market.” The latter objective, however, does not purport to suppress the offshore S$ market. While MAS would discourage a further development of the offshore S$ market, market participants and the authorities are unanimous in the view that there currently exists a fairly liquid offshore S$ market, which is deep enough to enable market participants to use S$ as a proxy for regional currencies.

E. Has the Policy Caused Major Distortions?

13. Despite several restrictions that were imposed to limit the offshore use of the Singapore dollar, evidence suggests that this has not impeded the growth of trade or capital mobility. Singapore has maintained open trade regime and has served as the regional base for entrepot trade: exports and imports each exceeded 150 percent of GDP in the 1980s and 1990s, with entrepot trade accounting for about a third of them.

14. Capital and financial accounts were also highly open since the removal of exchange restrictions in the late 1970s. The volume of international capital flows has been high, with gross flows averaging nearly 40–50 percent of GDP in the 1980s and 1990s, respectively (Figure IV.1). The flows of foreign direct investment (FDI) have been high from the early period, reflecting Singapore’s commitment to bring in multinational corporations for its economic development, and averaged about 10 percent of GDP in both decades. Portfolio flows were relatively moderate for both inflows and outflows, but outflows picked up in the 1990s, reflecting the large saving of Singaporeans that are invested overseas. The high volume of gross flows in other investment reflected the lively interaction between domestic banks and Asian Currency Units and other nonresidents.

Figure IV.1
Figure IV.1

Singapore: Capital Flows, 1980–1999

Citation: IMF Staff Country Reports 2001, 177; 10.5089/9781451834192.002.A001

Source: IMF, International Financial Statistics.

15. Various interest parity conditions held up during the 1990s before the Asian crisis, according to a recent study by MAS (2000), which provides price-based evidence of capital account openness. Not only did the covered interest parity condition hold, as is the case with most countries with well developed money and foreign exchange markets, but the uncovered interest parity condition also held during this period unlike most other countries. The parity conditions indicate that Singapore’s money market has been fully integrated with international markets.

16. Singapore’s integration with international financial markets has been made possible partly by the narrow scope of the restrictions that were in place to discourage the internationalization of the Singapore dollar. From the beginning, the restrictions have been imposed on selected asset-side transactions of the bank balance sheet, with no restrictions on the liability side. The major focus of the restrictions was to limit the offshore use and availability of the currency for speculative activities. Thus with few restrictions on depositing or withdrawing bona fide funds in the banking system, interest rate differentials could be arbitraged away quickly, as evident in the various parity conditions.

17. These restrictions alone, therefore, are unlikely to have been the single most important factor in protecting the Singapore dollar against the speculative attack. Indeed, a number of factors have contributed to discouraging speculation against the currency. Singapore has maintained very high levels of external reserves, averaging 80 percent of GDP in the 1990s. Policy management has been prudent on both fiscal and monetary side, and thus has enjoyed very high credibility. As a result, no substantial macroeconomic imbalances built up: studies of the equilibrium exchange rates show that there has been no substantial or sustained deviation between the actual and the equilibrium exchange rate measured in various ways. Montiel (1997) and Lee (1999) find, for different sample periods with the latter including the crisis period, that the real exchange rate of Singapore has been broadly in line with the equilibrium exchange rate based on macroeconomic fundamentals.

18. It thus appears fair to conclude that the absence of speculative attacks against the Singapore dollar was not so much due to these restrictions as due to sound economic fundamentals. Through the past two decades, the authorities have been committed to the policy of free trade and capital mobility, aside from consultation requirements for speculative transactions. With the domestic economy fully integrated with the international economy, the maintenance of both internal and external macroeconomic balance was critical to avoid sharp corrections. This discipline was well heeded by a prudent policy management. Against this background, there was little incentive to wage a speculative attack against the currency, or to circumvent the restrictions for speculative purposes.

19. Supportive evidence for this assessment can also be found in the comparison of the experience by Korea and Singapore during the Asian crisis (Ishii et al (2001)). At the dawn of the crisis, Korea maintained more extensive restrictions against the offshore use of the currency than Singapore. Nevertheless, Korea fell prey to speculative attack and its currency depreciated sharply initially, until market confidence and stability were restored following policy reforms and an agreement to extend external credit lines. In contrast, the speculative pressure against the Singapore dollar was much less significant, largely owing to Singapore’s strong economic fundamentals and the credibility of policy management.

20. Finally, it should also be noted that the authorities have remained vigilant to ensuing that the restriction did not become overly binding against the development of the economy. The most recent example has been the effort to further develop the domestic capital market. For example, Gobat (2000) noted the importance of allowing more short-sales of securities and access to domestic currency credit lines in deepening market liquidity. As the risk increased that restrictions would hamper the development of the domestic capital market, the authorities relaxed them in a preemptive manner, before the restrictions obstructed market activities and strengthened the incentives for circumvention. As the result, the remaining set of restrictions is regarded as nonbinding by the market, especially cast against the background of strong fundamentals.

F. Conclusion

21. The noninternationalization policy needs to be appraised from the perspective of overall macroeconomic policy framework of Singapore, which has been remarkable in maintaining the internal and external balance. As noted earlier, it is difficult to disentangle the effects of the measures to curb the international use of the Singapore dollar on insulating Singpaore from speculative attacks from the overall macroeconomic policy track record. The noninternationalization policy clearly has had a strong signalling effect in deterring potential speculative activity against the S$. However, without the strong and credible policy record, the noninternationalization policy is not likely to have been defensible for over two decades under the highly open regime for capital and financial accounts.

ANNEX: November 1999 version of Mas Notice 621

Banks were allowed to engage in the following activities without prior consultation with MAS.

  • Banks could extend S$ credit facilities or transact S$ interest rate products with other banks, merchant banks, finance companies or insurance companies in Singapore.

  • Banks could extend S$ credit facilities of any amount to nonresidents, via repurchase agreements of Singapore Government Securities (SGS) or S$ denominated bonds listed on the Stock Exchange of Singapore (SES).

  • Banks could extend S$ credit facilities to nonbank nonresidents up to the maximum of S$ 5 million.

  • Banks could arrange S$ bond issue for nonresidents if the proceeds are used for designated economic activities in Singapore.

  • Banks could arrange S$ equity listings for nonresidents, but have to ensure that the proceeds must be converted into foreign currency before drawdown if they are not to be used for designated economic activities in Singapore.

  • Banks could transact S$ derivatives with residents freely, and engage in an expanded range of derivative transactions with nonresidents, including option-related products with nonbank counterparties.

Banks were required to consult MAS for activities not permitted in the Notice, including the following activities in particular:

  • Banks must consult MAS before extending S$ credit facilities above S$ 5 million to nonresidents except for a few purposes expressly permitted in the Notice.

  • Banks must consult MAS before transacting S$ current options or option-related products with nonbank financial institutions, and before extending S$ credit facilities exceeding S$5 million to banks and other financial institutions outside Singapore.

  • Banks are not allowed to transact S$ currency options or option-related products with other banks.

The S$ proceeds from credit facilities extended to nonresidents for all overseas projects must be converted or swapped into foreign currency for use outside Singapore.

Table IV.1.

Major Regulations on the Offshore Use of Currencies in Selected Asian Countries1

(as of December 31, 2000)

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Based on Table 1 in Ishii et al (2001). The categories refer to the key element of restrictions, and do not reflect full details which can be found in the original table. The category “Restricted” often involves requirements of prior approval or consultation on selected transactions, and thus are more lightly regulated than the category “Approval” which require prior approval on a broad spectrum of transactions.

References

  • Gobat, Jeanne, 2000, “Singapore—Financial Sector Development: A Strategy of Controlled Deregulation,” Singapore—Selected Issues 00/83 (Washington: International Monetary Fund).

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  • Ishii, Shogo, Inci Otker-Robe, and Li Cui, 2001, “Measures to Limit the Offshore Use of Currencies: Pros and Cons,” Working Paper 01/43 (Washington: International Monetary Fund).

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    • Export Citation

  • Lee, Jaewoo, 1999, “Singapore: Competitiveness Issues,” Singapore-Selected Issues 99/53, (Washington: International Monetary Fund).

  • Monetary Authority of Singapore, 2000, “Financial Market Integration in Singapore: The Narrow and The Broad Views” (Singapore).

  • Montiel, Peter, 1997, “Exchange Rate Policy and Macroeconomic Management in ASEAN Countries,” Macroeconomic Issues Facing ASEAN Countries, Chapter 11 (Washington: International Monetary Fund).

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  • Ostry, Jonathan D., 1997, “Are Current Account Imbalances in ASEAN Countries a Problem?” Macroeconomic Issues Facing ASEAN Countries, Chapter 4 (Washington: International Monetary Fund).

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    • Export Citation

STATISTICAL APPENDIX

Table 1.

Singapore: Expenditure on Gross Domestic Product at 1990 Market Prices, 1996–2001

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Sources: CEIC database; and data provided by the Singapore authorities.