The paper first uses the production function to analyze the sources of past growth in Singapore and compares it with the experience of other Asian and industrialized economies. This study also provides some thoughts on how to boost medium-term growth prospects in Singapore, and assesses the growth slowdown of the past few years in Singapore reflecting cyclical versus structural factors. The assessment given in this paper suggests that there are returns to be had from investment in education and structural reforms.


The paper first uses the production function to analyze the sources of past growth in Singapore and compares it with the experience of other Asian and industrialized economies. This study also provides some thoughts on how to boost medium-term growth prospects in Singapore, and assesses the growth slowdown of the past few years in Singapore reflecting cyclical versus structural factors. The assessment given in this paper suggests that there are returns to be had from investment in education and structural reforms.

IV. Development of the Corporate Bond Market1

A. Introduction

1. This chapter examines the scope for Singapore to develop a more active corporate bond market. Development of the corporate bond market is one way to ensure the maintenance and expansion of Singapore’s role as a regional financial center. At present, further development of the market is constrained by Singapore’s small economic size at a time when large-scale mature financial markets provide increasing direct competition. A main conclusion is that development of the corporate bond market may require tapping into regional financial flows where the expertise of local asset managers can provide a measure of value added in valuing and investing in these securities.

2. The authorities have taken measures to encourage financial sector development. The objective is to expand employment in the financial sector at a time when lower value-added jobs in manufacturing are being lost to low-cost regional economies. These efforts are an application of the Economic Review Committee’s recommendations on ways to remake Singapore into a diversified, entrepreneurial, trading hub.

3. The potential for the bond market to provide financing for local small- and medium-sized companies in Singapore and the region has yet to be realized. Local banks have finished a cycle of debt write-off in Singapore, and may be reluctant to engage in unsecured term lending.2 At the same time, large financial institutions in Singapore that invest in securities prefer only the safest available names, those which they feel comfortable holding to maturity, in this highly illiquid market. They favor, for this reason, government securities and the bonds of government-linked companies.

4. A conclusion of this chapter is that there may be scope for policy measures to support regional underwriting of corporate debt in Singapore. This would both increase local underwriting activity and take advantage of local asset management expertise in evaluating regional business risks.

B. Characteristics of Singapore’s Financial Markets

5. Singapore is a major international financial center with traditional activity concentrated in banking. In international bank lending, Singaporean banks represented about 3 percent of total international bank assets at end-2002, compared with Hong Kong SAR (2.9 percent) and London (18.7 percent). The financial sector accounted for about 11 percent of GDP and 5 percent of total employment in 2002. The centerpiece of Singapore’s financial center has been the Asian Dollar Market (ADM), total assets of which were $486 billion at the end of 2002. But growth has been weak in the past few years because of the regional economic environment, and the reduced foreign operations of Japanese banks. Given the small size of the domestic economy, the bulk of commercial banking operations are conducted in the ADM and largely carried out by foreign banks with a limited domestic retail market presence.3

6. Traditional treasury and swap operations, linked to international banking, are well developed in Singapore. Foreign exchange trading and swap activity are highly developed and markets are deep, in part because the local financial system is largely derivative of the mature financial markets. Since monetary policy is implemented through intervention in the foreign exchange market based on a target band for trade-weighted exchange rate index, local interest rates are derived from those abroad through the swap market. A deep swap market allows investors and issuers to easily convert payment streams into alternative duration and currency compositions at low cost.

7. In the area of bond market development, policies have focused on developing the infrastructure for a viable corporate bond market. A liquid government debt market has been created, notwithstanding that the fiscal position has generally been in surplus, providing a key component for efficient setting of the price of corporate bonds, by establishing the riskfree rate at each duration. Having a liquid government debt market, and repurchase arrangements, permits hedging by bond market intermediaries and hence increases liquidity in corporate bonds.

C. Conditions for Bond Market Development

Sufficient Scale

8. Singapore faces particular difficulties in achieving sufficient scale to successfully establish a corporate bond market. Direct distribution of securities to investors through specialist underwriters works best when continuous large-scale financial flows reduce overhead costs. Accordingly, more efficient distribution will always be available for recognized credits in the mature market centers, limiting the scope for corporate bond markets in any secondary center, unless some specific regional advantage for locally issued bonds emerges. These disadvantages of scale may be less important in the asset management business, where the key structural role of underwriting desks is not a factor (see Section F).

9. The development of a corporate bond market may be beneficial for economic performance.4 When claims are broadly distributed, concentrated risk on the balance sheet of systemically important bank intermediaries is reduced. At the same time, the broad distribution of claims could facilitate market valuations that incorporate impartial judgments about debtors and early recognition of emerging credit difficulties. The broader range of corporate liabilities now available in mature markets, including bonds and securitized debt, and investors specialized in those assets, may have increased the likelihood that some financing means are always available, reducing systemic risks.

10. The advantages of fixed income finance are, however, only likely to be attained at substantial scale. Each individual borrower who relies on issuing fixed income instruments at infrequent intervals must manage his other cash needs in a more elaborate and detailed fashion than otherwise.5 At the same time, investors in fixed income markets, where a small possibility of a large loss is always present, typically require large and highly diversified portfolios to achieve stable statistical properties for their investments. Large professionally managed portfolios are for this reason typical in mature corporate bond markets. Lastly, liquidity and continuous pricing are often related to the frequency of new issues over a minimum size, which in turn depends on the size of aggregate borrowing in the market.

11. Empirical observation confirms the key role of scale in the development of bond markets. In cross-country comparisons, deeper fixed income markets (measured as higher capitalization to GDP ratios) tend to emerge in larger economies. Bond markets do, indeed, become more efficient and hence more attractive with increased scale. In a related finding, systems with stronger banking functions tend to have smaller bond markets.6 The presence of effective financial alternatives can apparently inhibit development of the scale required for effective bond market development.

Other Factors

12. Obstacles to a viable corporate bond market in Singapore include both general considerations of size as well as the specific features of local institutions. One adverse effect of small scale is the limited use of third-party credit ratings in Singapore. Credit ratings reduce costs for investors by facilitating a quick comparison of risk and pricing between companies. Third party risk assessments, however, depend upon stable audited statements, not generally available for smaller companies in Singapore or the region. They also depend on the willingness of borrowers to pay fees for a credit rating.

13. The strength of Singapore’s banking system may also limit the attractiveness of bond markets to issuers. Banks in Singapore are well regulated and hold ample capital and liquidity.7 Currently their main business problem is finding an outlet for deposit funding at a time of limited loan growth. Companies in Singapore with high creditworthiness find bank lending easily available at low cost with the observed result that growth in Singapore dollar bond activity has been relatively constrained. The recent mergers among Singaporean banks, however, could mean that once an expansion begins, the limit on individual bank lending at 25 percent of bank capital will begin to bind, encouraging borrowers to seek financing alternatives including bond issuance.

14. Remaining restrictions on the international use of Singapore dollars by foreign residents may be an indirect impediment to investors. Foreign debt issuers must convert their proceeds through the swap market when they transfer the funds abroad and financial institutions are to exercise vigilance to avoid lending to foreign financial institutions for speculative purposes. While not binding for most purposes, these restrictions might arguably dissuade some foreign issuers from using a market subject to constraints, although it has not stopped many foreign institutions from tapping the capital markets.

15. Weak growth in Singapore in recent years has reduced credit demand and inhibited the introduction of new financial instruments. This was not felt immediately in corporate bond issuance because a wave of mature market borrowers sought to sell bonds in every market available, including Singapore, to extend their financing and avoid rollover risk. A surge in bonds issued to finance local bank mergers up to 2001 was another reason for a temporary surge in activity, followed by a relative pause as underlying credit demand was restrained (Table IV.1). Issuance activity has since turned up with the economic recovery.

Table IV.1.

Corporate Bonds Issued and Outstanding in Singapore

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Sources: Monetary Authority of Singapore; Singapore Department of Statistics, Bureau of Economic Analysis, Lehman Brothers.

Singapore definitions included 60 percent of non-Singapore dollars and 35 percent of Singapore dollars new issues in 2002-01 under $50 million.

Lehman Singapore Credit Index, over US$300 million equivalent, over one-year maturity, issued in Singapore dollars.

Lehman Universal Aggregate, over one-yearmaturity and, including high yield, CMBS, matured Eurodollar issues, and emerging market debt.

D. Regional Credit

16. Regional credit demand, which could be an outlet for Singapore savings, has been limited by lingering adjustment to the Asian financial crisis. Borrowers in the region have continued to adjust to the financial risks they perceive by reducing leverage levels—that is selling equity and accumulating cash balances. The regional pattern is reflected in both high levels of national foreign exchange reserves and in the issuance by local companies of equity, the sale of outstanding equity to foreign investors, and an inflow of foreign capital into local banking systems.8 This regional pattern has left Singapore’s financial system to accumulate low-margin wholesale bank deposits in the mature markets.

17. The absence of regional bond markets is a prominent gap in the range of financial instruments available. The cost of equity finance for local companies could be reduced with long-term bond finance, and the returns of a properly managed portfolio of regional bonds should exceed those available in the G-3 government bill and money markets, where national reserves are now widely invested. Eventually, under official encouragement or otherwise, the advantages of fixed income investment in the region should attract participation.

18. As regional borrowers retrench, and in the absence of developed regional bond markets, Singapore’s outward capital flows—the counterpart of its current account surpluses—continue to be invested largely in mature markets. Nevertheless, alternative investment outlets are emerging. Government-linked companies have been seeking direct investment opportunities in the region, local banks have expanded into Malaysia, Indonesia and Hong Kong SAR in search of lending opportunities, and local equity markets have absorbed an increase in regional issues, particularly from China (Figure IV.1). With respect to the latter development, manufacturing companies in China have found investors in Singapore willing to offer a high market value for their business prospects, possibly reflecting local experience in assessing manufacturing stocks.

Figure IV.1.
Figure IV.1.

Equity Underwriting for Chinese Resident Businesses

(Number of new listings)

Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A004

Source: Singapore Exchange Limited

E. Activity in Singapore’s Corporate Bond Market

19. Under the structural and cyclical handicaps noted above, Singapore’s corporate bond market remains largely a market in waiting. Underwriting activity is low and bonds, once issued, tend to be held to maturity. Large-sized, long duration, issuance is less than the overall aggregates show. As a result, the liquidity, price discovery, and potential for portfolio shifts that would be available to investors in a fully developed bond market are not fully available. 9 Still, a level of issuance by foreign and Singaporean borrowers has taken place, although to a limited extent, which suggests that there is a potential for a more viable market when institutional and cyclical factors improve.

20. New bond issuance activity, particularly in U.S. dollars, has picked up after a pause. Issuing activity by foreign borrowers in foreign currency was restrained in 2002 by the last stages of distress in global credit markets. In 2003, however, issuance was nearly double the level of the year before, despite continued financial market uncertainties. Very large, liquid, issues as included in the Lehman bond index, however, remain relatively limited.

21. Low-risk issuers have dominated the bond market. Government-linked and commercial property companies have the credit recognition necessary for immediate acceptance by investors. Property companies borrowed 16 percent of the new issue amounts raised in Singapore dollars in 2002. International financial companies are also traditional bond issuers in Singapore; out of foreign issuers in Singapore dollars, 46 percent of issuance was for financial institutions. These borrowers typically issue in small size and short maturities to capture small opportunistic differences in funding costs—and these issues are commonly excluded from standard bond market indices elsewhere.10

22. A large and increasing share of underwriting has been linked to securitized debt. In 2002, 47 percent of all Singapore dollar bonds issued were the liabilities of special purpose vehicles, while fully 56 percent were structured (including asset backed securities, equity linked notes and other structured products). Among foreign currency bonds, 46 percent were structured obligations. High quality structured liabilities of well recognized financial entities are clearly acceptable to Singapore and other regional investors.

23. International underwriting activity for Singapore-based underwriters has recovered in 2003 and into early 2004 (Table IV.2). Regional issuers increased their borrowing, to a pace not seen since 2001.11 At the same time, credit differentiation, which is required for pricing and distribution of riskier issuers, rated BBB+ or lower, for example, is increasing. Earlier, issuance with Singapore underwriting participation was characterized by very high ratings or no ratings, and a high share of bank and financial company names, all of which are typical of an undifferentiating credit culture. Lastly, activity in financing vehicles, including special purpose vehicles, has increased compared with earlier years as the techniques for combining claims into new securitized claims are extended.

Table IV.2.

International Bond Issuance Linked to Underwriters in Singapore and Hong Kong SAR

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Source: Dealogic-International bonds underwritten or listed in Hong Kong SAR.

F. Singapore’s Asset Management Industry

24. An expanding asset management industry should provide a deeper pool of local buyers for new corporate bond issues and improve the attractiveness of local corporate bond underwriting. Recent initiatives to allocate funds to the local asset management industry have facilitated growth of the sector. Choices available to local investors in the deployment of their savings in the Central Provident Fund (CPF) have been increased. As well, $6 billion of CPF assets were placed directly with local asset managers.12 In response to these measures, several asset management firms set up and others expanded to offer alternative investments to Singaporean savers.

25. The Economic Review Committee has recommended measures to reduce cost of capital market services used by asset managers. Hedge funds may find costs reduced by the encouraged establishment of specialist international law firms, prime brokers, and administrators. Global trust operations may be made easier after trust and company legislation is reformed. Lastly, processing centers should find support in a cluster of Universal Processing Centers and supporting technology companies. The policy approach is one of lowering costs where possible through investment in infrastructure or legal changes for the benefit of the businesses involved.13

26. Recent increases in institutional funds under management in Singapore have been due to the transfer there of regional portfolios previously managed abroad. Nondiscretionary, mostly fixed-income fund rose by 36 percent in 2002 to $93 billion. The increase consisted of: new global mandates for investors, transfers of existing portfolios to Singapore for management there, and expansion of the management and advisory function on the pan-Asian portion of global mandates. Discretionary funds, which are mostly equity, were up 9 percent at $106 billion. Still, investment specialists working in Singapore remain predominantly equity experts as the relatively small amounts under management may have encouraged specialization in higher-return investment decisions.

27. Mutual funds available to individual local investors in the CPF have increased rapidly, but remain a small source of asset management funds. Collective investments available to CPF investors rose 47 percent to $6 billion in 2002, while other collective schemes were up 33 percent to $6 billion. The most popular retail products by far have been capital-protected funds that effectively promise an equity-related gain with limited loss, reflecting an aversion to equity risk after recent equity market volatility, but also an appetite for higher returns than are available in bank deposits.

28. While minimum effective scale is clearly far smaller in the asset management business than it is in the corporate bond business, larger scale will become increasingly important. Singapore asset managers may be subject over time to the same forces that are driving global money management toward larger size in order to spread the cost of proprietary research to replace traditional broker-provided research. An alternative to larger size is to adopt a low-overhead route with indexed products, which replicate average market behavior at relatively low portfolio size. Singapore’s effort to foster a local asset management business has resulted in a large number of start-up managers that are small and may be subject to a round of consolidation, although the amounts under management should continue to climb.

G. Conclusion

29. This paper has discussed recent developments in Singapore’s corporate bond market and factors that have limited its growth. Economies of scale play a great role in reducing corporate bond issuance costs, and the absence of scale may pose an obstacle to development of a deep and liquid market in the aftermath of a recession that has depressed financial activity. But in this situation Singapore has two advantages: a growing asset management business and its presence in a region that is under-served by corporate bonds.

Table IV.3.

Asset Management in Singapore

(In billions of U.S. dollars)

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Source: Monetary Authority of Singapore “2002 Survey of the Singapore Asset Management Industry.”

Share of total assets in 1998; share of discretionary assets in other years.

30. Asset managers may be in a position to evaluate new forms of regional asset-backed credit, adding to the value of local bond issuance. Small and medium companies in the region may not now be well served, particularly in their trade receivable financing, but also in their long-term investment financing needs not met by banks.14 Derivative products may allow transformation of these claims into U.S. dollar fixed income claims. Structured investment vehicles that accumulate claims on small companies into statistically stable portfolios may allow rating agencies to develop reliable classifications of the obligations.

31. Policymakers could consider various initiatives to facilitate regional private sector credit securitization. One such initiative would be to establish an institution to absorb a partial credit loss, over a set level, on securities issued by smaller regional borrowers. Such an institution, which should charge fees sufficient to fully cover expected costs, could reduce the high initial commercial uncertainty faced by underwriters and investors that seek to assemble a combination of credits into securitized credit bonds. The setting of the loss level and fee structure would need to be considered carefully in order to avoid the potential for moral hazard.

32. In case a shortage of demand for local securities proves to be the greater obstacle, policies to encourage investment by publicly managed funds may be considered. For example, aligning guaranteed rates of return at the CPF with market rates— the CPF now guarantees an interest rate of 2.5 percent for the Ordinary Account and 4.0 percent for the Special Account—could encourage members to invest in corporate securities, directly or in unit trusts.15 Another, related, demand-increasing measure could be to allow the CPF to replace some nonmarketable government securities with high-quality long-term corporate bonds.


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Prepared by Lars Pedersen (ext. 36774).


Classified loans (current loans that exhibit definable weaknesses in addition to nonperforming loans) fell from 8.5 percent of total loans in 1999 to 5.3 percent in September 2003 as banks absorbed these losses.


See Financial System Stability Assessment (FSSA) for a more detailed description.


See International Capital Markets (2003) for a general statement, Alan Greenspan’s (2004) speech for an application in the ability of mature markets to absorb a large loss in value, and Hakansson (1999) for an argument that corporate bonds increase the responsiveness, flexibility and safety of a financial system.


See Table 2 of FSSA.


See Chapter V, Section B of FSSA for a more detailed description.


Singapore-linked international bond issues are those in which Singapore-registered underwriters participated or that are registered in Singapore. The international bonds involved are sold in foreign currency or otherwise designed for offshore investors.


Over three years starting in 1999.


See Chapter V, Section B of FSSA.

Singapore: Selected Issues
Author: International Monetary Fund