REGULATIONS AND INCENTIVES

The Asian currency market was instituted in 1968 when Singapore authorities licensed a branch of the Bank of America to set up a special international department to handle transactions of nonresidents.¹ Regulations governing such transactions² that were issued by the authorities were intended to stimulate further entries in the offshore banking. To separate transactions with nonresidents from local and foreign business conducted for residents of Singapore, all banks that were granted licenses were required to set up a special accounting unit for nonresident transactions, named the Asian currency unit (ACU).³

The authorities exempted ACU transactions from exchange controls⁴ and provided a number of fiscal and banking incentives. The most important of these incentives was the abolition in 1968 of the 10 per cent withholding tax on interest income from nonresident foreign currency⁵ deposits. In the following years, several stamp and estate duties on negotiable paper in foreign currencies and a tax on income from Asian currency bonds were also abolished. In 1972 the Monetary Authority of Singapore abolished the 20 per cent minimum reserve requirements against deposit liabilities in foreign currencies that the banks operating ACU accounts had hitherto been required to hold. The measure was particularly important, since it permitted an increase in earnings from offshore credit. In 1973 the corporate tax on net income from offshore lending and other offshore activities was reduced from 40 per cent to 10 per cent.

Singapore’s offshore operations are regulated by the Monetary Authority of Singapore, which also regulates the country’s banking system and administers its exchange controls. The Monetary Authority has been very conscious of the requirement for quality in the operations of this newly developed financial market and has been very selective in granting ACU licenses. The Banking Act of 1970 has permitted foreign commercial banks to set up branches, rather than subsidiaries, so that the risk of insolvency has been passed on to the banks’ head offices. Furthermore, in applying for licenses to operate ACU accounts, the head offices have had to provide the Authority with an undertaking to make up for any shortfall in liquidity suffered by their ACU branches in Singapore.

The general aim of the Monetary Authority has been to limit access to the Asian currency market to well-established foreign and domestic banks of medium to large size.⁶ A further aim of the Authority has been to protect Singapore from an excessive opening of banks operating in the domestic money market, which could crowd out small purely local banks operating on a modest capital base. Since the creation of the Asian currency market, licenses for an entire range of domestic and foreign banking operations have not been granted to foreign banks. Only 13 foreign commercial banks that were established prior to 1970 were fully licensed.⁷ Between 1971 and 1973, only “restricted licenses” were given to new entrants authorizing them to practice a full range of ACU operations, but limiting them in their operation in the local money market. The foreign banks with restricted licenses cannot operate more than one branch in Singapore, cannot offer residents savings account services, and cannot accept from residents deposits of less than S$250,000; but they can grant local currency loans to residents without restrictions. Since 1973 only “offshore banking licenses” have been granted to foreign banks. These banks are permitted to receive local funds only through the interbank market, and the deposits they can accept cannot be less than S$250,000. Their local lending is also restricted; they can grant residents only medium-term to long-term loans, the minimum amount being S$l million. Furthermore, their local lending is subject to the approval of the Monetary Authority. Therefore, the policy of the Monetary Authority has been to progressively limit new foreign banks to those areas of local business in which their operations are complementary to, rather than competitive with, the operations of the local and fully licensed banks.

Another category of foreign banks operating in the Asian currency market are merchant banks. Although they are not regulated by the Banking Act,⁸ these banks are subject to the supervision of the Monetary Authority. Merchant banks derive their earnings from financing various commercial and industrial activities, and from operating as underwriters, corporate advisors, and investment managers. Their access to local funds is limited to deposits from commercial banks and finance companies. Those merchant banks that are licensed to operate in the Asian currency market are particularly active in loan syndication, and in the flotation of Asian bonds and other international bonds.

Initially the exchange control regulations did not permit participation of residents in the Asian currency market. However, these restrictions have been substantially relaxed over the years. Residents have been permitted to borrow foreign currencies from the ACU banks for export finance and for other export-related transactions. Individual residents and corporations are permitted to hold limited foreign currency deposits on the ACU account.⁹ Insurance companies, pension funds, and provident societies are permitted to hold up to 10 per cent of their assets on that account.

In evaluating the participation of Singapore residents in the Asian currency market, one should take into consideration peculiarities of the exchange control regulations. While payments and capital transfers between Singapore residents and countries other than those belonging to the post-World War II sterling area have been subject to exchange controls, payments and transfers between residents and postwar sterling area countries have not been subject to controls. Under such conditions, a lively triangular arbitrage has been established between Singapore and international capital markets via Hong Kong, which has no exchange controls on payments and capital transfers. This large loop-hole in Singapore’s exchange control system made a natural candidate of Hong Kong for financial intermediation between Singapore and the countries outside the sterling area. However, since Hong Kong has a withholding tax of 15 per cent on interest income from nonresident transactions in foreign currencies, with an elimination of such a tax on transactions by the ACU banks in Singapore, this intermediation has been switched to the Asian currency market, but the ease with which residents can bypass exchange controls on non-sterling area currencies has also increased.

Another difference between Singapore and Hong Kong in the fiscal treatment of foreign banks’ offshore transactions involves net income from foreign currency lending abroad, which includes syndication and other similar ventures. While there is no tax on such income in Hong Kong, in Singapore the tax rate was 40 per cent prior to August 1973 and has been 10 per cent since then. It is, therefore, in the interest of foreign banks having branches in both financial centers to maximize earnings from deposits in Singapore and earnings from offshore lending in Hong Kong.

MARKET ACTIVITY

The incentives provided by the Government of Singapore permitted a vigorous expansion of foreign currency transactions in this relatively small capital market (Table 1). The number of banks participating in the market grew from 11 at the end 1969 to 69 by the end of 1976;¹⁰ the size of the market grew from US$123 million to US$17 billion,¹¹ which amounted to an average annual growth rate of 75 per cent, two and a half times the average growth rate of the Eurocurrency market. However, following the difficulties of some Eurocurrency banks in 1974 and the recession in 1975, the increased caution in granting credit has caused a significant deceleration of the Asian currency market growth.

In the period 1968 to 1970, when credit conditions in the United States were quite tight and U.S. banks were borrowing Eurodollars heavily, the activity of banks operating in the Asian currency market consisted of gathering dollar deposits and placing them in London and Tokyo. As a result of these operations, deposits of the nonbank sector exceeded two thirds of ACU banks’ total liabilities (Table 1), while loans to the nonbank sector were less than 5 per cent of total assets. Since the second half of 1970, with an easing of the credit tightness in the United States and in international capital markets, and with new banks entering the Asian currency market, interbank transactions have become by far the most important activity. Although deposits of the nonbanking sector grew substantially in size, their proportion of the ACU banks’ total liabilities fell to 15-18 per cent. Loans to the nonbank sector, however, increased faster than the total assets of the banks, reflecting the opening up of business opportunities in the region. Since 1973 the ratio of interbank transactions to total transactions in the Asian currency market has become roughly similar to the ratio in the Eurocurrency market. Singapore has become the most important international clearing market for interbank transactions of a large network of banks in south and east Asia and a major source of funds in the region for business investments and government borrowing.

Table 1.

Asian Currency Market: Number of ACU Banks and Their Assets AND Liabilities, December 1968-December 1976

(In millions of U.S. dollars)

Sources: Monetary Authority of Singapore and its Quarterly Bulletin, various issues.

¹Total assets and liabilities include those of Singapore residents; therefore, as accounting identities, they are necessarily equal.

Table 1.

Asian Currency Market: Number of ACU Banks and Their Assets AND Liabilities, December 1968-December 1976

(In millions of U.S. dollars)

			Assets			Total Assets/Liabilities1	Liabilities
Date		No. of ACU banks	Loans to nonbanks	Interbank funds	Other		Deposits of nonbanks	Interbank deposits	Other
1968	Dec.	1	1	29	—	30	18	13	—
1969	Dec.	11	1	120	2	123	98	24	1
1970	Dec.	16	14	370	6	390	244	141	5
1971	Dec.	21	189	851	23	1,063	238	811	14
1972	Dec.	24	601	2,331	44	2,976	399	2,550	27
1973	June		734	3,034	59	3,827	520	3,274	34
	Dec.	46	1,214	4,962	101	6,277	913	5,249	115
1974	June		1,899	6,052	161	8,112	1,324	6,647	141
	Dec.	56	2,629	7,528	200	10,357	1,614	8,531	212
1975	June	61	3,246	7,586	184	11,016	1,764	9,036	216
	Dec.		3,303	9,098	196	12,597	2,068	10,294	235
1976	June		3,845	10,643	203	14,690	2,109	12,363	218
	Dec.	69	4,060	12,939	354	17,354	1,960	15,067	327

Sources: Monetary Authority of Singapore and its Quarterly Bulletin, various issues.

¹Total assets and liabilities include those of Singapore residents; therefore, as accounting identities, they are necessarily equal.

View Table

Table 1.

Asian Currency Market: Number of ACU Banks and Their Assets AND Liabilities, December 1968-December 1976

(In millions of U.S. dollars)

			Assets			Total Assets/Liabilities1	Liabilities
Date		No. of ACU banks	Loans to nonbanks	Interbank funds	Other		Deposits of nonbanks	Interbank deposits	Other
1968	Dec.	1	1	29	—	30	18	13	—
1969	Dec.	11	1	120	2	123	98	24	1
1970	Dec.	16	14	370	6	390	244	141	5
1971	Dec.	21	189	851	23	1,063	238	811	14
1972	Dec.	24	601	2,331	44	2,976	399	2,550	27
1973	June		734	3,034	59	3,827	520	3,274	34
	Dec.	46	1,214	4,962	101	6,277	913	5,249	115
1974	June		1,899	6,052	161	8,112	1,324	6,647	141
	Dec.	56	2,629	7,528	200	10,357	1,614	8,531	212
1975	June	61	3,246	7,586	184	11,016	1,764	9,036	216
	Dec.		3,303	9,098	196	12,597	2,068	10,294	235
1976	June		3,845	10,643	203	14,690	2,109	12,363	218
	Dec.	69	4,060	12,939	354	17,354	1,960	15,067	327

Sources: Monetary Authority of Singapore and its Quarterly Bulletin, various issues.

¹Total assets and liabilities include those of Singapore residents; therefore, as accounting identities, they are necessarily equal.

In addition to the commercial banks, suppliers of funds to the Asian currency market are nonbank companies, central banks, some government organizations, and individuals residing outside Singapore. Among the nonbank companies the most important are multinational corporations and major enterprises in the Asian region. Prior to the 1974 liberalization of U.S. constraints on direct investment flows, U.S. multinational corporations with branches in Asia were bypassing controls by using “swap arrangements” with banks in the Asian currency market.¹² Corporations would make short-term deposits with ACU banks; in turn, these deposits would be borrowed by branches in the Asian region. Since 1974, the multinational and regional companies have continued to place their working capital and other liquid assets in the market. Deposits by central banks are not very large; with the accumulation of surplus funds in the Middle East, deposits by government statutory bodies and semigovernmental institutions from that region have become fairly large. Among nonresident individuals, deposits by members of the Chinese community are also significant.

The borrowers other than banks are prime name enterprises in the region, such as large regional and national companies and some smaller enterprises with first-class standing. More recently, governments and government agencies have also appeared as important users of Asian currency funds. Multinational corporations, on the other hand, have a preference for local currency financing of their medium-term needs, which minimizes the exchange rate risk; their borrowing on the Asian currency market has been mostly short term, for working capital needs.¹³

Singapore banks appear to be more selective than the Eurocurrency banks in granting credit. Such caution is in part germane to a higher risk of lending to government and enterprises in less developed countries; in part, this caution reflects the policy of head offices that have provided an explicit guaranty of solvency and liquidity of their ACU branches. Also, this caution reflects at least in part a fairly close supervision of ACU banks by the Monetary Authority. Credit is granted preferably to borrowers in the countries with convertible currencies; for a borrower residing in a country that practices exchange controls, special approval from his authorities is needed to certify that he will be able to obtain the foreign exchange necessary for meeting his repayment obligations.

Geographical breakdown of sources and uses of funds in the Asian currency market distinguish three major regional groupings (Table 2): Asia, including Australia; Europe; and others, including the United States, the Middle East, and Latin America. The Asian region used to supply about 50 per cent of deposits in the market. With an increased flow of funds from the Middle East in recent years, this percentage has fallen somewhat. Lending to the Asian region by ACU banks, however, has always exceeded 80 per cent of total lending, with borrowers situated in Indonesia, Hong Kong, Malaysia, the Philippines, the Republic of China, Korea, and Thailand. Developed countries in the region have also borrowed in the Asian currency market; however, they have preferred to float Eurobonds at fixed interest rates, compared with syndicated loans from the banks at floating interest rates.

Thus, throughout the operation of the Asian currency market, the Asian region has been a net user of funds, while Europe and the rest of the world have been net sources. In June 1976, net claims by ACU banks on the Asian region exceeded US$5 billion. Therefore the market has efficiently fulfilled its role as an intermediary, channeling the funds from major capital markets into a large number of developing countries in Asia.

CURRENCY USED AND TERM STRUCTURE OF LOANS

The U.S. dollar is by far the most important currency used in the market. Since the early years, about 85-90 per cent of ACU banks’ assets and liabilities have been denominated in U.S. dollars, which reflects the importance of the dollar in the Asian region as a vehicle currency for trade and financial transactions. The dependence on the U.S. dollar also reflects the competitive edge that U.S. banks have in the region, because of their extensive network of branches in Asia. According to tentative estimates provided by a bank in Singapore, 46 per cent of total syndicated credit in 1975 was arranged and taken up by U.S. banks.¹⁴ The dependence on the dollar has increased with the generalized floating of major currencies. Since 1972, 92-95 per cent of assets and liabilities has been denominated in U.S. dollars.¹⁵

Table 2.

Asian Currency Market: Geographical Distribution of External Liabilities AND Claims of ACU Banks in Foreign Currencies, June 1971-JUNE 1976

(In millions of U.S. dollars)

Sources: Monetary Authority of Singapore and its Quarterly Bulletin, various issues.

¹Includes Australia.

Table 2.

Asian Currency Market: Geographical Distribution of External Liabilities AND Claims of ACU Banks in Foreign Currencies, June 1971-JUNE 1976

(In millions of U.S. dollars)

		Liabilities (Sources of Funds)			Total Liabilities/Claims	Claims (Uses of Funds)			Net Uses of Funds
Date		Asia1	Europe	All other		Asia1	Europe	All other	Asia1	Europe	All other
1971	June	448	256	37	741	606	86	49	158	-170	12
	Dec.	516	454	93	1,063	916	102	44	400	-352	-49
1972	June	759	613	247	1,619	1,358	118	143	599	-495	-104
	Dec.	1,445	1,318	213	2,976	2,411	310	255	966	-1,008	42
1973	June	2,126	1,483	218	3,827	2,963	549	315	837	-934	97
	Dec.	3,673	2,083	521	6,277	4,784	1,072	421	1,111	-1,011	-100
1974	June	4,502	2,769	841	8,112	5,976	1,339	797	1,474	-1,430	-44
	Dec.	5,460	3,709	1,188	10,357	8,203	1,171	983	2,743	-2,538	-205
1975	June	5,115	4,522	1,379	11,016	8,764	1,168	1,084	3,649	-3,354	-295
	Dec.	6,114	4,708	1,775	12,597	10,163	1,439	995	4,049	-3,269	-780
1976	June	6,706	6,021	1,963	14,690	11,910	1,543	1,237	5,204	-4,478	-726

Sources: Monetary Authority of Singapore and its Quarterly Bulletin, various issues.

¹Includes Australia.

View Table

Table 2.

Asian Currency Market: Geographical Distribution of External Liabilities AND Claims of ACU Banks in Foreign Currencies, June 1971-JUNE 1976

(In millions of U.S. dollars)

		Liabilities (Sources of Funds)			Total Liabilities/Claims	Claims (Uses of Funds)			Net Uses of Funds
Date		Asia1	Europe	All other		Asia1	Europe	All other	Asia1	Europe	All other
1971	June	448	256	37	741	606	86	49	158	-170	12
	Dec.	516	454	93	1,063	916	102	44	400	-352	-49
1972	June	759	613	247	1,619	1,358	118	143	599	-495	-104
	Dec.	1,445	1,318	213	2,976	2,411	310	255	966	-1,008	42
1973	June	2,126	1,483	218	3,827	2,963	549	315	837	-934	97
	Dec.	3,673	2,083	521	6,277	4,784	1,072	421	1,111	-1,011	-100
1974	June	4,502	2,769	841	8,112	5,976	1,339	797	1,474	-1,430	-44
	Dec.	5,460	3,709	1,188	10,357	8,203	1,171	983	2,743	-2,538	-205
1975	June	5,115	4,522	1,379	11,016	8,764	1,168	1,084	3,649	-3,354	-295
	Dec.	6,114	4,708	1,775	12,597	10,163	1,439	995	4,049	-3,269	-780
1976	June	6,706	6,021	1,963	14,690	11,910	1,543	1,237	5,204	-4,478	-726

Sources: Monetary Authority of Singapore and its Quarterly Bulletin, various issues.

¹Includes Australia.

Deposit and loan facilities offered in the Asian currency market are similar to those offered in the Eurocurrency market.¹⁶ Deposits accepted are (a) sight; (b) two-day to seven-day notice, generally limited to US$100,000 or higher; and (c) deposits with fixed-term maturities of up to five years. Contrary to the practice of the Eurocurrency banks, the banks in Singapore accept small fixed-term and time deposits, the amounts sometimes being as low as US$5,000.

Loan facilities offered are (a) short-term, including overnight; (b) fixed-interest rate loans for various maturities that in recent years have often exceeded one year; (c) lines of credit for commercial transactions, for a fixed term but subject to a rollover; and (d) floating interest rate credits for some loans exceeding three years on which the interest rate, based on the interbank offer rate plus a margin, is adjusted every 3 to 6 months.

As in the Eurocurrency market, the increase in oil prices in 1974 has resulted in a radical modification of the maturity structure of ACU banks’ deposits and loans. It can be seen from Table 3 that ACU banks carefully matched the maturities of their claims and liabilities prior to 1974. This was largely so because unlike in a domestic monetary system credit creation is slight and leakages are substantial in international capital transactions in which ACU banks are operating. Furthermore, the large majority of ACU banks’ sight and short-term deposits is drawn from other banks. Prior to 1974, the largest amount of claims and liabilities was concentrated in the range between 3 and 12 months. Small net liabilities in the range of eight days to one year were used to finance net claims in the range exceeding one year. However, transactions with terms exceeding one year were an exception rather than a rule.

Table 3.

ACU Banks: Maturities of Claims and Liabilities and the Net Position, December 1970-December 1976¹

(In millions of U.S. dollars)

Sources: Monetary Authority of Singapore and its Quarterly Bulletin, various issues.

¹Maturity classification was by original maturity through the first quarter of 1976; thereafter, by outstanding period to maturity.

Until the second quarter of 1976, total assets included only balances and fixed deposits with banks, and loans and advances to banks and nonbanks. Foreign notes and coins, Treasury bills, public securities and other securities, fixed assets, and all other assets held by ACUs were excluded. Total liabilities included only balances held for banks, fixed deposits from banks, and amounts borrowed from banks and other creditors. All other liabilities were excluded. From the second quarter of 1976, all assets and liabilities are included.

²Outstanding maturities of more than three years are as follows:

1976 June				1976 September				1976 December
	Net position	1,794			Net position	2,018			Net position	2,020
	Claims	2,025	14		Claims	2,260	14		Claims	2,347	14
	Liabilities	231	2		Liabilities	242	2		Liabilities	327	2

View Table

1976 June				1976 September				1976 December
	Net position	1,794			Net position	2,018			Net position	2,020
	Claims	2,025	14		Claims	2,260	14		Claims	2,347	14
	Liabilities	231	2		Liabilities	242	2		Liabilities	327	2

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Table 3.

ACU Banks: Maturities of Claims and Liabilities and the Net Position, December 1970-December 1976¹

(In millions of U.S. dollars)

		Sight to 7 days	Per cent of total	8 days to 3 months	Per cent of total	Total, sight to 3 months	Per cent of total	Over 3 months to 12 months	Per cent of total	More than 1 year	Per cent of total	Sum total
		(1)		(2)		(3)		(4)		(5)		(6)
						(1+2)						(3+4+5)
1970 December
	Net position	168		-161		7		-8		2
	Claims	198	51	77	20	275	71	106	28	4	1	385
	Liabilities	30	8	238	62	268	70	114	29	2	1	384
1971 December
	Net position	112		-13		99		-180		72
	Claims	165	16	361	20	526	36	416	40	98	9	1,040
	Liabilities	53	5	374	36	427	41	596	57	26	2	1,049
1972 December
	Net position	78		-185		-107		-43		132
	Claims	374	13	1,072	35	1,446	48	1,234	42	251	9	2,931
	Liabilities	296	10	1,257	43	1,553	53	1,277	43	119	4	2,949
1973 June
	Net position	18		-139		-121		-3		100
	Claims	445	12	1,254	33	1,699	45	1,850	49	221	6	3,770
	Liabilities	427	11	1,393	37	1,820	47	1,853	49	121	3	3,794
1973 December
	Net position	66		-268		-202		112		75
	Claims	663	11	2,120	34	2,783	45	3,096	50	298	5	6,177
	Liabilities	597	10	2,388	39	2,985	49	2,984	48	223	4	6,192
1974 June
	Net position	-170		-254		-424		219		173
	Claims	586	7	2,685	34	3,271	41	4,237	53	461	6	7,969
	Liabilities	756	10	2,939	37	3,695	47	4,018	50	288	4	8,001
1974 December
	Net position	-571		-70		-641		61		566
	Claims	1,032	10	3,795	37	4,827	47	4,546	45	784	7	10,157
	Liabilities	1,603	16	3,865	38	5,468	54	4,485	44	218	2	10,171
1975 June
	Net position	-566		-502		-1,068		-48		1,144
	Claims	787	7	3,722	34	4,509	42	4,924	45	1,400	13	10,833
	Liabilities	1,353	12	4,224	39	5,577	52	4,972	46	256	2	10,805
1975 December
	Net position	-914		-425		-1,339		-214		1,568
	Claims	942	8	4,736	38	5,678	46	4,873	39	1,850	15	12,401
	Liabilities	1,856	15	5,161	42	7,017	57	5,087	41	282	2	12,386
1976 June
	Net position	-1,468		-621		-2,089		12		2,0682
	Claims	1,799	12	7,029	48	8,828	60	3,462	24	2,3912	16	14,681
	Liabilities	3,267	22	7,650	52	10,917	74	3,450	23	3232	2	14,690
1976 September
	Net position	-1,207		-1,397		-2,604		267		2,3382
	Claims	2,369	15	7,381	46	9,750	61	3,430	22	2,6942	17	15,874
	Liabilities	3,576	22	8,778	55	12,354	78	3,163	20	3562	2	15,873
1976 December
	Net position	—		—		-2,562		260		2,3022
	Claims					10,829	62	3,624	21	2,9012	17	17,354
	Liabilities	—		—		13,391	77	3,364	19	599 2	3	17,354

Sources: Monetary Authority of Singapore and its Quarterly Bulletin, various issues.

¹Maturity classification was by original maturity through the first quarter of 1976; thereafter, by outstanding period to maturity.

Until the second quarter of 1976, total assets included only balances and fixed deposits with banks, and loans and advances to banks and nonbanks. Foreign notes and coins, Treasury bills, public securities and other securities, fixed assets, and all other assets held by ACUs were excluded. Total liabilities included only balances held for banks, fixed deposits from banks, and amounts borrowed from banks and other creditors. All other liabilities were excluded. From the second quarter of 1976, all assets and liabilities are included.

²Outstanding maturities of more than three years are as follows:

1976 June				1976 September				1976 December
	Net position	1,794			Net position	2,018			Net position	2,020
	Claims	2,025	14		Claims	2,260	14		Claims	2,347	14
	Liabilities	231	2		Liabilities	242	2		Liabilities	327	2

View Table

Table 3.

ACU Banks: Maturities of Claims and Liabilities and the Net Position, December 1970-December 1976¹

(In millions of U.S. dollars)

		Sight to 7 days	Per cent of total	8 days to 3 months	Per cent of total	Total, sight to 3 months	Per cent of total	Over 3 months to 12 months	Per cent of total	More than 1 year	Per cent of total	Sum total
		(1)		(2)		(3)		(4)		(5)		(6)
						(1+2)						(3+4+5)
1970 December
	Net position	168		-161		7		-8		2
	Claims	198	51	77	20	275	71	106	28	4	1	385
	Liabilities	30	8	238	62	268	70	114	29	2	1	384
1971 December
	Net position	112		-13		99		-180		72
	Claims	165	16	361	20	526	36	416	40	98	9	1,040
	Liabilities	53	5	374	36	427	41	596	57	26	2	1,049
1972 December
	Net position	78		-185		-107		-43		132
	Claims	374	13	1,072	35	1,446	48	1,234	42	251	9	2,931
	Liabilities	296	10	1,257	43	1,553	53	1,277	43	119	4	2,949
1973 June
	Net position	18		-139		-121		-3		100
	Claims	445	12	1,254	33	1,699	45	1,850	49	221	6	3,770
	Liabilities	427	11	1,393	37	1,820	47	1,853	49	121	3	3,794
1973 December
	Net position	66		-268		-202		112		75
	Claims	663	11	2,120	34	2,783	45	3,096	50	298	5	6,177
	Liabilities	597	10	2,388	39	2,985	49	2,984	48	223	4	6,192
1974 June
	Net position	-170		-254		-424		219		173
	Claims	586	7	2,685	34	3,271	41	4,237	53	461	6	7,969
	Liabilities	756	10	2,939	37	3,695	47	4,018	50	288	4	8,001
1974 December
	Net position	-571		-70		-641		61		566
	Claims	1,032	10	3,795	37	4,827	47	4,546	45	784	7	10,157
	Liabilities	1,603	16	3,865	38	5,468	54	4,485	44	218	2	10,171
1975 June
	Net position	-566		-502		-1,068		-48		1,144
	Claims	787	7	3,722	34	4,509	42	4,924	45	1,400	13	10,833
	Liabilities	1,353	12	4,224	39	5,577	52	4,972	46	256	2	10,805
1975 December
	Net position	-914		-425		-1,339		-214		1,568
	Claims	942	8	4,736	38	5,678	46	4,873	39	1,850	15	12,401
	Liabilities	1,856	15	5,161	42	7,017	57	5,087	41	282	2	12,386
1976 June
	Net position	-1,468		-621		-2,089		12		2,0682
	Claims	1,799	12	7,029	48	8,828	60	3,462	24	2,3912	16	14,681
	Liabilities	3,267	22	7,650	52	10,917	74	3,450	23	3232	2	14,690
1976 September
	Net position	-1,207		-1,397		-2,604		267		2,3382
	Claims	2,369	15	7,381	46	9,750	61	3,430	22	2,6942	17	15,874
	Liabilities	3,576	22	8,778	55	12,354	78	3,163	20	3562	2	15,873
1976 December
	Net position	—		—		-2,562		260		2,3022
	Claims					10,829	62	3,624	21	2,9012	17	17,354
	Liabilities	—		—		13,391	77	3,364	19	599 2	3	17,354

Sources: Monetary Authority of Singapore and its Quarterly Bulletin, various issues.

¹Maturity classification was by original maturity through the first quarter of 1976; thereafter, by outstanding period to maturity.

Until the second quarter of 1976, total assets included only balances and fixed deposits with banks, and loans and advances to banks and nonbanks. Foreign notes and coins, Treasury bills, public securities and other securities, fixed assets, and all other assets held by ACUs were excluded. Total liabilities included only balances held for banks, fixed deposits from banks, and amounts borrowed from banks and other creditors. All other liabilities were excluded. From the second quarter of 1976, all assets and liabilities are included.

²Outstanding maturities of more than three years are as follows:

1976 June				1976 September				1976 December
	Net position	1,794			Net position	2,018			Net position	2,020
	Claims	2,025	14		Claims	2,260	14		Claims	2,347	14
	Liabilities	231	2		Liabilities	242	2		Liabilities	327	2

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1976 June				1976 September				1976 December
	Net position	1,794			Net position	2,018			Net position	2,020
	Claims	2,025	14		Claims	2,260	14		Claims	2,347	14
	Liabilities	231	2		Liabilities	242	2		Liabilities	327	2

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Since 1974, banks of the Asian currency market have participated in the activity of major financial centers to recycle surplus funds of the oil producing countries. The activity resulted in important modifications of the maturity structure of ACU banks’ assets and liabilities. The preference of the OPEC countries for very short-term deposits was reflected in substantial increases in banks’ liabilities with maturities of three months or less between 1973 and 1976.¹⁷ On the other hand, a very large increase in demand for medium-term to long-term loans has been reflected in a manifold increase of claims with maturities exceeding one year. ACU banks showed a remarkable flexibility in adjusting to changes in the maturity structure of their assets and liabilities, despite the fact that these changes occurred in a period of unprecedented strains on the international payments system. As in the Eurocurrency market, the techniques used included: (a) loan syndication to spread default risk; (b) rollover clauses on short-term deposits to minimize withdrawal risk; (c) stand-by lines of credit with other banks to buffet the effect of possible liquidity difficulties; and (d) floating interest rates on long-term loans to minimize the probability that deposit rate fluctuation may make them unprofitable. The revival of the Asian bond issues also served to increase the flow of funds for long-term financing.

Nevertheless, banks operating in the Asian currency market have handled the recycling problem with somewhat greater caution than the other financial centers. This caution has been reflected in efforts by the banks to shorten the maturity of loans granted for less than one year, in order to improve the balance with the maturity of their liabilities. This caution was further reflected in a significant deceleration of the growth of the market in 1975 and 1976. Also, the share of loans in excess of one year has been smaller than in the Eurocurrency market.¹⁸ Despite this cautious approach, the Asian currency market has played an important role in contributing to the financing of payments deficits of a number of countries in the region.

SYNDICATION AND ASIAN BOND MARKET

The syndication of banks, for the purpose of handling larger loans on terms exceeding two years, has become more prevalent in Singapore in recent years. Data on flow of syndicated loans are not complete, but it appears that most of these loans were granted to borrowers from the Pacific region, including Brunei, Hong Kong, Indonesia, Korea, and the Philippines. Loans are mostly for development purposes, among which exploration for oil, production of oil and natural gas, and investment in manufacturing are the most prevalent. The maturities of syndicated loans have-been three to seven years, with floating interest rates and premia over comparable interbank offer rates varying from ¾ to 1¾ percentage points. In general, ACU banks have been lead managers, agents, or comanagers of loans floated in Singapore. They have also participated in syndication of loans placed simultaneously on several markets.

From the beginning, one of the main objectives of the Singapore authorities has been to stimulate issues of international bonds, called Asian bonds, as an integral part of the Asian currency market activity. To stimulate the issue of these bonds, the Government of Singapore floated its own international bond issue in 1972 and influenced two domestic banks to do the same. This attempt was not successful on the whole, mainly because it occurred on the eve of a sharp two-year upward trend in interest rates in the Asian currency market (Chart 1), as well as in other international markets, that discouraged flotation of bonds. Furthermore, the secondary market for such assets still did not exist in Singapore. The bond market remained dormant for several years. However, with a substantial decline in interest rates in international markets in 1975, the flurry of new international bond issues in Europe also stimulated the Asian bond market into activity. In the second half of 1975, three new issues were floated in the market, while in 1976, nine new issues totaling US$273 million were floated. A new investment instrument appeared in 1976 in the form of a note issue of US$25 million with a floating interest rate. Borrowers outside the Asian region also appeared in the market.¹⁹ Japanese security companies were very active as lead managers and participants in syndicates underwriting these issues. The maturity of bonds issued ranged between 7 and 10 years; only the 1972 bond issues of the Singapore Government and of the Singapore banks were for 15 years.

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Singapore: Maturity Structure of ACU Banks’ Bid Rates on Deposits, 1971-February 1977

(In per cent per annum)

Citation: IMF Staff Papers 1978, 002; 10.5089/9781451946826.024.A001

Sources: ACU banks’ dollar interest rates: Straits Times, and Robert F. Emery; Eurodollar notes: Economic Group of the Chase Manhattan Bank.

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Several brokerage houses that came to Singapore in the early 1970s contributed substantially to the development of the secondary market for international bonds and for other paper issued by the ACU banks. Improved conditions in the secondary market helped considerably in achieving a wider acceptability for new international bond issues. Nevertheless, bond issues are still limited in Singapore, which suggests that the size of its international market is still modest for efficiently conducting such operations.

TIME ARBITRAGE AND MARKET INTEGRATION

Singapore has an important time advantage in conducting arbitrage between financial centers in the Pacific region and Europe. The difference in time zones between Sydney, Tokyo, Hong Kong, the Middle East, and Western Europe, on the one hand, and Singapore, on the other hand, is such as to permit banks in the Asian currency market to conduct business with all these financial centers during a normal business day. This also means that Singapore quotations can serve as a basis for determining interest rates on international transactions in all financial centers east of the Mediterranean, before the start of the business day in London or Frankfurt.

London is the single most important market influencing interest rates quoted by the ACU banks, so that the levels and the structure of interest rates in the Asian currency market correspond closely to the level and the structure of Eurodollar rates in London. As a result of the tightening of credit in the United States and in international capital markets, there was a steep increase in interest rates between the second half of 1972 and the middle of 1974 (Chart 1). The ensuing decline in interest rates moderated in 1975 and 1976, but the differentials between the rates across the maturity scale widened and increased the possibility for gains by the banks through maturity transformation. These differentials narrowed again in 1977.

In the determination of interest rates in the market, ACU banks in Singapore use the London interbank rate quotation of the preceding day as a basis. This rate is often modified by interest rate developments in New York and San Francisco after the closing of the London market. With the opening of the Singapore market, the next day, ACU banks proceed gradually with interest arbitrage on dollar transactions with banks from Sydney and Tokyo to Beirut. With the opening of the London market at 3:30 p.m. Singapore time, the two markets merge, and ACU banks adjust their interest rates to correspond to the opening quotation in London. However, since major changes in Eurodollar rates in London occur later in the day when the New York market is also open, but the Singapore market is closed, any major changes in London Eurodollar quotations are reflected in Asian dollar interest rates the next day.²⁰

This complex time arbitrage resulted in sizable fluctuations in interest rates on the U.S. dollar between the Asian currency market and London. The variance of the interest differential between these markets can serve as an indicator of a change in financial integration of the ACU banks in Singapore and the Eurocurrency market. Indeed, the variance for the differential on three-month dollar deposits for the period 1969-70 is two and a half times the variance for the period 1975-76. (See also Chart 2.)²¹ This indicates that fluctuations in the Singapore-London differential have decreased significantly since the early years. Also, in the early years of operation, deposit rates offered by the ACU banks were fractionally lower than the comparable rates in London, and the loan rates were fractionally higher. The banks could offer lower deposit rates because they were accepting deposits of a much smaller size than that accepted by banks in the major Eurocurrency centers. Furthermore, during the first few years, a wider spread in the Asian currency market permitted the banks to take into account the risk involved in contracting deposit and loan rates prior to the opening of the London market. However, the increase in the size of the market over the years, the learning process in time arbitrage, and competition generated by the increase in international financial integration withered away this differential in charges by the end of 1973.

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Singapore: Differences on Three-Month Bid Rates Between Singapore and London, 1969-February 1977

(In per cent per annum)

Citation: IMF Staff Papers 1978, 002; 10.5089/9781451946826.024.A001

Sources: ACU banks’ dollar interest rates: Straits Times, and Robert F. Emery; Eurodollar notes: Economic Group of the Chase Manhattan Bank.

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Another aspect of financial integration between markets and of responses to the risk is shown in the comparative movements of the spread between quotations for offer and bid interbank transactions in the two markets. (See Chart 3, in the Appendix.) Traditionally, such a spread did not exceed ⅛ of 1 per cent in the Eurocurrency market. A doubling of the spread to ¼ of 1 per cent, for a period of time, would reflect a disturbance in the market that had significantly increased the risk to the banks. In the early years, the usual spread in the Asian currency market was $\frac{3}{16}$ to $\frac{5}{16}$ of 1 per cent on maturities of one month and higher. This wider spread reflected the risk inherent in operations in a new market, and an initial lack of competitive pressures from banks operating in other markets. This difference in spread disappeared in September 1972.

However, the two markets reacted differently to disturbances created by the Middle East war, by the increase in the oil prices, and by difficulties of several banks involved in Eurocurrency transactions. In the Eurodollar market in London, the spread widened on all maturities through the summer of 1974. Despite being much thinner and subject to short-term fluctuation, the Asian currency market reacted with greater calm. The spread for maturities in excess of one month widened only briefly with the increase in oil prices at the end of 1973, and soon after returned to normal. Although this may have reflected less exposure of the ACU banks to the risks generated by the events in 1973 and 1974, it reflected mainly greater confidence by investors as a result of the cautious approach to international lending by the banks. This greater confidence is also shown by the continuous growth of the Asian currency market (Table 1), despite the Herstatt bank failure in 1974. During the same period, the Eurocurrency market experienced a period of retrenchment, with its size decreasing in the third quarter of 1974.

CONTRIBUTION TO Singapore

The Asian currency market has provided substantial benefits to the Asian region by facilitating large inflows of funds that otherwise might not have become available. However, questions have often been raised about the benefits that the market has provided to Singapore, its host country. Recorded flows between the Asian currency market and Singapore²² (Table 5, in the Appendix) do not provide an adequate picture, because they do not include substantial unrecorded flows coming via Hong Kong. Furthermore, as the balance of payments data indicate (Table 6, in the Appendix), the major contribution of foreign capital to Singapore has come from flows of direct investment that have not directly involved the activity of the Asian currency market. On the whole, net flows of Singapore’s commercial bank capital have reflected cyclical forces at home and abroad; they have experienced inflows in periods of domestic booms and tight money, and outflows in periods of domestic recessions and high liquidity.

The contribution of the Asian currency market to the real income of Singapore can be estimated in terms of: (1) banks’ earnings from operating ACU accounts, net of profits remitted to head offices abroad; (2) direct contribution of the Asian currency market to the gross domestic product (GDP); and (3) contribution to the GDP, which would also include external economies generated by the market. While bank earnings from ACU accounts retained by Singapore can be roughly estimated, the remaining two methods can yield only a qualitative evaluation because the relevant data are lacking.

(1) A rough estimate of gross income by banks from operating ACU accounts and of earnings retained by Singapore can be imputed from data on assets and liabilities for various categories of transaction and from quotations of interest rates on these transactions. These estimates are shown in Table 4. Gross income from ACU accounts comes from three main sources: (a) a spread between bid and asked on deposits of ⅛ of 1 per cent in recent years; (b) a premium on loans to customers other than banks, averaging about 1.5 per cent in recent years; and (c) the earnings from the maturity transformation through borrowing short and lending long. Depending on the maturities involved, the differential between borrowing and lending rates may vary from ½ to 1¾ per cent.²³ In addition, one should add (d) earnings from flotations of Asian bonds with an average spread of 1.5 per cent. Total earnings by banks from operating ACU accounts, imputed from these data, amounted to about US$110 million in 1976, which is about 2 per cent of Singapore’s 1976 GDP.

Operating costs of ACU banks that are expended in Singapore are imputed in alternative ways. The first takes three U.S.-based international banks that have the lowest ratios of operating costs²⁴ to income net of interest costs (i.e., total income minus interest payments) on deposits and other borrowed funds. The three banks, whose operating costs in 1976 ranged 50 to 60 per cent of income net of interest payments,²⁵ are banks that are heavily involved in worldwide Eurocurrency operations. Although salaries in Singapore are probably below the average of salaries paid by these banks worldwide, more than one half of ACU banks had been in Singapore three years or less at the end of 1976 and therefore have a much higher ratio of operating costs to gross income than do the banks that were already established. On this basis, the expenditures of ACU banks in Singapore range between US$55 million and US$65 million.

Table 4.

ACU Accounts: Imputed Income, 1976

(In millions of U.S. dollars)

¹Includes 75 per cent of the average deposits in 1976 to US$15 billion. The adjustment is made to take into account double counting in data on interbank transactions. See also footnote 11 in the text.

²Singapore interbank offer rate.

³US$5.8 billion.

⁴Equal to the range of the lowest ratios of operating cost (net of interest payments) to gross income in three multinational banks based in the United States. See also footnote 25 in the text.

⁵See text, fifth paragraph in section. contribution to Singapore.

Table 4.

ACU Accounts: Imputed Income, 1976

(In millions of U.S. dollars)

Source			Average Interest Rate Differential or Spread	Average Level of Deposits or Assets	Earnings
			Per cent
			per annum
1.	Imputed gross income From spread on deposits		⅛	11,250.01	14.1
	Premium over SIBOR2 on loans		1.5	3,800.0	57.0
	Maturity transformation
		Sight to 3-12 months	0.5	150.0	0.8
		Sight to over 1 year	1.75	1,000.0	17.5
		8-day to 3-month to over 1 year	1.5	1,000.0	15.0
	Flotation of Asian bonds		1.5	2,750.0	4.1
	Total imputed gross income				108.5
	(as a percentage of 1976 GDP) 3				1.9
2.	Imputed operating costs in Singapore [50-60 per cent of gross income]4				54.5-65.5
	(as a percentage of 1976 GDP)				0.9-1.1
3.	Hypothetical net earnings remitted abroad5
	Premium over prime rate		0.75		28.5
	Maturity transformation over prime rate				16.5
	Bond flotations: differential over minimum spread		0.75		2.0
	Total hypothetical net earnings				47.0
4.	Hypothetical operating costs in Singapore [(1)-(3)]				61.5
		(as a percentage of 1976 GDP)			1.1

¹Includes 75 per cent of the average deposits in 1976 to US$15 billion. The adjustment is made to take into account double counting in data on interbank transactions. See also footnote 11 in the text.

²Singapore interbank offer rate.

³US$5.8 billion.

⁴Equal to the range of the lowest ratios of operating cost (net of interest payments) to gross income in three multinational banks based in the United States. See also footnote 25 in the text.

⁵See text, fifth paragraph in section. contribution to Singapore.

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Table 4.

ACU Accounts: Imputed Income, 1976

(In millions of U.S. dollars)

Source			Average Interest Rate Differential or Spread	Average Level of Deposits or Assets	Earnings
			Per cent
			per annum
1.	Imputed gross income From spread on deposits		⅛	11,250.01	14.1
	Premium over SIBOR2 on loans		1.5	3,800.0	57.0
	Maturity transformation
		Sight to 3-12 months	0.5	150.0	0.8
		Sight to over 1 year	1.75	1,000.0	17.5
		8-day to 3-month to over 1 year	1.5	1,000.0	15.0
	Flotation of Asian bonds		1.5	2,750.0	4.1
	Total imputed gross income				108.5
	(as a percentage of 1976 GDP) 3				1.9
2.	Imputed operating costs in Singapore [50-60 per cent of gross income]4				54.5-65.5
	(as a percentage of 1976 GDP)				0.9-1.1
3.	Hypothetical net earnings remitted abroad5
	Premium over prime rate		0.75		28.5
	Maturity transformation over prime rate				16.5
	Bond flotations: differential over minimum spread		0.75		2.0
	Total hypothetical net earnings				47.0
4.	Hypothetical operating costs in Singapore [(1)-(3)]				61.5
		(as a percentage of 1976 GDP)			1.1

¹Includes 75 per cent of the average deposits in 1976 to US$15 billion. The adjustment is made to take into account double counting in data on interbank transactions. See also footnote 11 in the text.

²Singapore interbank offer rate.

³US$5.8 billion.

⁴Equal to the range of the lowest ratios of operating cost (net of interest payments) to gross income in three multinational banks based in the United States. See also footnote 25 in the text.

⁵See text, fifth paragraph in section. contribution to Singapore.

The alternative method is based on a hypothesis of highly competitive conditions in international financial markets. Under such conditions, profits that are repatriated to head offices relate to business risk assumed by the banks. On this basis, earnings in excess of the prime rate, which was 0.75 per cent over the Singapore interbank offer rate (SIBOR) in 1976, were remitted as profits abroad. Imputed in such a way, profits in 1976 amounted to US$47 million, and the amount expended in Singapore was $62 million.

Both methods lead to estimates of earnings from ACU operations that are retained in Singapore amounting to 1 per cent of Singapore’s GDP in 1976. It is clear that these calculations are only approximate but despite possible overstating of the extent of the maturity transformation,²⁶ they should be taken as conservative. The earnings shown in Table 4 do not include income from transactions, such as letters of credit, foreign exchange trading,²⁷ commitment fees on undrawn loans, and management fees of syndicate leaders and comanagers,²⁸ as well as income from other services performed for customers whose funds are managed.²⁹ However, the customary premiums over SIBOR are often shaved when very large funds are involved, although in a small international financial market, such as Singapore’s, these large transactions are relatively rare.

Altogether these calculations suggest that operations of the Asian currency market have generated a small, but not negligible, benefit for Singapore.

(2) The second method of estimating the direct effect of the Asian currency market on Singapore’s real income is to trace from national income data the contribution of the ACU bank activity to GDP. Direct estimation is, however, not possible, because Singapore’s GDP statistics do not have sufficiently disaggregated breakdown by sectors to show the contributions of the banking sector. There are data on the financial sector that include banking as a major component but also include insurance, real estate, and business services.³⁰

Between 1965 and 1975, the growth of the financial sector was substantially higher than the growth of GDP and second only to the growth of the manufacturing sector, the mainspring of Singapore’s development during that period. (See Table 7, in the Appendix.) Furthermore, the highest growth rate of the financial sector occurred between 1969 and 1973, which was the period of the fastest expansion of the Asian currency market. Between 1968, the year of the creation of the Asian currency market, and 1975, the ratio of the financial sector’s output to the rapidly growing GDP increased from 8.5 to 10.5 per cent. This indicates the increasing importance of financial activity in general, and of banking in particular, in the economy of Singapore.

Between 1970 and 1976,³¹ employment in the financial sector (also shown in Table 8, in the Appendix) increased much faster than total employment and even faster than employment in the manufacturing sector.³² The percentage of highly skilled employees³³ in the financial sector is almost twice as high as the average for the economy as a whole; furthermore, it has been increasing in recent years at a much faster rate. However, the ratio of employment in the financial sector to assets in the banking sector has decreased over the years. On the assumption that the financial and banking sectors experienced a similar growth of employment, this decreasing ratio suggests that important economies of scale in banking are still not realized at the present time.

(3) The third method would be to evaluate both the direct and indirect contributions of the Asian currency market to Singapore’s income. The fast growth of international banking transactions has stimulated the location in Singapore of a host of related activities that are essential for the efficient working of the Asian market. These activities include forward and spot arbitrage operations, financial and trade brokerage facilities, business-related travel and travel agencies, international insurance, new hotels, and real estate operations. Favorable access to international finance in Singapore and an excellent communications network have stimulated the location of many enterprises specializing in trade. The same reasons have motivated a number of multinational and large regional corporations and investment companies to locate their Asian headquarters in Singapore. Furthermore, since foreign direct investment plays an important role in the industrial development of Singapore, the existence of a well-developed international financial market on its soil has provided an additional stimulus to foreign firms and foreign capital to locate their operations there. A dynamic international financial market also provides a secure haven for funds from abroad that are not directly tied to the productive process, but, above all, the market serves as an excellent indicator of the political and economic stability of the country. Therefore, the Asian currency market has been a major stimulus to the rapidly growing financial sector of Singapore and to some other related activities.³⁴

Despite controls on the participation by residents, the Asian currency market has also had a growing influence on the monetary and financial policies of Singapore. The arbitrage between the Asian market and the Singapore money market, initially via Hong Kong and later also directly, has increased the international mobility of financial capital. This arbitrage has played a major role in progressively relaxing controls over the domestic interest rates, and this in turn resulted in the introduction of a system of competitive interest rate quotations in July 1975. The freeing of interest rates has increased the efficiency of allocating funds among various investment projects, although it may have increased the cost of capital to some sectors that previously could have borrowed at lower controlled rates.

In addition to benefits of the Asian currency market, costs that its development has imposed on Singapore should also be considered. These are mostly direct opportunity costs in terms of real product forgone and some “external” costs related to the effect of market development on other sectors of the economy.

(4) Direct opportunity costs involve the value added forgone by employees who are drawn from other sectors of the economy into the faster growing financial sector. These costs should be examined, however, in the light of Singapore’s historical dependence on immigrant labor.³⁵ Thus, when a shortage of labor developed at the beginning of the 1970s, the authorities liberalized the existing restrictions on immigration and increased the elasticity of supply.³⁶ In the long run, the opportunity costs of increased employment in financial and related sectors consist of the costs involved in the upward mobility of labor. In its general development program, the Government has instituted a number of skill improvement projects that are supported largely by the industries concerned. In banking, a large proportion of training in foreign banking operations has been financed mostly by the banks but partly by foreign students. Therefore, in a rapidly developing economy, such as Singapore, it is difficult to disentangle specific opportunity costs of expansion of the financial sector from costs of ambitious programs in the overall improvement of skills of the labor force.

(5) Another direct cost with potentially important implications would occur if foreign banks that are remitting profits abroad were to expand local business at the expense of Singapore’s domestic banks. This process is, however, minimized by the strict restrictions through licensing procedures of the local activities of new entrants. Furthermore, the phenomenal growth of transactions in the Asian currency market has also increased non-ACU banking activities in which domestic banks are involved.

(6) The major indirect cost of the Asian currency market involves a high level of international reserve holdings that are motivated partly by the Government’s desire to support the role of Singapore as an international financial center. Between 1968 and 1976, Singapore’s gross reserves increased from US$712 million to US$3,364 million. In the 1960s, the reserve buildup reflected the desire of the authorities to achieve a better ratio between gross reserves and rapidly growing imports. The very comfortable reserve/import ratio in the early 1970s was among the highest for developing countries; in 1976, it was similar to the reserve/import ratio of several other developing countries that had a balance of payments surplus.³⁷ In view of the complexity of criteria that are used by countries in determining the desired level of their reserves, it is not possible to estimate the cost of reserves used to support the Asian currency market.

(7) Before 1973, capital mobility that was increased with the existence of the Asian currency market imposed additional costs in terms of limiting the independence of Singapore’s monetary policy. Particularly during the periods of international currency disturbances between 1971 and 1973, ACU banks were instrumental in large-scale arbitrage operations.³⁸ Since domestic interest rates in 1972-73 were higher than those in the Eurocurrency market and the U.S. dollar was depreciating, the inflow of funds through the banks created an excess of liquidity at home that could not be neutralized by the authorities. Floating of the Singapore dollar in May 1973 permitted the authorities to regain a large degree of independence in their domestic monetary policy.³⁹

In summary, it appears that the Asian currency market has provided a modest contribution to real income in Singapore. Rough calculations suggest that a direct contribution in terms of gross earnings from international banks that remain in Singapore is in the order of 1 per cent of GDP. As evidenced by a very rapid expansion of the financial sector, the indirect contribution of additional employment in related activities and of substantial improvement of skills is probably larger. An estimate by the Singapore authorities that the Asian currency market contributed about 3 per cent of its GDP in 1976 appears reasonable.