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Singapore Financial Center Development
As a result of its strategic location and
well-developed
infrastructure, Singapore traditionally had been the trade
and
financial services center for the region. In the 1970s,
the
government identified financial services as a key source
of growth
and provided incentives for its development. By the 1980s,
the
focus was on further diversification, upgrading, and
automation of
financial services. Emphasis was placed on the development
of
investment portfolio management, securities trading,
capital market
activities, foreign exchange and futures trading, and
promotion of
more sophisticated and specialized fee-based activities.
Consequently, by the mid-1980s, Singapore was the third
most
important financial center in Asia after Tokyo and Hong
Kong. The
financial services sector, having sustained double digit
growth
over the previous decade, accounted for some 23 percent of
GDP and
employed approximately 9 percent of the labor force. In
1985,
however, growth in the sector slowed to just 2.6 percent,
and in
December of that year the Stock Exchange of Singapore
suffered a
major crisis, which forced it to close for three days. In
view of
the troubled domestic economy, observers worried that
Singapore's
future as a financial center looked somewhat problematic.
Furthermore, international financial market deregulation
threatened
to create an environment in which it would be more
difficult for
Singapore to thrive, especially given its high cost
structure and
somewhat heavy-handed regulatory environment. The
government took
steps to correct some of the problems, and by 1989
Singapore's
financial service sector could again be described as
"booming."
The financial sector included three types of commercial
banks
(full license, restricted, and offshore), representative
offices,
merchant banks, discount houses, and finance companies. In
1988
there were 13 local, 64 merchant, and 134 commercial
banks. All
banks in Singapore were administered by the Monetary
Authority of
Singapore and were required to hold a statutory minimum
cash
balance against their deposit and other specified
liabilities with
the authority.
The Development Bank of Singapore was established in
1968 to
provide financial services supporting industrialization
and general
economic development. Owned jointly by the government (49
percent)
and private sector shareholders, it had evolved from a
long-term
financing institution to a multiservice bank. The largest
Singaporean commercial bank in terms of assets in 1989,
the
Development Bank was listed on the stock exchanges of both
Singapore and Malaysia. Through its subsidiaries, it also
provided
specialized financial and insurance services, factoring,
stockbroking, merchant banking, and venture capital
investment
management services. The Development Bank was the
city-state's
largest source of long-term finance, including equity and
venture
capital financing, medium- and long-term loans, and
guarantees.
The Singapore Foreign Exchange Market had grown
remarkably
since the 1985 recession. As an international financial
center, the
country had benefited from the worldwide increase in
business as
well as from the related expansion in the financially
liberated
Japanese market. Major currencies--the United States
dollar, the
Japanese yen, the West German deutsche mark, and the
British pound
sterling--were actively traded. Volumes in such other
currencies as
the Australian dollar had risen as well. Average daily
turnover was
US$45 billion in 1988 compared with US$12.5 billion in
1985.
Singapore established the Asian dollar market as the
Asian
equivalent of the Eurodollar market in 1968 when the local
branch
of the United States-based Bank of America secured
government
approval to borrow deposits of nonresidents, mainly in
foreign
currencies, and use them to finance corporate activities
in Asia.
At the time, expanding economic development in Southeast
Asia was
rapidly increasing the demand for foreign investment
funds, and the
desirability of a regional center able to carry out the
necessary
middleman function was apparent. Singapore offered the
ideal
location. The Asian dollar market was essentially an
international
money and capital market for foreign currencies, and its
assets
grew from US$30 million in 1968 to US$273 billion in
November 1988.
To operate in the market, financial institutions were
required to
obtain approval from the Monetary Authority of Singapore
and to set
up separate bookkeeping entities called Asian currency
units for
transactions in the market. Funds were obtained mainly
from
external or nonresident sources--central banks, foreigners
seeking
a stable location such as Singapore to deposit cash,
multinational
corporations, and commercial banks outside Singapore.
In 1973, to stimulate the expansion of the Asian dollar
market,
the Monetary Authority of Singapore established the
so-called
offshore banking system, designed to concentrate on that
market and
its foreign exchange operations. Beginning in 1983, funds
managed
in Singapore on behalf of nonresidents and invested
offshore or in
the local stock market were exempt from tax. The fees
earned for
managing such offshore funds were taxed at a concessionary
rate of
10 percent.
Inaugurated in 1973, the Stock Exchange of Singapore
was
governed by a committee comprising four elected
stockbroker members
and five appointed nonbroker members. In late 1988, the
327
companies listed on the main board of the exchange were
classified
into six groups: industrial and commercial, finance,
hotel,
property, plantation (farming), and mining. The market
underwent a
major, prolonged reorganization following the December
1985
collapse of a Singaporean company, Pan Electric, which
revealed a
massive web of forward share dealings based on borrowed
money. The
collapse resulted in a tighter regulation of the financial
futures
market and the securities industry. In 1986 the Securities
Industry
Council was established to advise the minister for finance
on all
matters relating to the securities industry.
In 1987 the government introduced tax incentives to
encourage
the trading of international securities in Singapore. The
National
Association of Securities Dealers (NASDAQ) in the United
States and
the Stock Exchange of Singapore established a link to
facilitate
the trading of NASDAQ stocks in Singapore by providing for
the
exchange of price and trading information on a selected
list of
NASDAQ stocks between the two exchanges. A move by the
Singapore
exchange to a new, spacious location in 1988 brought a
transformation in trading methodology, including partial
automation
of the trading system, which until then had adhered to the
traditional outcry auction system.
By 1987 Singapore's stock market, fuelled by bullish
sentiments
sent indices soaring to new highs--a recovery from the
December
1985 crisis. All gains, however, were wiped out by the
crash of
world stock markets in October 1987, a crash from which
the
Singapore exchange had made substantial recovery by
mid-1989.
Singapore also expanded other international financial
markets
in the late 1980s. Trading in gold futures originally was
undertaken in the Gold Exchange of Singapore, which was
established
in 1978 and reorganized in 1983. The scope of its
activities was
widened to include financial futures trading, and it was
renamed
the Singapore International Monetary Exchange (SIMEX).
Starting in
1984, the financial futures market featured a mutual
offset
arrangement between SIMEX and the Chicago Mercantile
Exchange,
which allowed contracts executed on one exchange to be
offset on
the other without additional transactional cost for market
participants. The linkage was the first of its kind in the
world
and greatly facilitated round-the-clock trading in futures
contracts. In 1988 six forms of futures contracts were
traded:
international gold futures; the Eurodollar time deposit
interest
rate; the Nikkei Average Stock Index; and three currency
exchange
rates--US dollar/West German deutsche mark, US
dollar/Japanese yen,
and US dollar/British pound sterling. Trading volume on
the SIMEX
had grown steadily.
The restructured Government Securities Market was
launched in
May 1987, auctioning at market rates taxable Singapore
government
securities ranging in maturity from three months to five
years.
Previously, long-term government stock was sold to a
captive market
of banks, insurance companies, and a few individuals and
nonprofit
organizations.
Data as of December 1989
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