Asia's second financial hub: Opportunities in Hongkong exodus?
Although Kuala Lumpur has stolen some of its thunder, Singapore is in no danger of losing its unofficial title of Southeast Asia's answer to Hongkong. The question is whether Singapore can join New York, London, and Hongkong as a truly global, full-service financial center. More to the point, will Singapore's government surrender enough control to let the island republic fulfill its potential?
The fact that Singapore is known as the "Switzerland of the East" is testimony to the machinelike efficiency with which it has pursued success. Entrepreneurial flair has never been a selling point. Even so, what Singapore does, it does exceptionally well. It is unquestionably the world's most user-friendly financial hub: The quality of its physical infrastructure, telecommunications capabilities, and work force is simply unparalleled. As a result, the Lion City has been a magnet for investment banks and commercial banks alike. This, together with the growing interest in emerging market currencies, has enabled Singapore to challenge Tokyo as Asia's top forex center. And it is already the region's premier derivatives hub, as strong in over-the-counter products as it is in exchange-traded ones. The fact that the Barings debacle originated on the Simex floor has done little to dent Singapore's repution or dampen its appeal. But Simex is itself a reflection of
Singapore's cautious approach. Although the exchange does a brisk business in eurodollar, euroyen, and Nikkei stock index futures, not one Singaporean product is traded. Similarly, while the Singapore dollar could well serve as a safe-haven currency, the government has resisted calls to
internationalize it. Nor does it display the least desire to innovate in even the most innocuous areas. For example, the government has ignored suggestions that it follow Hongkong's lead and try to establish a yield curve by issuing long-term bonds. On the other hand, there plainly isn't much need for a bond market- Singapore runs big budget surpluses and most major companies are also cash-rich.
Regulation is a source of concern, as well. To be sure, Singapore has no shortage of rules; the 1985 Pan-Electric scandal, which closed the stock market for four days and put a number of brokers out of business, saw to that. But bankers complain that the Monetary Authority of Singapore, the central bank, doesn't always explain what is permissible and what is not. Requests for clarification often go unanswered for months. The financial services industry thus operates in a climate of fear, particularly since the MAS tends to deal swiftly and harshly with most infractions. "There is such a history of strong control here that reducing it is difficult," says one Singapore-based ana-
lyst. "They are determined to manage the liberalization process."
Competition may induce the government to relax. As much as they fear the idea of a freewheeling financial sector, Singaporeans are more fearful of losing market share to regional rivals. Indeed, now that Malaysia has declared its desire to make Kuala Lumpur a fund management center, Singapore is taking steps to boost its allure. The recently announced 1998 budget was notable mainly for tax breaks and other concessions directed at the investment community.
And even if the authorities refuse to loosen their grip, circumstances may yet lift Singapore. Now that Hongkong is under Chinese rule, any misfortune that it suffers will clearly benefit Singapore. The city-state is the escape route of choice for nearly every major investment and commercial bank that presently makes Hongkong its Asian hub. Bob Mckee of Independent Strategy, the London-based research boutique, expects to see more than a few banks set up shop in Singapore over the next decade. "In our view, the decisive factor in Singapore's favor is that Hongkong is going to be taking a few steps back," Mckee says. "Hongkong eventually will be just one of many gateways to China."
SINGAPURE AT A GLANCE
Population 3.14 million
Stock Exchange of Singapore market capitalization (end, 1996) $206.6 billion
As markets and currencies plunged across Southeast Asia last month, Singapore remained an island of relative stability.
Asia's Safe Haven.
By Russ Arensman
Investment analyst Robert Zielinski was feeling shell-shocked by the end of August after several weeks of watching Asian currencies and stocks plunge, seemingly with no end in sight. Not only were fund managers and investors comparing the Asian markets' late-summer decline with the Latin American crash following Mexico's 1994 peso collapse, many were nearing the point of despair. Said Zielinski, head of Asian banking research for Jardine Fleming Securities in Singapore: "I think people are just throwing in the towel on Southeast Asia, and I think it's sort of correct."
How bad was the situation? In Thailand, whose July 2 currency devaluation triggered the regional slump, the already hard-hit Stock Exchange of Thailand Index dropped a further 20% in the two weeks ending August 29. Indonesia's Jakarta Composite Index fared the next worst, crashing 11% in just two days of trading at month's end. Hongkong's Hang Seng Index collapsed 5% in a single day and Malaysia's Kuala Lumpur Composite Index was gripped by panic selling that drove the market to a four-year low and prompted the government to halt short-selling. Meanwhile, Singapore's normally placid Straits Times Industrials Index lost almost 6% over two days of trading, sinking to levels not seen since 1993.
Yet despite the carnage unfolding around them, Zielinski and other Singapore investment professionals remain relatively upbeat about the island-state's economic prospects. Most, in fact, give the Lion City credit for maintaining one of the region's strongest economies, as well what arguably is Asia's best investment climate.
"I certainly feel more confident in Singapore than Thailand or Malaysia," says Zielinski. "If you look around the region, you see the exact same trends of property price appreciation, overbuilding of new hotels and condominiums, and bank exposure to real estate. Here in Singapore there's been much less excess. The property market is quite controlled by the government. It's not like in Bangkok, where everybody can put up a building. I also think there's greater recognition here of the problems-the necessity to react and change policies."
Koh Foong Yin, vice president of economic research for Singapore's Overseas Union Bank (OUB), says Singapore's economic outlook is encouraging despite the recent market plunge. The economy has recently shown signs of rebounding from two years of slowing GDP growth (10.5% in 1994, 8.8% in 1995, and 7.0% in 1996) caused mainly by a worldwide slump in electronics prices. Koh, after seeing a surprisingly strong 7.8% gain in this year's second-quarter GDP, had been projecting growth of about 6.6% for all of 1997, and 6-7% growth again in 1998. "Now it may be closer to 6% for next year," she says. "But I think we can maintain that type of growth."
Ironically, the unsettled markets may actually benefit Singapore's financial industry, says Koh. "Because of the currency turmoil and falling share prices, turnover has been quite active," she says. "Although the stock market is down, volume is up, and therefore I think the financial sector did well." Koh notes that the financial services sector grew strongly in 1997's first half, up almost 15% over the previous year. "We think that this will probably be maintained in the second half as well," she adds.
Jim Walker, Singapore-based chief economist for Credit Lyonnais Securities Asia, agrees that Singapore's economy seemed on the verge of recovering its lost momentum before last month's market plunge. "That [recovery] actually is probably still in place, but I think people are looking more 12 months out now rather than the next three months or even the next two quarters," he says.