Financial Markets In Singapore


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This is a research / analytical report on the Financial Markets in Singapore

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Financial Markets In Singapore

  1. 1. Financial Markets – Singapore 金融市場- 新加坡 “Singapore’s financial sector has proven resilient in the face of a series of economic shocks and asset price declines in the past few years. The local banks and insurance companies are profitable and well capitalized. Stress test results indicate that Singapore’s systemically important banks and insurance companies could withstand further significant shocks…”1 1 IMF Country Report No. 04/104
  2. 2. Singapore in a Snapshot2 Source: Population 4,839,400 Area 704 sq kms Official Language Malay, Chinese, Tamil & English Unit of Currency Singaporean Dollar (SGD) Legislature Parliament GDP $240 billion GDP Growth 1.2% Inflation 4.3% Exports $ 235.8 billion 2
  3. 3. Financial System The Monetary Authority of Singapore (MAS)3 is Singapore’s Central Bank. Like the Central Banks of any other country, the major responsibility of MAS is maintenance of the stability of the national currency (Singaporean Dollar), controlling the interest rates of subsidized loans and supervise that banks and other financial institutes do not resort to reckless or fraudulent behavior. It also manages Singapore’s official foreign reserves and is responsible for monetary policy supervision of financial markets in Singapore. MAS was established in 1970 and it became operational on January 1, 1971. On a macro-economical front, economical development and the financial systems of both Singapore and economies with which Singapore has a close trade link is monitored by MAS. Singapore has around 580 local and foreign financial institutes. The products that they offer range trade financing, loan syndication, foreign exchange trading to securities trading, fund management and insurance service. The financial sector is dominated by commercial banks, which account for about 86% of the total financial sector assets. Despite a string of economic downturns and asset price declines, Singapore’s financial sector which is dominated by the banking sector has remained strong. Singapore’s local banks are very profitable and well capitalized, and they constitute 55 percent of the domestic banking assets. Though these banks follow a conservative approach in their management practices, they are highly liquid and adequately provisioned for non-performing asset exposure. The World Economic Forum Global Competitiveness Report in 2004 ranked Singapore as one of the most sophisticated financial markets in the world4. The Singapore Government has also played its role by introducing a number of measures to diversify and deepen its Financial Markets. The government has actively promoted development of capital markets to strengthen the country’s position as a regional financial centre and thus reduce the reliance on bank for financing. Although the Capital Markets have grown swiftly, the relatively small size of the economy and the competition from other regional financial centers pose a challenge to its growth prospects. With several countries consolidating their foreign exchange and derivatives business in the Asian Time Zone in Singapore, it has maintained its position as a global treasury center. 3 4
  4. 4. It was in the late 60s that the Singapore government seriously ventured to develop Singapore as a financial centre.5 A lot of special initiatives and subsidies were offered to various foreign financial institutes to set up their centers in Singapore. As a result, today, Singapore is one of the major forex trading centres in the world. Singapore has a strong domestic economy – since its independence in 1965, Singapore had done very well and had achieved double digit economic growth rates in 1960s and early 1970s. Also Singapore Dollar is considered to be a highly stable currency. It is backed by various currencies like the US dollars, Japanese Yen as well as the gold holdings. Money and Bond Market6 The money market in Singapore is dominated by the interbank market in the foreign currency and highly liquid. The interbank market comprises of short-term interbank deposits and lending in foreign currency. Due to the excess funds in the Singapore economy, the Asian Dollar Market is a vital center for mobilizing interbank funds globally. Source: The above graph shows the number of treasury dealers various market instruments over the year over the last decade. We can see that Forex has always been a major contributor to the Singapore economy. 5 Pg 3, Financial Markets and institutions in Singapore – Tan Chwee Huat 6 Pg 37, IMF Country Report No. 04/104
  5. 5. The SGS (Singapore Government Securities) market has continued to grow thanks to the various steps taken by the authorities with this regards. In Singapore, the corporate bonds comprise of the Asian dollar bond market and the Singapore Dollar corporate bond market. Majority of the outstanding Asian Dollar Bonds are commercial papers and fixed rate notes with short term maturity. These have also been dominant in the Singapore dollar corporate bond market. The secondary bond market in Singapore is considerably illiquid as majority of the bonds are held until maturity. Equity and Derivatives Market7 The Equity and Derivative market in Singapore is very well developed. The SGX (Singapore Exchange Ltd) was a result of the 1999 merger of the Stock Exchange of Singapore and the Singapore International Monetary Exchange. Equities are traded on its Securities Trading Division (SGX-ST) and derivatives (including a wide range of international futures and options) on its Derivatives Trading Division (SGX-DT). Source: The above figure shows the transaction details on the Equity market at SGX over the last 3 months. It shows a slight decrease in the total turnover and the volumes of trade in the month of June, while the market capitalization has increased steadily. SGX also has got linkages with a number of international exchanges, including a co-trading linkage with the Australian Stock Exchange, a mutual offset system linkage with the Chicago Mercantile Exchange, and a joint venture with the American Stock Exchange for the trading of exchange traded funds. 7 Pg 38, IMF Country Report No. 04/104
  6. 6. Source: The above chart is a comparative study of the various derivative instruments and the volumes since 1984 to 2008. The futures market has seen a steady growth, while the options has seen a 50% decline in the year 2008 due to the current financial crisis. Due to the volatility in the current global markets and the launch of a variety of new products, the SGX- DT has been pretty robust in 2009.
  7. 7. Foreign Exchange8 The foreign Exchange market in Singapore is the 4th largest in the world. It has benefited a lot due to its geographic location and the time zone advantage that it gets over the other international markets and also the presence of a huge number of foreign banking institutes and multinationals. G3 currencies continue to dominate the foreign exchange trading in Singapore. 90% of the total transactions are through Swaps and Spot transactions and the rest is covered by the forwards, futures and options contract. Source: The above graph shows the progress of the Singapore Dollar over the US Dollar over the last couple of decades. 2008 and 2009 has seen a steady appreciation in SGD over the USD in wake of the crisis and the steady depreciation of the US Dollar. Outlook 8 Pg 38, IMF Country Report No. 04/104
  8. 8. Singapore is a trade oriented economy with its major trade partners being the United States. Considering the economic turmoil that the whole world in general and the USA in particular is going through, the ripple effects were felt in Singapore economy to a very large extend. As a policy, Singapore should look to diversify and move away from just being a trading port to a more matured and an independent economy. Though Singapore is politically stable, the political instability in its neighboring countries like Indonesia is a cause of worry due to the looming prospects of refugees coming in from such countries. According to me, one of the best policies that the Singapore government had adapted were the “open-door” policy that it extended to the foreign investors. This was really crucial to the exponential growth that Singapore has witnessed over the past decades and has also made it one of the leading forex traders in the world. Singapore needs to concentrate more on its corporate bond structure and other money market instruments as it forms a very important part of the economy. To conclude, considering that Independent Singapore is hardly 50 years old, Singapore had done a fine progress from being a port city to the cosmopolitan city that it is today. Lot of credit must go to the former Prime Minister Lee Kuan Yew, who was at the helm of affairs from 1959 to 1990 for 3 decades. Onus lies on Mr Lee Hsien Loong to maintain if not to exceed the heights and the glory that Singapore has achieved over the past years.