Has Singapore Got What It Takes To Be A Finance Powerhouse?by
Damage control was the order of the day in Singapore on Mar. 4. At a press conference to explain the government's take on the collapse of Barings PLC, officials declared Singapore couldn't be blamed for the British bank's reckless futures trading. To prove their point, they used an overhead projector to flash letters from Barings officials declaring Singapore-based trader Nicholas W. Leeson a loose cannon. "We cannot help it if a company does not regulate its operation," said Elizabeth Sam, chairperson of the Singapore International Monetary Exchange (SIMEX). The next day, Prime Minister Goh Chok Tong said regulators had handled the crisis "very well."
Even as they expressed confidence in their system, however, Singaporeans were announcing measures to increase controls. The SIMEX, which has grown fourfold since 1992, would now have tighter rules, including new restrictions to prevent traders from settling their own accounts. Officials also pushed ahead with legislation licensing futures traders. Meanwhile, local banks came up with a $300-million standby loan for SIMEX to guarantee that any losses would not be passed on to its 68 member firms. "If SIMEX went down," says one regulator, "we didn't want all of the other parties to be dragged down with it."
The bureaucrats had good reason for concern. The trades that brought the bank to its knees happened on Singapore's turf, putting its reputation as a financial center on the line. Outsiders have called into question the actions of Singapore authorities in the weeks before the Barings collapse. They have also wondered about the lack of self-regulation among some SIMEX traders. Chicago Mercantile Exchange Chairman John F. Sandner says his exchange, which has maintained close ties with SIMEX since its founding, would have never allowed Leeson to build up such huge bets. Such trading "could not have taken place" in Chicago, Sandner says.
The Barings episode comes at a time when Singapore is pushing hard to become Asia's premier financial center after Hong Kong reverts to China's control in 1997. The country has already moved beyond low-wage assembly industries to become a showcase for high-tech investment by multinationals. Now, Singapore's top-level planners are determined to carve out a place for their tiny country in the worlds of international finance and communications. The paradox is that the country's ambitions in finance and communications require creative minds and an unimpeded flow of information, while the nation's officials routinely restrict what its citizens read in the newspapers and watch on TV.
TAX BREAKS. Singapore has spent the past decade trying to prove that such a tricky balancing act can be done. And the country has made some impressive gains. Financial-service industries, which employ 4% of the workforce, grew more than 30% in the past two years and account for 13.5% of gross domestic product. Singapore has the world's third largest foreign exchange market. Led by products such as futures in the Nikkei 225, SIMEX has become East Asia's unchallenged hot spot for a raft of derivatives, competing against the more costly and more heavily regulated Osaka exchange.
Singapore has also become a banking center. The 127 foreign banks with operations there have made it a regional base for loan syndications. And despite complaints from research analysts that they can't speak out on issues sensitive to the government, 90 fund-management firms have flocked to the country, lured in part by the government's moves to allow foreigners to manage more than $50 billion worth of retirement and government funds by 2000. In 1994 alone, institutions ranging from Lehman Brothers and CS First Boston to Credit Lyonnais and Commerzbank arrived.
The strengths in its financial markets mirror the country's overall gains in the global marketplace. Per capita income is $22,000 a year, and U.S. companies alone have invested $20 billion and employ 91,000 Singaporeans--or 1 in 16 people. With aspirations of becoming a communications hub for Asia, Singapore's leaders have granted generous tax breaks to broadcasters such as ESPN, Walt Disney, and HBO, which are setting up their Asian headquarters in Singapore.
Attractions include an English-speaking workforce and top-notch infrastructure. Taxes on financial services are low, at about 10% of profits. Unlike pollution-clogged Bangkok or Taipei, Singapore has strict controls on traffic, so its roads are rarely clogged even during rush hour--and bougainvillea graces highway overpasses. The island of 3 million also has the advantage of some very large--and fast-growing--neighbors such as India and Indonesia. For companies hoping to enter those countries, Singapore is a more reasonable base than distant Hong Kong. "The more growth, the more reasons for multinationals to come to Singapore," boasts Trade & Industry Minister Yeo Cheow Tong.
All of which is what attracted Barings to set up in Singapore. What went wrong? At their press conference, officials said they expressed concern about Leeson's trading positions in January but received assurances from Barings that it could cover his positions. Barings even sent nearly $900 million to cover potential losses. Regulators pressed for more guarantees, and Barings group treasurer Anthony Hawes flew to Singapore in January to assuage fears.
Still, the debacle highlights the strains in Singapore's regulatory system as it tries to police the rapid growth of trading in derivatives. For three years, SIMEX officials were oblivious to the fact that Leeson had a dangerous degree of control--not only of massive high-risk bets on futures but also the settlement of accounts.
Even SIMEX boosters see room for improvement. Patrick H. Arbor, chairman of the Chicago Board of Trade, which is currently negotiating with the 11-year-old SIMEX to develop closer ties, says the younger exchange lacks experience in how to deal with crises. "We would have gone to the chairman or CEO [of Barings]," he says. Arbor and Commodity Futures Trading Commission Chairman Mary Schapiro also fault SIMEX, as well as Japanese exchanges, for freezing assets of Barings' customers for several days during the crisis. The Singapore Monetary Authority, however, says no funds were frozen. Regulators had "no uniform procedures for immediate transfer of positions and margin deposits to other firms," says Arbor. "That was the real flaw."
The Singaporeans say their officials had received assurances from locally based Barings executives that their internal controls were sound. "They were senior people, and Barings was a strong organization with a long track record," says one Singapore official close to the investigation. "Up to a point, SIMEX had to take them at face value."
JOURNALIST CRACKDOWN. Beyond the Barings case, however, some analysts question whether Singapore's tight controls on information will hinder its efforts to join the big leagues. Since many of the country's main companies are state-owned, analysts in Singapore have to be "careful about being critical," says a former head of research for a major merchant bank in Singapore. A Singapore-based derivatives trader agrees: The constraints on research--real or perceived--"are in the back of everyone's mind who has to rely on local information."
The government has criminalized the printing of leaked economic data, considered a legitimate part of a reporter's job in Western countries. After a local business newspaper in 1992 published an unauthorized growth estimate acquired from the Monetary Authority of Singapore (MAS), the government threatened an MAS official, two newspaper editors, and two securities analysts with jail terms for breaking the Official Secrets Act. They were each fined up to $3,800 last year.
Even analysts for major U.S. brokerages refuse to comment on anything controversial in Singapore because they fear hurting their business. The Singapore-based head of foreign exchange trading for a leading firm says that discussing even the Singapore currency with the media is "taboo."
For its part, the government doesn't think that the constraints have curtailed Singapore's attractiveness. One MAS official says that the number of locally based financial analysts is growing. "It's in the government's interest to promote the number of analysts because we want to promote Singapore as a research base," he says.
But the government's determination to avoid losing control of its markets has prevented it from achieving clear financial hegemony in the region. "Singapore's biggest problem is that it's overregulated," says William H. Overholt, managing director of Bankers Trust in Hong Kong. The ability of foreigners to buy local stocks has been heavily restricted. Borrowing by foreigners of more than $3.6 million in Singapore dollars on the local swap market can only be done with permission of the MAS, and the borrowers must assure the bureaucrats that the money will be used for investments or trade financing--not speculation.
Partly as a result, Singapore's domestic equity market is not as big as others in the region. While Hong Kong can rely on new listings from Chinese conglomerates, Singapore is attracting few big names from outside the country to list on its bourse. Thailand and Malaysia, which have stock markets with bigger market capitalizations, are competing with Singapore by trying to increase their own attractiveness as regional hubs.
COME HITHER. Singapore counters by demonstrating its ability to attract new direct investment. In 1994, it recorded nearly $4 billion in contracted manufacturing investments, a 49% increase over 1993. Disk-drive maker Seagate Technology Inc., which has invested more than $500 million in production and research facilities, employs 13,500 locals, making it the largest private-sector employer. Singapore, says Joel A. Stead, Seagate's vice-president for marketing and sales for the Asia-Pacific region, is "disk-drive heaven." Singapore captures more than 70% of the market, and virtually all heavyweights in the disk-drive business--Western Digital, Conner Peripherals, IBM--have a significant presence there.
In a push to become the key hub in Asia, Singapore has launched a campaign to entice Western and Japanese companies to set up regional headquarters on the island. Nearly 70 claim Singapore as their "operational headquarters" from which they oversee business in the region. Unisys Corp. decided last March to move its regional headquarters from Hong Kong, where property prices are astronomical, to somewhat more affordable Singapore. Caterpillar Inc. claimed "business-headquarter" status in Singapore last July.
The government wants to mimic that success in communications--a far more challenging goal in such a controlled nation. ESPN Inc. looked at Hong Kong before deciding last year to build its 44,000-square-foot facilities in Singapore. The country's Economic Development Board offered ESPN pioneer status, tax holidays, training subsidies--and guaranteed a license, something Hong Kong could not promise beyond 1997, says Harold Anderson, vice-president of programming and production, ESPN Asia (Singapore) Ltd.
Challenges are far greater for news broadcasters. CNN and CNBC have opted to place their main facilities in Hong Kong. CNBC says it feared pressure from Singapmre's government, which is sensitive about coverage of Singapore as well as that of its neighbors. Even after the Chinese takeover in 1997, Hong Kong looks better than Singapore, says Bud Pratt, director of network development for NBC Asia. "China is easier on foreign reporters than Singapore," he says.
Some critics of Singapore argue that the advent of unfettered communications on the Internet will ultimately crack Singapore's grip on information. Not so, says the government. Singapore is setting up what Information and Arts Minister George Yeo calls a "neighborhood police post" for the Internet. Manned by the Singapore Broadcasting Authority, the innovation will allow people to alert authorities of pornography and other kinds of cybersleaze on the Net.
Such moves may indicate how Singapore's leaders will respond to other challenges to their control. Leaders such as Senior Minister Lee Kuan Yew are determined to keep out what they see as corrupting Western influences, so they may never totally open up their country. The Barings case does not seem likely to force wholesale regulatory changes. Instead, as they push to join the sophisticated worlds of international finance and communication, the Singaporeans will try to adjust their ordered system only at the margins. The question is whether that will be enough to succeed.
WHAT SINGAPORE HAS ACCOMPLISHED...
-- The world's third-largest foreign exchange market
-- Asia's center for many derivatives products
-- Regional financial center for foreign banks and securities firms
- High-tech manufacturing base for multi-nationals
...AND WHAT COULD HOLD IT BACK]
- Tight controls over information available to its citizens
-- Strong pressure to discourage criticism of government policies
-- Small size of domestic equity market and increased competition from
-- Regulatory system that hasn't kept pace with changes in derivatives