Singapore eyes regional prize with currency liberalisation
While stopping short of full internationalisation of the Singapore dollar, the
Moves to free-up the Singapore dollar's usage mark another step in the republic's drive to ensure its place in the new millennium as a leading regional financial hub.
Research commissioned for the Singapore Government suggests that in the high-tech, globalised world of the 21st Century, there may be room for only two, or perhaps, three leading financial centres in the East Asian time zone.
Japan seems sure to secure one of those slots, leaving Singapore competing with cities such as Hong Kong, Shanghai, Taipei and Sydney for the remaining berths.
Businessmen have repeatedly warned the Singapore authorities that its biggest obstacle is not its rivals but its heavy-handed bureaucracy, regulation and restrictive business practices, especially for foreigners.
In particular, bankers and fund managers have told the Monetary Authority of Singapore (MAS) that restrictions on the Singapore dollar's usage were hindering its development as a financial centre.
The monetary authority's own review has come to the same conclusion, especially with regard to the development of the city's capital markets.
However, it has concluded that internationalisation of the currency is still firmly out of the question, despite repeated calls for the unit to be used as Southeast Asia's common currency for international trade settlement.
Announcing the results of the review yesterday, Deputy Prime Minister and MAS chairman Lee Hsien Loong said: 'First, the [non-internationalisation] policy makes it harder to mount a speculative attack on the Singapore dollar. The restrictions hinder speculators, who need to borrow Singapore dollars in order to short the currency.
'Second, the policy has impeded the development of an offshore market in Singapore dollars, beyond MAS' oversight and influence.
'Third, the non-internationalisation policy has an important deterrent effect, signalling the MAS's determination not to tolerate speculation in the Singapore dollar.' The fortress-Singapore approach has served the republic well during the region's recent currency crisis.
While its neighbours' currencies have crashed, the monetary authority has been able to mastermind a more conservative and smaller depreciation of the Singapore dollar to maintain the economy's competitiveness.
Andy Tan, general manager of Standard & Poor's MMS International, said: 'The whole intention is not to allow someone to speculate against the Singapore dollar.
'The Hong Kong dollar is not an international currency and that has not hindered it becoming an international financial centre. It has yet to be proved whether internationalisation of a country's currency is a necessary prerequisite.' The changes in the Singapore dollar's use are primarily designed for within the city-state.
A string of conditions remain with the common theme of preventing potential leakage of Singapore dollars off-shore for possible speculative activities.
With all these new measures, proceeds raised in Singapore dollars in Singapore must be converted to a foreign currency before being transferred offshore.
Far freer usage of Singapore dollars will be allowed within the capital markets.
The currency changes are expected to have only modest repercussions for the Singapore-dollar exchange rate.
Kuan Weng Chi, senior capital markets analyst at Technical Data, said: 'We might see some initial reaction, but that's all.
'The Singapore dollar is likely to weaken anyway, not because of this, but because the Singapore economy is slowing down and the currency is still relatively strong compared to its neighbours.' Singapore's fledgling bond market is one of the biggest beneficiaries of the changes in a bid to make it more liquid.
The monetary authority sees huge potential for the republic's bond market, given the large amounts of capital Asian countries are likely to need in coming years.
In the short term, it says countries will need to recapitalise insolvent banks and companies, while in the medium term, as their economies recover, infrastructure projects will be re-started and companies will again need to tap capital markets.
To get things going, the monetary authority recently issued its first longer-term Singapore government securities with a 10-year yield curve to serve as an industry benchmark.
These will be issued at regular intervals, depending on how much the market can absorb with foreigners now allowed to engage in Singapore-dollar repurchase agreements.
Also, statutory boards such as the Jurong Town Corp, Land Transport Authority, Housing Development Board and Public Utilities Board will be encouraged to issue bonds to fund infrastructure projects.
The housing board is also examining the feasibility of securitising its mortgages for issue as high-grade bonds for the first time.
Despite its efforts, analysts say it is questionable how much interest Singapore will generate from foreign issuers and subscribers in the near term.
Asian dragon bonds targeted at Asians were pioneered in the early 1980s, but after their initial launch these were primarily traded outside the region. Eurobonds and Yankee bonds are more favoured.
Paul Alapat, Southeast Asia fixed-income specialist at Indosuez WI Carr, said: 'Singapore is a high-savings economy and therefore a potential avenue for capital.
'They have deepened the instruments available, but I expect to see only a gradual deepening of the market.' He said a lot depended on how restrictive the authority was.
Mr Kuan also doubted whether many East Asian firms would come rushing to Singapore to issue bonds, at least in the near term.
He said: 'The region is in very bad shape at the moment. They won't want just any company raising money here.'