A dent in Singapore's financial hub dream
By Megawati Wijaya
SINGAPORE - When the United States and Europe showed early signs of financial
distress last year, Singapore came to the rescue of a handful of big investment
banks hit by subprime mortgage problems. But as the financial contagion
spreads, the island nation's open economy is emerging at least in the short
term as one of the region's biggest losers from the crisis.
Despite the island state's emergence as a regional financial hub and its
limited exposure to the toxic securitized financial products which have blown
big holes in Western banks' balance sheets, Singapore's economy is in a bad
way. That's because its economic growth is still highly reliant on commercial
trade, with merchandise exports representing over 220% of gross domestic
product (GDP), according to a Credit Suisse research report.
Typically, around 20% of those shipments are destined for US markets, making
Singapore's economic growth highly correlated to America's performance,
according to the same research. As such, Singapore is already technically in
recession, where a slump in exports pushed quarterly growth into negative
territory for the second quarter in a row.
Third-quarter gross domestic product (GDP) contracted 6.3% from the previous
quarter, a steeper decline than the 5.7% contraction in the previous three
months. The Ministry of Trade and Industry revised down its full-year economic
growth forecast for the second time this year, recently trimming its projection
to "around 3%" from 4% to 5% previously.
Swiss investment bank UBS sees the economy growing at 3.5% this year, but
recently revised down sharply its 2009 forecast from 4.8% to 1.5%. Meanwhile,
inflation earlier this year reached a 26-year high and consumer prices are on
pace to rise between 6% and 7% this year, according to the Monetary Authority
of Singapore (MAS). The Straits Times Index also fell to its five-year low of
below 1,600 in the last week of October from the comfortable 3,500 in the
beginning of the year.
"The direct financial exposure of Singapore financial institutions to the US
sub-prime mortgages is relatively small," said Anand Srinivasan, associate
professor of finance at the National University of Singapore (NUS) Business
School. "However, the indirect impact of a worldwide recession is bound to be
large."
Singapore's National Trade Union Congress has (NTUC) warned that retrenchment
will rise next year as business continues to deteriorate.
However, Singapore's ability to maintain a position as a global financial hub -
already the world's largest private banking center next to Switzerland - will
also likely require a rethink in the wake of the crisis, some analysts say.
Srinivasan believes the sudden demise of global investment banks, in which some
of which Singapore's government-linked investment arms recently took major
stakes, will have a negative impact on previously money-spinning proprietary
trading and hedge fund activities here.
Meanwhile, the decline in stock market wealth across the globe means the need
for wealth managers and private bankers will decline in the months, if not
years, ahead. One Singapore-based relationship manager at a major bank who
requested anonymity said that the funds he has under management have dropped by
30% in the past two months.
Singapore is world renowned for its banking confidentiality and has on occasion
stood accused of managing money of suspect origin. One former US Treasury
Department official says that in recent years Singapore finance authorities
sent out a small fraction of the number of alerts about potentially suspect
financial transfers compared to their counterparts in Hong Kong.
The current global financial crisis has underscored broadly the need for
greater regulation of banks and financial institutions, not just in the US and
Europe, but worldwide. Should Singapore delay or resist the reforms called for
in the West, it could have an impact on the island state's financial hub
ambitions.
According to Srinivasan, more regulation and transparency of counterparty
exposures is needed to prevent future financial contagion of the like recently
spread from securitized sub-prime mortgage products.
"The development of a financial hub is something that takes a long time, as it
requires a core of investors, institutions, laws and so on," said Srinivasan.
"I think Singapore is on the way to becoming a financial hub, but the crisis
would neither help nor hurt this move."
Others believe that Singapore could actually emerge from the crisis stronger
and better positioned with Wall Street's collapse. "Banks in Singapore earn
their income mostly through loans, and they don't invest out their books," said
Eric Sidharta, a relationship manager at a local bank. "In fact, the crisis may
result in a stronger internal control and management processes. Banks that
adapt best and fastest will survive," he said.
Winners and losers
Whether Singapore's homegrown DBS, one of Southeast Asia's largest commercial
banks, will emerge stronger from the recent turmoil is in doubt. Thousands of
retail investors lost their holdings when Lehman Brothers-linked financial
products offered and managed by DBS failed after the US investment bank
collapsed.
The bank said 4,700 of its customers in Singapore and Hong Kong had invested a
total US$360 million into the products, which are now deemed worthless. Angry
investors have accused the bank of misrepresenting the products' risk and have
asked the bank or government to refund their money. DBS Hong Kong has said that
it will return 100% of investors' investments, while the bank's Singapore
office has said that it will deal with the failure on a case-by-case basis.
A large number of investors in the Lehman Brothers "high note five" product in
Singapore have yet to receive any reply from DBS Bank after waiting three to
five weeks after filing complaints that they were "missold" the notes,
according to Gerard Ee, who was appointed by DBS as an independent external
consultant to oversee its process of handling customer complaints.
The Monetary Authority of Singapore has said it too would look into the
"misselling" complaints. It has promised an imminent review of the structured
products industry and hinted at new regulations requiring better descriptions
and labeling of products and better training for professional relationship
managers.
"There will be increasing rules and regulations on investment, which in a way
will limit the banks' revenue stream in the short term," said Sidharta.
The multi-billion dollar question is how Singapore's two major government
investment arms, Temasek Holdings and GIC, have fared amid the global financial
meltdown. Both investment firms have historically been criticized for their
lack of disclosure, but in line with Singapore's broad financial hub ambitions
have recently moved towards greater transparency in their reporting.
Temasek announced in a release in August that it recorded a record profit of
$12.8 billion for the fiscal year which ended in March. The investment company,
with $134 billion in assets, said it had as of March spread its investments
near evenly between Asian and non-Asian markets. Financial service-oriented
investments represented 40% of Temasek's portfolio, according to the same
company statistics.
Significantly, Temasek highlighted its December $4.9 billion capital infusion
in US investment bank Merrill Lynch and also noted that in July it invested
another $3.4 billion into the ailing firm, which collapsed in October. The
sovereign fund also invested $2 billion in Barclays and raised its existing
stake in Standard Chartered Bank to around 19%.
GIC, which invests well over $100 billion in assets worldwide and is believed
to be among the world's top five sovereign wealth funds, had as of March
allocated nearly 70% of its total investment to positions in the US and Europe.
Last year, it provided a $6.88 billion capital lifeline to Citibank and an
additional $9.7 billion to Switzerland's UBS.
GIC said in a report from its chief investment officer on the firm's activities
through March 2008 that by mid-2007 it had made a "modest reduction" in its
exposure to public equity markets due to perceived "market excesses". GIC also
said it invested in "several external funds that invested in mortgage-related
securities and corporate leverage loans, where selling by distressed holders
had created compelling value".
With the more recent global collapse in banking shares and evisceration of
major financial institutions exposed to those same sub-prime products,
financial analysts estimate both Temasek and GIC are likely sitting on
multi-billion dollar paper losses for the fiscal year scheduled to end in March
2009. Neither investment firm releases quarterly results of their investment
activities.
Nonetheless some local analysts believe the investments in distressed financial
assets will bounce back over the medium term and eventually contribute to
solidifying Singapore's position as a global financial hub. Srinivasan notes
that the stakes were bought when markets were already significantly off their
peaks and that "the time range for judging such investments should be between
5-10 years".
He notes that leading US investors like Warren Buffet and other major sovereign
wealth funds have recently committed capital to distressed financial assets.
"Are all these people stupid? I don't think so," said Srinivasan. "In bad
times, people with cash can take advantage of bargain basement prices of assets
... One needs a longer time horizon to evaluate the reasonableness of these
investments."
Megawati Wijaya is a Singapore-based journalist. She may be contacted at
megawati.wijaya@gmail.com. With additional reporting from Shawn W Crispin in
Bangkok.
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