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 [email protected]
With additional reporting from Shawn W Crispin in
Bangkok.
http://www.atimes.com/atimes/Southeast