The country's rapid development was closely linked to the government's efficient financial management. Conservative fiscal and monetary policies generated high savings, which, along with high levels of foreign investment, allowed growth without the accumulation of external debt. In 1988 Singapore had foreign reserves worth about S$33 billion, which, per capita, put it ahead of Switzerland, Saudi Arabia, and Taiwan. That same year, the domestic savings rate rose to one of the highest in the world (42 percent), as gross national savings, comprising public and private savings, totaled S$20.9 billion, 19 percent higher than in 1987. By the mid-1980s, however, domestic demand had been so stunted that it became increasingly difficult to find productive areas for investment. In the recession year of 1986, for the first time, gross national savings exceeded gross capital formation. This was in spite of a 15 percent cut in the employers' contribution to the Central Provident Fund. As a result, already depressed domestic demand was depressed even further, falling by 1 percent in 1986 after a decline of 3 percent the previous year.
Singapore's foreign reserves were, in fact, the country's domestic savings held overseas. Since the source of the domestic savings was in large measure the compulsory savings held by the Central Provident Fund, Singapore had a huge domestic liability. The fund claims, standing in 1988 at S$32 billion, almost equalled Singapore's foreign reserves. But since they were fully funded and denominated in Singapore dollars, the country was relieved of the problems of showing either a budget deficit or an external debt.
Indeed, for many years, the government had pointed out that its foreign reserves, managed by the Government of Singapore Investment Corporation, were larger than that of wealthier, more populous countries. The reserves issue became politicized after 1987 when Lee Kuan Yew proposed a change in the country's government to an executive presidency in which the president (presumably Lee himself) would have veto power over Parliament's use of the reserves. In 1986 the government-sponsored Report of the Economic Committee admitted that "over saving" was a problem. Not until 1988, however, were some tentative steps taken to invest the surpluses directly in productive resources. This process included a one-time transfer to government revenue of S$1.5 billion from the accumulated reserves of four statutory boards.
The country's public sector financial system was structurally complex and difficult to follow owing to different accounting practices. Funds essentially were derived from three sources: tax revenue (directly on income, property, and inheritance; indirectly as excise duties, motor vehicle taxes; stamp duties, and other taxes), nontax revenue (regulatory charges, sales of goods and services, and interest and dividends); and public sector borrowing. The statutory boards had separate budgets, although they played a major role in infrastructure creation. Government companies also were not included in public finance reporting.
After 1975 the government consistently had substantial current as well as overall surpluses. From 1983 to 1985, total government expenditure averaged 59.8 percent of current revenue. In fact, the overall surplus exceeded even the net contributions to the Central Provident Fund. The seven major statutory boards also had consistent current surpluses. Economic theoretician and member of Parliament Augustine Tan suggested that Singapore's public spending and public savings were much too large. According to Tan, the government tended to err on the side of financial surplus, despite frequent forecasts of deficit, because the government consistently underestimated tax revenues and overestimated expenditures. These surpluses then put upward pressure on the exchange rate and eroded manufacturers' competitiveness.
Currency, Trade, and Investment Regulation
Singapore had an exceptionally open economy. Fundamentally strong, the currency reflected a sound balance of payments position, large reserves, and the authorities' conservative attitude. From 1967 until June 1973, the Singapore dollar was tied to the United States dollar, and thereafter the currency was allowed to float.
The Monetary Authority of Singapore, the country's quasicentral bank, pursued a policy of intervention both domestically and in foreign exchange markets to maintain a strong currency. This multifaceted strategy was designed to promote Singapore's development as a financial center by attracting funds, while inducing low inflation by preventing the erosion of the large Central Provident Fund balances. Furthermore, the strong currency complemented the high wage industrial strategy, forcing long-term quality rather than short-term prices to be the basis for export competition.
Given Singapore's dependency on imports, however, setting an exchange rate always generated controversy. The 1986 Report of the Economic Committee did not clarify official thinking. It recommended that the exchange rate should "continue to be set by market forces, but its impact on [Singapore's] export competitiveness and tourist costs should be taken into account. The [Singapore] dollar should, as far as possible, be allowed to find its own appropriate level, reflecting fundamental economic trends."
After 1978, when the government abolished all currency exchange controls, Singaporean residents (individuals and corporations) were free to move funds, import capital, or repatriate profits without restriction. Likewise, trade regulations were minimal. Import duties applied only to a few items (automobiles, alcohol, petroleum, and tobacco), and licenses were required only for imports originating from a few Eastern bloc countries. There were no export duties. As the government played an active part in promoting exports, there was an extensive system of supports including an export insurance plan.
The government promoted investment vigorously through a whole range of tax and investment allowances and soft loans aimed at attracting new investment or at helping existing businesses upgrade or expand. There was no capital gains tax. Special incentives existed for foreigners, including concessionary tax arrangements for some nonresidents, relief from double taxation, and permission to buy commercial and certain residential property. In 1985 extensive tax reductions were introduced to reduce business costs.
Financial Center Development
As a result of its strategic location and well-developed infrastructure, Singapore traditionally had been the trade and financial services center for the region. In the 1970s, the government identified financial services as a key source of growth and provided incentives for its development. By the 1980s, the focus was on further diversification, upgrading, and automation of financial services. Emphasis was placed on the development of investment portfolio management, securities trading, capital market activities, foreign exchange and futures trading, and promotion of more sophisticated and specialized fee-based activities.
Consequently, by the mid-1980s, Singapore was the third most important financial center in Asia after Tokyo and Hong Kong. The financial services sector, having sustained double digit growth over the previous decade, accounted for some 23 percent of GDP and employed approximately 9 percent of the labor force. In 1985, however, growth in the sector slowed to just 2.6 percent, and in December of that year the Stock Exchange of Singapore suffered a major crisis, which forced it to close for three days. In view of the troubled domestic economy, observers worried that Singapore's future as a financial center looked somewhat problematic. Furthermore, international financial market deregulation threatened to create an environment in which it would be more difficult for Singapore to thrive, especially given its high cost structure and somewhat heavy-handed regulatory environment. The government took steps to correct some of the problems, and by 1989 Singapore's financial service sector could again be described as "booming."
The financial sector included three types of commercial banks (full license, restricted, and offshore), representative offices, merchant banks, discount houses, and finance companies. In 1988 there were 13 local, 64 merchant, and 134 commercial banks. All banks in Singapore were administered by the Monetary Authority of Singapore and were required to hold a statutory minimum cash balance against their deposit and other specified liabilities with the authority.
The Development Bank of Singapore was established in 1968 to provide financial services supporting industrialization and general economic development. Owned jointly by the government (49 percent) and private sector shareholders, it had evolved from a long-term financing institution to a multiservice bank. The largest Singaporean commercial bank in terms of assets in 1989, the Development Bank was listed on the stock exchanges of both Singapore and Malaysia. Through its subsidiaries, it also provided specialized financial and insurance services, factoring, stockbroking, merchant banking, and venture capital investment management services. The Development Bank was the city-state's largest source of long-term finance, including equity and venture capital financing, medium- and long-term loans, and guarantees.
The Singapore Foreign Exchange Market had grown remarkably since the 1985 recession. As an international financial center, the country had benefited from the worldwide increase in business as well as from the related expansion in the financially liberated Japanese market. Major currencies--the United States dollar, the Japanese yen, the West German deutsche mark, and the British pound sterling--were actively traded. Volumes in such other currencies as the Australian dollar had risen as well. Average daily turnover was US$45 billion in 1988 compared with US$12.5 billion in 1985.
Singapore established the Asian dollar market as the Asian equivalent of the Eurodollar market in 1968 when the local branch of the United States-based Bank of America secured government approval to borrow deposits of nonresidents, mainly in foreign currencies, and use them to finance corporate activities in Asia. At the time, expanding economic development in Southeast Asia was rapidly increasing the demand for foreign investment funds, and the desirability of a regional center able to carry out the necessary middleman function was apparent. Singapore offered the ideal location. The Asian dollar market was essentially an international money and capital market for foreign currencies, and its assets grew from US$30 million in 1968 to US$273 billion in November 1988. To operate in the market, financial institutions were required to obtain approval from the Monetary Authority of Singapore and to set up separate bookkeeping entities called Asian currency units for transactions in the market. Funds were obtained mainly from external or nonresident sources--central banks, foreigners seeking a stable location such as Singapore to deposit cash, multinational corporations, and commercial banks outside Singapore.
In 1973, to stimulate the expansion of the Asian dollar market, the Monetary Authority of Singapore established the so-called offshore banking system, designed to concentrate on that market and its foreign exchange operations. Beginning in 1983, funds managed in Singapore on behalf of nonresidents and invested offshore or in the local stock market were exempt from tax. The fees earned for managing such offshore funds were taxed at a concessionary rate of 10 percent.
Inaugurated in 1973, the Stock Exchange of Singapore was governed by a committee comprising four elected stockbroker members and five appointed nonbroker members. In late 1988, the 327 companies listed on the main board of the exchange were classified into six groups: industrial and commercial, finance, hotel, property, plantation (farming), and mining. The market underwent a major, prolonged reorganization following the December 1985 collapse of a Singaporean company, Pan Electric, which revealed a massive web of forward share dealings based on borrowed money. The collapse resulted in a tighter regulation of the financial futures market and the securities industry. In 1986 the Securities Industry Council was established to advise the minister for finance on all matters relating to the securities industry.
In 1987 the government introduced tax incentives to encourage the trading of international securities in Singapore. The National Association of Securities Dealers (NASDAQ) in the United States and the Stock Exchange of Singapore established a link to facilitate the trading of NASDAQ stocks in Singapore by providing for the exchange of price and trading information on a selected list of NASDAQ stocks between the two exchanges. A move by the Singapore exchange to a new, spacious location in 1988 brought a transformation in trading methodology, including partial automation of the trading system, which until then had adhered to the traditional outcry auction system.
By 1987 Singapore's stock market, fuelled by bullish sentiments sent indices soaring to new highs--a recovery from the December 1985 crisis. All gains, however, were wiped out by the crash of world stock markets in October 1987, a crash from which the Singapore exchange had made substantial recovery by mid-1989.
Singapore also expanded other international financial markets in the late 1980s. Trading in gold futures originally was undertaken in the Gold Exchange of Singapore, which was established in 1978 and reorganized in 1983. The scope of its activities was widened to include financial futures trading, and it was renamed the Singapore International Monetary Exchange (SIMEX). Starting in 1984, the financial futures market featured a mutual offset arrangement between SIMEX and the Chicago Mercantile Exchange, which allowed contracts executed on one exchange to be offset on the other without additional transactional cost for market participants. The linkage was the first of its kind in the world and greatly facilitated round-the-clock trading in futures contracts. In 1988 six forms of futures contracts were traded: international gold futures; the Eurodollar time deposit interest rate; the Nikkei Average Stock Index; and three currency exchange rates--US dollar/West German deutsche mark, US dollar/Japanese yen, and US dollar/British pound sterling. Trading volume on the SIMEX had grown steadily.
The restructured Government Securities Market was launched in May 1987, auctioning at market rates taxable Singapore government securities ranging in maturity from three months to five years. Previously, long-term government stock was sold to a captive market of banks, insurance companies, and a few individuals and nonprofit organizations.
International Financial Organizations
In 1966 Singapore became a member of the International Monetary Fund ( IMF), the World Bank, and the Asian Development Bank. Two years later, Singapore joined the International Finance Corporation, an affiliate of the World Bank. Singapore's loans from the World Bank and the Asian Development Bank had been used to finance development projects relating to water supply, electric power generation and distribution, sewerage, telephone services, educational services, and environmental control. A total of fourteen loans were secured from the World Bank between 1963 and 1975 and fourteen from the Asian Development Bank between 1969 and 1980. There were no further loans in the 1980s. Singapore's estimated outstanding borrowings from the World Bank and the Asian Development Bank in late 1988 totalled US$35.1 billion and US$45.4 million, respectively. Its 1988 quota of IMF special drawing rights (SDR)--related to its national income, monetary reserves, trade balance and other economic indicators--was SDR 92.4 million.
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