Treasury Today Country Profiles in association with Citi

Singapore – staying on top

Ferris wheel in Singapore

Despite lacking the natural resources of its neighbouring countries Singapore has experienced an astonishingly fast ascent to become one of the most developed countries in the world and a remarkable hub for financial activity. We examine the hows and whys of its rise and the outlook for its future.

Singapore: facts and figures

Land area:
715.8 sq km
Total population:
Real per capita GDP:
Labour force:
Gross national savings (% of GNI):
Literacy rate:
96.4% (aged 15 and above)

Following its independence from Malaysia in August 1965, Singapore, which was then a third-world nation with poor infrastructure, limited capital and most importantly no natural resources, had to develop a plan to steer its economy.

In a bid to create jobs in the early 1960s, the government set up the Jurong Industrial Estate – the first of many – and the Economic Development Board (EDB) with a $100m budget to woo foreign investors. These two events marked the start of Singapore’s path to industrialisation.

Thirty years later, the EDB shifted its focus from manufacturing to new key industries – chemicals, electronics and engineering, as well as funding growth in biomedical sciences.

The Singaporean government is once again in the process of restructuring its economy, this time to ensure growth is anchored in productivity and innovation in the mid to long term.

The 2013 budget builds on the restructuring measures put in place since 2010, with additional initiatives for businesses to upgrade, create better jobs and raise wages.

For the fourth consecutive year, Singapore has unveiled restrictions on foreign labour, with total workforce growth targeted to ease to 1%-2% annually through 2020, compared with an average 3.3% per annum over the past 30 years.

Foreign labour policies were tightened further through higher foreign worker levies, dependency ratio ceilings and more stringent eligibility requirements for certain passes, with the least productive sectors that rely most heavily on low-skilled foreign workers being hit the hardest.

“The foreign workforce can’t keep growing faster than the local workforce, not indefinitely,” Singapore’s Finance Minister, Tharman Shanmugaratnam, told Bloomberg in March. “That’s why our most important economic and social strategy is that of raising productivity to a new level.”

Wrapping up the March 2013 budget debate in parliament, Shanmugaratnam warned that economic restructuring will be painful but it cannot be put off any longer, arguing that Singapore was at a critical point in transition and that the push for a restructure was not just an economic issue but also a key social pillar.

“If we do not achieve momentum in the next three years, there’s a real risk that we will be in exactly the same position as today. Both workers and businesses will be worse off,” he told parliament.

Elaborating on the budget’s two priorities – economic restructuring and society inclusivity – he said that productivity growth has been weak and that 2011’s 2.6% decline was “miserable”.

Manu Bhaskaran, Founding Director and CEO of Centennial Asia Advisors, says, “Singapore is moving towards a productivity-driven growth model, settling for lower growth but higher quality. This in the sense of the impact on income distribution and opportunities for Singaporeans, as opposed to foreign workers, etc.”

He says this entails stricter controls on immigration, especially low-skilled workers and semi-professionals, coupled with several government incentives for businesses to upgrade and move up the value chain.

Citi’s Head of Treasury Advisory for Asia Pacific, Gourang Shah, agrees. “Singapore used to be an electronic manufacturing centre but it was forced to move up the value chain. It has to constantly innovate to keep its developed world status and stay one step ahead of the others.”

David Blair, Managing Director of Acarate in Singapore and the former Vice President, Treasury of Huawei, notes that the government remains committed to the finance sector, including treasury and is consciously trying to make Singapore more attractive for locating regional treasury centres (RTCs).

“A potential issue that has been covered recently in the press has been that by limiting the number of work permits the country runs the risk of making it harder to get expatriates into the country. However, these constraints are mainly placed on low-end service jobs and Singapore remains committed to high value-add finance jobs.”

However, Blair concedes that work permit applications are now taking on average a couple of months to process instead of a few weeks, as in the past.


According to a report published in March 2013 by the Monetary Authority of Singapore (MAS), Singapore’s real GDP grew by 1.3% in 2012. On a quarterly basis, it grew 1.5% year-on-year in the fourth quarter, after registering zero growth in the third quarter. According to latest estimates by the Ministry of Trade and Industry, GDP in the first quarter of 2013 was a year-on-year contraction of 0.6%. MAS has forecasted a growth of 1%-3% for 2013, supported by domestic-oriented activities and some recovery in the sectors reliant on external demand. Activity is expected to remain modest in the first half, especially in the externally-exposed industries, before picking up in the latter half of the year, in tandem with the strengthening of the global economy.

2012 Q1 Q2 Q3 Q4 Full year
Real sector
Real GDP growth, year-on-year % 1.5 2.3 0.0 1.5 1.3
Real GDP growth, quarter-on-quarter saar1 % 7.8 0.1 -4.6 3.3 -
Index of industrial production, year-onyear % -1.1 4.2 -1.4 -0.4 0.3
Non-oil domestic exports, year-on-year % 6.0 3.7 -3.2 -4.2 0.5
Labour market and prices
Unemployment rate, sa2, % (Average) 2.1 2.0 1.9 1.8 2.0
CPI inflation, year-on-year % 4.9 5.3 4.2 4.0 4.6
Wage growth, year-on-year % 0.9 2.8 3.1 2.5 2.3

Source: Monetary Authority of Singapore

  1. Saar: seasonally adjusted annualised rate

  2. Sa: seasonally adjusted

However, domestic-oriented activities are likely to remain firm, with the construction sector expected to see significant expansion in 2013, in view of a strong pipeline of projects awarded over the past years. This could create positive spillover effects for activities such as bank lending and real estate services.

Structure of economy Nominal value-added (% Share) Real growth (%)
Total 100.0 1.3
Goods producing industries 26.8 1.2
Manufacturing 20.7 0.1
Construction 4.4 8.2
Utilities 1.6 3.4
Other goods industries 0.0 1.2
Services producing industries 68.5 1.2
Wholesale and retail trade 17.0 -0.7
Transportation and storage 7.7 2.7
Accommodation and food services 2.5 2.8
Information and communications 3.8 2.6
Finance and insurance 11.9 0.5
Business services 14.6 3.9
Other services industries 11.0 0.1
Ownership of dwellings 4.8 0.7

Source: Ministry of Trade and Industry

Inflation is forecast at 3.5%-4.5%, underpinned by firm accommodation and private road transport costs. However, if these two items are excluded, MAS expects that core inflation will be around 2%-3%.

The government estimates casinos contribute 1.5%-2% of GDP and employ 22,400 people. It has subsequently generated new revenue through taxes on gaming, accounting for 2.2% of total operating revenue, according to the Financial Times.

Sovereign ratings

Singapore is the only Asian country to have AAA credit ratings from all three major credit rating agencies – Standard & Poor’s (S&P), Moody’s and Fitch.

In affirming the AAA rating with a stable outlook in March this year, Fitch says the ratings are underpinned by Singapore’s strong sovereign balance sheet that serves to insulate the small and open economy from external shocks. Sustained fiscal surpluses have $259.3 billion – equivalent to 5.4 months of current external payments and 65.2% of broad money supply at the end of 2012.

The sovereign’s large current account surplus has been a main driver for sustained accumulation of foreign exchange (FX) reserves. The country is one of the largest net external creditors (in sovereign, bank and non-bank sectors) among AAA peers. Furthermore, its net international investment position reached 276% of GDP in 2011, the highest among AAA sovereigns.

Fitch however notes that although Singapore’s ratings are supported by strong economic performance, underpinned by an attractive investment environment, a low tax regime and high quality public institutions, as a small open economy, Singapore’s economic growth is more volatile than the AAA range median and is more exposed to global economic cycles.

“Nevertheless, Singapore has demonstrated its capacity to weather economic volatility, helped by its fiscal flexibility,” said Fitch.

In its credit rating report last year, Moody’s warns that challenges facing the country include containing consumer price and property inflation over the near term, and fostering a growth model that is driven by productivity and innovation over the longer term.

Double taxation agreements and free trade agreements

Singapore has 69 comprehensive double taxation agreements (DTAs) and seven limited DTAs in force. Limited DTAs are restricted to tax exemption on income derived from international shipping and/or air services.

Singapore’s network of free trade agreements (FTAs) covers 18 regional and bilateral FTAs with 24 trading partners. These include the ASEAN Free Trade Area (AFTA), with the US, India, China and Japan, among others.

Blair says what matters for RTCs are tax treaties and reduced withholding taxes, and these often go with FTAs. “Singapore is very strong in this respect. It is better than Hong Kong, which is viewed by many states as a tax pariah and therefore has less tax treaties,” he says.

The MAS also has cross-border collateral arrangements (CBCAs) with Bank Negara Malaysia, Bank of Thailand, Bank of England, Banque de France, Bundesbank, De Nederlandsche Bank and the Federal Reserve Bank.

Prior to these arrangements, MAS accepted only securities issued by AAA rated entities. By broadening the collateral pool to include foreign currency-denominated collateral, MAS now accepts certain kinds of collateral issued by entities with lower credit ratings but it applies larger haircuts.

Bhaskaran says Singapore’s multiple trade and economic partnership agreements have improved its competitiveness as a hub for global companies to base themselves to serve Asian growth.

“The gradual progress in ASEAN economic integration through AFTA in the past and soon through the ASEAN Economic Community will help, as will our economic links with Malaysia through the Iskandar region in southern Malaysia, which is being increasingly linked to the Singaporean economy with benefits for both countries.”

Financial sector

Singapore remains ranked fourth best financial centre, together with London, New York and Hong Kong, according to the Global Financial Centres Index 2013 (GFCI) released in March this year. Hong Kong and Singapore are now only two points apart, whereas there is a 48-point difference between London in the top spot and Singapore in the fourth spot.

In the GFCI’s list of questions, Singapore drew the most number of mentions as a centre that is likely to become more significant, followed by Shanghai, Hong Kong and Seoul.

In 2012, the finance and insurance sector in Singapore grew by a modest 0.5%, much lower than the 8.9% recorded in 2011, due to weak performance in sentiment sensitive segments such as FX trading and stockbroking, according to Singapore’s Ministry of Trade and Industry.

Singapore’s FX market saw an average daily turnover of $337 billion in 2012, largely unchanged from 2011. Trading in major currencies such as the US dollar, euro and Japanese yen continued to dominate the market with the euro/US dollar pair registering the highest trading volume.

In 2012, the derivatives market activity in the Singapore Exchange rose by 11% to 80 million contracts. Total options trading volume rose by 126% and total futures trading volume grew by 7.9% to five million option contracts and 75 million futures contracts respectively from 2011.

In its 2012 Financial Stability Review, published in November last year, MAS says Singapore’s economy and financial system have been resilient through the global financial crisis, with growth having slowed significantly. However, it says growth is still expected to be positive in 2013.

“Financial markets have remained stable despite financial fragilities and persistent macroeconomic uncertainties globally. Concerns over liquidity and counterparty credit risks have been muted in the domestic inter-bank market, while confidence in Singapore Government Securities remains high,” said the report.

The MAS expects interest rates to continue to remain low, but warns that there is a risk that expectations of low interest rates for the foreseeable future will become entrenched. It cautions that while Singapore dollar funding for domestic lending remains adequate, non-Singapore dollar funding risk should be closely monitored especially since non-Singapore dollar loan growth has outpaced non-Singapore dollar deposit over the past year. “A sudden spike in global risk aversion could trigger stresses in global US dollar liquidity, with adverse knock-on effects on the Singapore banking system.”

The central bank says corporates are more leveraged now than they were a year ago, and although they seem well-positioned to cover their interest expense, this could change if interest rates rise significantly.

Fund raising in other corporate finance markets rose, with large firms issuing twice the amount of debt in the first three quarters of 2012 compared to the previous year.

Currency interchangeability and RMB clearing

Three countries – Singapore, Malaysia and Brunei – adopted a system of free interchangeability of their respective currencies on 12th June 1967. Malaysia bowed out in 1973, but Brunei and Singapore decided to continue with the arrangement which is still in force today.

Under the arrangement, both countries undertake to accept the currency issued by the other and to exchange them at par, without charge, into their own currency.

The MAS says this arrangement can be viewed as a “currency union between two countries characterised by a one-for-one exchange rate of their currencies and a joint (but managed) float against all other currencies.”

The central bank says the two currencies serve as a medium of exchange, as direct payment in trade and investment between the two countries, thereby reducing conversion costs. It also eliminates exchange-rate fluctuations.

In April this year, the MAS and the People’s Bank of China (PBoC) signed a memorandum of understanding (MOU) on renminbi (RMB) business co-operation.

Under the agreement, MAS and PBoC will co-operate closely in reviewing the conduct of RMB businesses and clearing arrangements in Singapore. The two central banks also agree to establish a regular dialogue to review RMB liquidity conditions and discuss issues concerning the stability of the RMB market.

In addition, the PBoC signed an RMB Clearing Agreement with the Industrial and Commercial Bank of China (ICBC) Singapore branch in February, allowing the branch to provide RMB clearing services to participating banks and their customers for the next five years.

Payment and settlement systems


In order for Singapore to be a key financial hub, according to Ying Siew Ang, Head of Transaction Services in ASEAN, J.P. Morgan, it needed to leverage on operational efficiency and productivity, making sure that all payments are executed seamlessly, and allowing corporates to see payments or receipts almost instantly. Hence it developed MAS Electronic Payment System (MEPS+), which began operating in December 2006 and provides several improved features over its predecessor, MEPS.

MEPS+ offerings includes:

  • Use of SWIFT message formats and networks. This allows for greater straight through processing and cost savings by banks.

  • Advanced queue management capabilities which help participants to better manage settlement risks.

  • Automated collateralised intraday liquidity facilities.

  • Automated gridlock detection and resolution.


Continuous Linked Settlement System (CLS), a global multicurrency settlement system, went live in September 2002 and initially settled FX transactions in seven major currencies – the Australian dollar, Canadian dollar, euro, yen, pound sterling, Swiss franc and the US dollar. The Singapore dollar was added in 2003, together with the Danish krone, Norwegian krone and Swedish krona. FX trades involving the Singapore dollar and other CLS currencies can now be settled in CLS without exposure to FX settlement risks.

For efficiency, three local banks – DBS Bank, Overseas-Chinese Banking Corp (OCBC) and United Overseas (UOB), who are CLS shareholders – established the Clearing and Payment Services Pte (CAPS), a common clearing utility to process their CLS transactions.

Singapore ACH

The Singapore Clearing House Association (SCHA) was formed in December 1980, as an association to establish, manage and administer clearing services and facilities for cheques as well as debit and credit items of its members. In addition to MAS, at the end of 2010, it had 46 ordinary members and 51 associate members. The SCHA provides Singapore dollar cheque clearing, US dollar cheque clearing and inter-bank Giro clearing services through the automated clearing house (ACH). J.P. Morgan’s Ang says inter-bank Giro payments comprise 56% of the local ACH, with the remaining 44% in cheques.


Both Singapore dollar denominated cheques and US dollar cheques presented to and drawn on banks in Singapore, are cleared through the Cheque Truncation System (CTS). For US dollar cheques to be cleared in ACH, both the presenting and paying banks must be participants of ACH.

Inter-bank Giro

Inter-bank Giro (IBG) was enhanced in July 2001 to a browser-based eGiro system, which allows participants to send and receive Giro items, including returned and rejected items, electronically via a secured communication network. With eGiro, clearing cycles for the direct credit and debit transactions are shortened significantly.

Financial institutions

Commercial banks operate as full banks, wholesale banks or offshore banks. As of April 2013, there were a total of 123 commercial banks operating in Singapore. Commercial banks, licensed and governed under the Banking Act, may undertake universal banking. In addition to commercial banking, they may carry other businesses regulated or authorised by MAS, including financial advisory services, insurance broking and capital market services. They are however barred from engaging in non-financial activities.

There are three local banks in Singapore, with the biggest being DBS, followed by OCBC and UOB. Prior to the consolidation of the local banking industry in Singapore, some banks had already established a footprint in Asia, according to J.P. Morgan’s Ang; however, the expansion increased significantly after the consolidation. DBS, which bought Kwong On Bank and later Dao Heng Bank in Hong Kong, is now focusing more on the North Asia market, while OCBC is looking into the South Asia market and UOB is looking at both.

Full banks with Qualifying Full Bank privileges may operate in a total of 25 locations. Wholesale banks can offer the same range of banking businesses as full banks but cannot carry out Singapore dollar retail banking activities.

Offshore banks can engage in the same activities as full and wholesale banks for businesses transacted through their Asian Currency Units, which banks use to book all their foreign currency transactions conducted in the Asian Dollar Market. The banks’ Singapore dollar transactions are separately booked in the Domestic Banking Unit.

Fitch, in a statement in March, notes that domestic banks maintain solid asset quality and are well-capitalised, with a non-performing loan (NPL) ratio of 1.2% and core Tier 1 capital adequacy ratio of 12%-13% as of end 2012.

The credit rating agency says risks related to a potential build-up of a property bubble, spurred by prolonged negative real interest rates and optimistic prospects for Asia, led the authorities to introduce a seventh round of property cooling measures in January this year. These measures, together with the banks’ strong standalone strength and healthy household balance sheets, mitigate downside risks for the domestic banking sector.

“The system may face more risks from growing exposure to high growth markets such as China, India and Indonesia, but this is not a material risk in the near term,” Fitch says.

Cash management

J.P. Morgan’s Ang says, given that Singapore has no FX controls, various kinds of cash management techniques are used, whether physical cash concentration or notional pooling. “It all comes down to how well known the technique is in the market and how comfortable the corporate is in applying these techniques as each of them has its own advantages and disadvantages. It also depends on the corporate’s appetite and what they require.”

She says both physical cash concentration and notional pooling have been in the market for a very long time, but notional pooling is not as well known or researched. “There are also tax implications that need to be considered by the corporates and, as such, some companies tend to favour one technique over the other. But having said that, all the techniques are available in Singapore and there is no regulatory limitation as to which technique is being applied.”

Blair agrees that the country is open from a tax, legal and regulatory perspective. Because of that, Singapore is the most popular hub in Asia for cash concentration arrangements like zero balance account, sweeping and pooling.

“Singapore is Asia’s largest derivative centre and especially strong in FX, so it is excellent for financial risk management,” says Blair.