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 “mis-sold” 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 “mis-selling” 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.”