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Singapore: The Lion City lightens its touch

27 Nov 1998

Singapore has recently stepped up a gear in its drive to become Asia's premier international financial centre -- unveiling a raft of initiatives to stimulate the domestic capital markets, encourage greater participation from international borrowers and investors and establish the island state as the leading regional hub for fund management and investment banking. Some say the renewed drive has been sparked by the Asian crisis, which has drawn attention to Singapore's relative strength and stability and left many Asian economies with vast financing needs. Others say it is because the Singapore government misjudged the likely effect of Hong Kong's handover to China, and is having to battle harder than ever to compete with its long-standing rival to the north. Whatever the motive, there is no doubting the extent of Singapore's ambitions, the progress that has already been made and the speed with which the government is prepared to act to facilitate its aims. But what is less clear is whether a city famed for its authoritarian attitudes can ever develop the laisser-faire culture necessary for international capital markets to thrive -- or whether there is enough business available to justify international financial institutions stepping up their presence. Jackie Horne reports.

Singapore's lofty ambitions of shaping itself into Asia's premier financial centre were blazoned a little over 12 months ago in a seminal speech by deputy prime minister BG Lee Hsien Loong.

After years characterised more by rhetoric than substance, the nature and tone of Lee's remarks suggested not just a renewed drive to develop Singapore's financial markets -- but a new willingness to embrace a spirit of openness and liberalisation for which the country is hardly famed.

The keynote speaker at a function celebrating the 10th anniversary of Sesdaq, Singapore's second stockmarket, BG Lee -- the elder son of the island state's modern founder and emblematic first prime minister Lee Kuan Yew -- declared: "We must shift our emphasis. We need to regulate the financial sector with a lighter touch, accept more calculated risks and give the industry more room to innovate and stretch the envelope."

Signalling a new and radically different era for the island state, the speech was swiftly followed by a massive shake-up at the ultra conservative and all-powerful Monetary Authority of Singapore (MAS) which has since embraced a pro-active business attitude under its new chairman BG Lee.

Action has been swift, with a raft of MAS notices and directives issued this year -- prising open previously restricted areas of the domestic capital market and laying the groundwork for its future development.

In particular, the clear need for a broad-based bond market was signalled by Lee as one of the government's highest priorities. "In the short term, Asian counties will need to recapitalise insolvent banks and companies," he stated in August.

"In the medium term, as their economies recover, they will again be building infrastructure projects and companies will need to tap capital markets."

Steps taken to date include: extending and deepening the government yield curve; pushing forward Singapore's statutory boards and government-linked companies to create a semi-sovereign curve; opening up the swap market to allow issuance by a first supranational entity -- IFC (International Finance Corporation); initiating a series of tax breaks; and encouraging the promotion of international standards through the formation of practitioners' associations.

In doing so, the government has embarked on a twin pronged strategy -- aiming to develop the Singapore dollar denominated market as a tool for more efficient balance sheet management by local corporates, but also to use it as a springboard for the wider aim of becoming Asia's main origination and syndication centre for debt instruments outside of Japan.

"We have certainly set our sights high," admits Yeo Lian Sim, assistant managing director of the MAS's markets and investments department and the woman credited with easing the IFC's path to market.

But why it has taken the Singaporean government so long to acknowledge the importance of developing its debt markets is a question few bankers or government officials seems able or willing to answer.

As Singapore takes to the starting blocks, Hong Kong already has a nine year headstart in terms of active government involvement, although few would doubt that Hong Kong has publicly shot itself in the foot by cutting off supranational issuance in the hope of stemming speculative pressure on Hong Kong's currency peg via the swap market.

Citicorp's director of corporate finance Lui Chong Chee concedes: "We know that we are only taking our first steps in becoming an international financial centre. But everyone has to start somewhere."

What has yet to be determined is whether Singapore has certain innate advantages over its well-established northern rival that will allow it to leapfrog it, whether Hong Kong will maintain its pre-eminence, or whether the two will happily co-exist, each serving its surrounding geographical area.

And perhaps most importantly of all is the question of whether in Singapore, a country famed for its adherence to rules and unquestioning obedience to government, the local banking community and its regulators have the necessary stomach to embrace risk and all that it will entail.

Government deregulation

A new organisational structure shifting the emphasis of the MAS away from regulation to supervision was formally put in place at the beginning of April.

As part of its expanded strategic role, the authority also established a Financial Sector Promotions Department (FPD) which has been tasked with fostering a progressive financial services sector and acting as an intermediary between officials and the outside world.

One of the department's first major accomplishments was escorting a handful of the city's statutory boards on a fact-finding mission around the world's major bond markets.

Since then it has also established its own industry newsletter Financial Hub and is in the process of setting up offices in London and New York.

The London office will be headed by Lee Boon Ngiap, the official who currently represents the MAS on its capital markets committee and bankers believe that the new year may yet see the department helping to organise international roadshows for a first Singaporean names in many years.

The new user-friendly atmosphere pervading the authority was applauded by IFC assistant treasurer Mamta Shah at the signing ceremony for the group's inaugural S$300m deal in mid-October.

"The reason we were able to do our deal in such a record timeframe was because of the good support we had from MAS officials, who were able to make all the relevant decisions through one single phone call," she explains.

"The authority exhibited a degree of professionalism that I have never witnessed in government circles before and it felt more like working with a business partner than it did with a government official."

A year before MAS's personnel re-organisation, the government had established a Financial Sector Review Group, whose ongoing recommendations have led to a number of key directives de-regulating the bond markets.

In particular, a report submitted by the Stock Exchange of Singapore (SES) in late July highlighted a number of areas for development. These included: government issuance of long term bonds; encouragement of GLCs and financial institutions to issue high quality medium and long term bonds; MAS sponsorship of a mortgage securities vehicle; selective permission to allow supranationals and other OECD countries to issue bonds in Singapore dollars; SES sponsorship of a credit rating agency; the implementation of a delivery versus payment (DVP) system with links to Euroclear and Cedel; and the establishment of a working group to develop a "vibrant, competitive and efficient debt capital market".

A few weeks later MAS notice 757 concerning the internationalisation of the Singapore dollar was published. Re-emphasising the government's policy of not encouraging the internationalisation of its currency, the notice did, however, allow for the issuance of Singapore dollar-denominated bonds by foreign owned companies of "good standing".

The notice stipulated that where banks wished to arrange Singapore dollar-denominated bonds for non-residents and the proceeds would be used onshore, MAS permission was no longer necessary.

However, if banks wanted to arrange issues for non-residents where proceeds would be used offshore, approval would be needed and further the bonds would need to be swapped into a foreign currency.

To kickstart the development of a mortgage backed securities (MBS) market, banks were also allowed to transact Singapore dollar currency swaps and interest rate swaps with Singapore-incorporated special purpose vehicles (SPVs) as long as the proceeds were for the express purpose of securitising mortgages of financial institutions in Singapore.

Two months later, MAS notice 613 followed, allowing for certain swaps to be classified as exempted assets for banks' minimum cash balance (MCB) and minimum liquid asset (MLA) requirements.

The notice stated that Singapore dollar funds received by banks as a result of foreign currency swaps deriving from bond issuance by non-resident entities could be exempted, provided that certain requirements were met.

The original maturity of the bond must be longer than three years and has no shortening features; the Singapore dollar/foreign currency swap must be entered into at the time the non-bank customer receives the S$ proceeds from the bond; the amount and timing of the cashflows of the S$/foreign currency swap must match those of the S$ bond issue; and details of the S$/foreign currency swap, including the banks' receiving the S$ swap fund, must be provided to the MAS when applying for an exemption.

Alongside its partial lifting of restrictions governing swaps, the government also unveiled a series of tax initiatives during its annual budget.

A new tax treatment for debt securities issued within a period of five years commencing 28 February 1998 had three principal points. First, tax exemptions were granted on fee income earned from arranging, underwriting and distributing debt securities in Singapore. Second, a concessionary tax rate of 10% (compared to the normal corporate tax rate of 26%) was applied on interest income from holding debt securities, though for offshore investors, interest is tax exempt.

And third, the government applied a concessionary tax rate of 10% on income earned from trading debt securities.

In Hong Kong, however, the Hong Kong Monetary Authority and the four government-linked issuers (Mass Transit Rail Corporation, Kowloon-Canton Rail Corporation, Hong Kong Mortgage Corporation and the Airport Authority) are completely tax exempt on both interest receipts and trading profits as are 10 supranational issuers.

For corporate and bank issuers, by contrast, a concessionary tax rate equal to 50% of profits tax was applied in 1996.

Government bond market

Until earlier this year, Singapore's government bond market (SGS) was characterised by sporadic, shorter-dated issuance, unrealistically low yields and thin liquidity.

As of the year end 1997, total outstandings in the government market totalled S$23.1bn ($14.25bn) a roughly 15% ratio to the country's $92bn GDP.

Over the course of the year there had been only five issues of two, five and seven year paper amounting to S$3.5bn ($2.16bn), but a net increase of just S$460m ($284m) after maturing paper is discounted.

Both the supply and demand side of the equation were neutered; the former constrained by government surpluses negating any need for funding and the latter by the fact that SGS paper ranks as an eligible security for banks' reserve requirements. As part of its drive to deepen the domestic capital markets, the government sector was one of the first areas to feel the winds of change.

Consequently, rather than simply expecting a new issue when government paper matures, the state's eight primary dealers have now been issued with a regular monthly calendar comprising two issues of 10, seven and one year paper and three issues of five and two year paper over the course of a year.

To benchmark the longer end of the curve, an inaugural 10 year bond was also launched in June. At S$1.5bn ($925m), the issue was moreover considerably larger in size than previous government auctions which have tended to be around the S$500m to S$700m mark.

Primary dealers report that the net result of increased issuance has been greatly enhanced secondary trading volumes combined with gently rising yields.

Compared to 1996 when average daily turnover totalled S$270m ($166m), activity doubled during 1997 to average S$534m ($329m) and was up again by the first quarter of 1998 to $757m ($467m). During the last four months or so, according to MAS figures, however, turnover is now hitting the magical S$1bn ($613m) mark.

As HSBC Markets chief dealer Chua Ghee Kiat puts it: "Volume has risen incredibly over the last four months, with a lot of interest from new accounts. We are seeing interest from retail banks, insurance companies and even foreign banks who because their credit lines across the region have been cut, are looking for safer ways to make profits."

She adds: "Now that trading levels are shooting up and yields have started to become slightly more realistic, some banks are also beginning to feel that the market is one worth taking a view on."

Bankers would say, however, that while government bond yields are still not a true reflection of risk, the trend is at least in the right direction.

Where only a year ago the differential between the government curve and cross-currency swap rates could be as wide as 150bp to 180bp, it came down to as narrow as 5bp at one point as swaps came sharply inwards, before widening back out to a current 15bp


And bankers argue that ,while the currency has not been internationalised, swap market spreads did react sufficiently at the beginning of the year to reflect the risk premium of Singapore's status as an Asian credit.

Generally speaking, however, traders comment that demand still outstrips supply, with secondary market trading falling far short of expectations.

Says HSBC's Chua: "Many accounts feel that their one chance to get paper is in the primary market. "Where there is nothing else out there to buy, everyone adopts a buy-and-hold strategy and trades of over S$100m can move the market."

The MAS believes that trading can be enhanced through further extensions of the primary dealer system first established in 1987. Alongside six local banks: Development Bank of Singapore (DBS), Oversea-Chinese Banking Corp (OCBC), Overseas Union Bank (OUB), United Overseas Bank (UOB), Keppel Bank and Tat Lee are two foreign banks -- Citicorp and HSBC, the latter joining after Credit Suisse First Boston gave up its seat in 1997.

In December Standard Chartered is also set to become a primary dealer, although the MAS's Yeo denies that this is connected to any vacancy following the merger between Keppel and Tat Lee.

"It is purely co-incidental," she states, "and we have had some enquiries recently about primary dealership which we welcome, because we are always keen to have institutions of good standing on board."

Clearing and settlement of government bonds is conducted through the authority's own system MEPS (MAS Electronic Payment System), a major technological step forward unveiled by deputy premier Lee in August.

The government hopes that the system, which provides real time gross settlement for Singapore dollar interbank payments and delivery-versus-payment (DVP) settlement for SGS transactions, will soon be extended to enable real-time DVP settlement for all Singapore dollar denominated securities -- and, in the future, be linked with other RTGS systems, enabling global payment-versus-payment for foreign exchange transactions.

However, alongside MEPS, the stock exchange has also adapted its own Central Depository Ptd Ltd (CDP) to enable electronic book entry for the clearing and settlement of Singapore dollar bonds, with links to Euroclear and Cedel being developed.

The test transaction for the new clearing system, which removes the need for physical delivery of bond certificates, was the IFC bond issue. All corporate bonds will now be cleared through the new system, as will bonds issued by the statutory boards, although they are likely to be traded off the government desks.

The statutory boards

The main driver behind the government's ambitions to develop Singapore as a regional financial centre are its 44 statutory boards and government-linked companies which will raise fixed income funds to finance their development projects.

Typically the three boards which have already publicly stated their intention to use the bond markets are doing so under government instruction, having had their government grants reduced and preferential lines of funding cut.

"Essentially monopolies, the boards were until this year extremely cash rich," explains one fund manager. "Benefiting from preferential funding rates from POSBank (the government-owned Post Office Savings Bank, which is now integrating with DBS) to build up their reserves, they were always historically much more active as investors than they were as borrowers."

But the fund manager adds: "The government now believes that for future operating needs it is healthier for them to borrow in the marketplace and has tried to wean them off their reliance on cash. Particularly for recently privatised companies such as Singapore Telecom and Singapore Power (previously under the Public Utilities Board), one of the conditions attached to their corporatisation was that the government would take away much of their reserves so that they would no longer maintain too much of a competitive advantage."

Initially the government tried to push some of the boards into the market last year, only backing down when interest rates shot up to the 7% to 8% mark and a number complained.

Since then, momentum has built up around three boards -- Jurong Town Corporation, Housing & Development Board and Land Transport Authority, all of whom are likely to have completed benchmark bond offerings by the second quarter of 1999.

Jurong Town Corporation (JTC), which already had some experience in the domestic private placement market, has been the forerunner -- launching and closing a first public bond off its newly inaugurated MTN programme in late November.

The S$4m programme and subsequent S$300m bond issue set a number of firsts.

It is the largest MTN programme in Singapore's history, it is the first bond issue by a statutory board to be listed on the Stock Exchange of Singapore (SES) and it is the first to be offered to the retail public, who have been allowed to purchase S$10m in paper through their Central Provident Fund (CPF) investment funds.

Commenting on the launch of the programme, JTC chief financial officer Lim Teow Beng said that the programme would, from now on, be "the main borrowing vehicle taking care of all our funding needs".

Under the programme, arranged by Citicorp with a dealer panel comprising DBS, OCBC, OUB and UOB, it was decided to offer paper via the same pay-as-you-bid tender system used for Singapore government securities.

Pricing, announced after the completion of the tender on Monday, comprised a semi-annual coupon of 4.75% per annum equating to a spread of 48pp over government bonds. While the institutional offering closed 2.6 times oversubscribed, the retail tranche was completely sold out within

1-1/2 hours of opening.

Having received widespread publicity in Singapore, the 1,000 lots available to the general public were pitched for the widest possible placement with the minimum denomination reduced from S$25,000 ($15,337) to S$10,000 ($6,134).

Demand was said to have been particularly strong because the bonds offered a yield pick-up over cash deposited with the CPF -- which currently yields roughly 4.25%, a figure derived by combining the 12 month deposit and savings rates of the big four local banks.

The decision to opt for a tender process for the S$290m institutional tranche surprised a number of observers, who concluded that it reflected a desire to achieve the finest possible pricing.

Some believe, however, that the deal is in danger of falling between two stools. While the paper will be cleared and settled through CDP as a corporate bond and will not be eligible for reserve free status, it is likely to be traded by the government desks which settle SGS paper through MEPs.

Other boards are said to be still evaluating whether to follow the template set by JTC or to utilise more traditional institutional placement methods. The MAS's Yeo is similarly ambivalent.

"We have considered whether the statutory boards should use the format of a domestic note issuance programme, a wider MTN programme or just stand-alone bonds," she says.

"Probably most will opt for an MTN format which will not just be limited to Singapore dollars, because it is important to look at the global picture as well. However, the most important consideration is that these borrowers will have a continuous need for funds and must therefore choose that structure which best meets their funding needs and creates an investor base."

How the credit will be evaluated by the market also remains an important consideration. "Whether the boards will all rest on a single curve remains to be seen," Yeo adds.

One banker believes that, because the semi-government market is still in its infancy, it will take some time for proper credit analysis to develop beyond a familiarity with each board on an operational level.

"The market is still not looking at potential paper in terms of a premium over SGS," he states. "To most investors the only consideration is the absolute rate a transaction will pay vis-à-vis other investable securities."

Having already launched S$1.7bn ($1.04bn) in the private placement bond market since 1985 and with S$780m ($478.5m) in outstandings, JTC is already relatively well known among the investment community. But, because of its status as an industrial developer, some bankers consider it the least desirable credit.

Established in 1968 as a tool for the implementation of the government's rapid industrialisation programme, the board has in recent years changed course as it tries to meet demand for shrinking land resources and competition from newly industrialised countries around the rest of Asia.

From its first project developing the mangrove swamps of Jurong into a manufacturing base, the group now runs 33 industrial estates in Singapore, housing more than 6,000 companies.

In recent years, JTC's overseas arm has also diversified rapidly, establishing joint venture operations in India, the Philippines, Thailand, Vietnam, Indonesia and China. But this expansion, once considered a credit plus, is now viewed as a likely drag on earnings.

Having earmarked S$1.85bn ($1.14bn) for new development over the 1997/98 financial year, the group's last year end figures showed an 18% increase in operating income to S$1.69bn ($1.04bn) and a 20% increase in operating surplus to S$1.02bn ($629m), or S$822m ($507m) after income tax and contributions to the government's consolidated fund are taken into account.

Behind JTC, the Housing & Development Board (HDB) is also well advanced with plans to come to market. HDB is selecting a financial adviser and hoping to launching a first issue before Christmas.

Citicorp is strongly tipped to win its third major mandate, arranging the S$2bn ($1.23bn) MTN programme which HDB wants to use as a shelf to fund its construction and redevelopment projects over the next 18 months.

Established in 1960, HDB -- which acts as the government's residential property developer -- has built over 700,000 flats and housed 86% of the population in the interim period.

According to government figures, nine out of 10 residents now own their own homes and the board is considered to be the government's most likely vehicle for setting up a mortgage corporation -- particularly now that the state's largest mortgage provider government-owned POSBank is being merged with DBS.

Should HDB decided to securitise its mortgage portfolio, it has a role model in the Hong Kong Mortgage Corporation. In both jurisdictions, a lack of long term funding for banks has meant that there are few fixed rate mortgage schemes, with most mortgages in Singapore being arranged against the prime rates of the big four local banks.

But local bankers point out that HDB differs very significantly from either a stand-alone mortgage corporation or a commercial bank. Its unique status has meant that proposals for asset securitisation have been complicated to the degree that the board now considers stand-alone bond issues to be its most likely funding avenue over the short term.

"There are a number of legal issues which will necessitate numerous changes to the HDB act," one local banker points out. "HDB is also very unusual in the sense that all property technically belongs to the board, with homeowners leasing their flats for a finite period."

"Simply acquiring a flat in the first place is very difficult," the banker continues. "Singaporeans have to queue for years to gain acceptance and when they do they have to be first time buyers, whose joint income does not exceed a certain threshold."

Driven by the government's perceived hesitation in establishing a separate corporation, most now believe that the baton has been passed to the combined talents of DBS and POSBank.

Morgan Stanley Dean Witter, the financial adviser to the merger, has also spent much of the year working on a residential mortgage securitisation for DBS -- a bank with which the US investment bank has historically had close ties.

Rounding up the trio, Land Transport Authority (LTA) is considered by funds and bankers alike to be the best credit. Established in 1995, it was formed through the merger of four existing bodies -- Mass Rapid Transit Corporation (MRT), Roads & Transport Division of the Public Works Department, Land Transport Division of the Ministry of Communications, and the Registry of Vehicles.

Having never previously issued bonds of any kind, LTA has -- like HDB -- amended its articles of incorporation to allow it to tap the bond markets.

The government has, however, pointed out that while the body will be more self-financing than in the past, the state will continue to subsidise the capital costs of rail projects and continue its policy of charging for road usage.

In terms of railway projects, future fundraising activity is likely to be considerable. The MRT, for example, is in the process of building a North-East Line which will bring 13 stations on stream by the year 2002, an extension to Changi Airport due for completion in 2000, and developing a Light Rapid Transit system (LRT) linking the MRT to three new towns -- Bukit Panjang, Sengkang and Punggol.

Corporate bond market

Singapore's notoriously secretive private placement bond market has proved infertile ground for most banks attempting the break the monopoly of longer established rivals.

Although the MAS provides figures of annual debt issuance levels, pricing details for individual deals are hard to come by -- either from the state's publicity-shy corporates or the banks which serve them and remain keen to maintain a competitive advantage.

Of the Singaporean banks, however, OCBC and DBS are generally reckoned to lead the field, with Schroders, Citicorp, Société Générale and Crédit Agricole Indosuez the most active international banks.

According to MAS figures, bond issuance during 1997 jumped markedly over 1996 -- with a total of 48 issues worth S$5.92bn ($3.63bn), compared with 31 issues totalling S$2.99bn ($1.83bn) the previous year.

Bankers characterise two main problems. DBS director Chan Mun Seng says: "Singaporean investors adopt a buy-and-hold strategy because there is a shortage of good names and few transactions which match their annuity profiles."

He adds: "There is a heavy concentration of paper in the property sector because this is a key sector which needs longer term funding."

The second difficulty is that pricing often bears very little relevance to risk, a factor participants believe may change when a fully transparent and liquid government yield curve emerges.

"A proper government or semi-government yield curve could actually work in favour of the corporate market because at the moment there is no risk-free curve to price anything off," says Pei Sai Fan, head of capital markets at OCBC.

"Because there has been no benchmark, it has often been the case that investors determine what the yield should be."

Like Hong Kong, Singapore has also not made any moves to establish a domestic ratings agency. Yeo of the MAS believes it is unnecessary. "It should be good enough to rely on the services of the global ones," she states.

Despite an SES recommendation that the government should consider the establishment of a domestic agency, its attitude seems to reflect the fact that Singapore simply does not have enough potential issuers on its own to make a rating agency cost effective.

Pei contends: "Singapore has the least number of companies rated by Moody's and Standard & Poor's of any country in Asia."

With no track record in the international debt markets, Singaporean companies have very little experience of the ratings process or (it would seem) appetite for the costs involved.

They also have a reputation for being loath to submit to greater financial disclosure. In an effort to combat this, one of the government's many initiatives is to sponsor an award for the "Most Informative Annual Report".

Some bankers hope that supranational issuers may be able to play the same kind of educational role in the Singaporean market as has been evidenced in other domestic bond markets in recent years.

The debut S$300m ($178m) three year for the International Finance Corporation (IFC) in early October broke a lot of ground, both in terms of setting a new pricing benchmark and aiming for wide distribution.

Citicorp was lead manager of the issue, which was priced at 99.446 with a semi-annual coupon of 4.5% to yield 4.7% (50bp to 55bp over the implied government curve), with DBS and OCBC as co-leads. Fees were set at 30bp, equating to a 15bp arrangement fee and 15bp underwriting and selling fee.

The deal was classified as a stand-alone transaction with no placement outside of Singapore, with the lead managers reporting that the final orderbook comprised between 50 and 60 investors taking an average ticket of $3m to $5m and with none larger than $8m.

Having been originated after the government's policy pronouncement in mid-August, the deal was bought to market in record time -- and was primarily timed to make a political statement about the government's ambitions for the domestic bond market to coincide with the IMF/World Bank's annual meeting in Washington.

A second important consideration hastening the deal's launch -- according to the lead bankers -- was the fact that swap rates were fast disappearing from screens as a new interest rate cut in the US bought domestic rates down across the board and led Sibor to hit a year to date low.

Other bankers and fund managers, on the other hand, were amazed that the lead had been able to put a swap together, and had also been able hit a sub-Libor funding target of 35bp in the process.

Although none had assumed that the MAS would allow the issue to fail, most believed that the swap market's poor liquidity -- combined with a relatively unattractive yield -- would prove difficult hurdles to overcome.

When bankers and institutional funds canvassed the market after the deal's completion and found very few institutional accounts willing to admit that they had taken paper, a consensus developed that Citicorp had warehoused the swap -- and must have been forced to retain a majority of paper on its own books.

"I had thought it would be quite difficult to sell the deal at the yield it was priced at and was even more surprised to hear how quickly it sold out," one fund manager reports.

"I checked around myself and found that none of us had really taken up much of the issue. After some scratching of heads, it was eventually concluded that the deal had gone into banks' trading books and treasury centres instead."

Although this may be fine in the short term, it does not augur quite so well in terms of a long term and stable investment pattern for the sector. Banks were primarily said to have seen the issue as an attractive proposition in capital gains terms because sharply dropping interbank rates meant that they were funding themselves near the 1% level.

"Looking for capital gains, a trading book will only hold on to the bonds until it reverses or diminishes and this can happen even if their funding costs are still positive," says one observer.

"What happens if they all decide to book the capital gains? Can the market bear it if they all try and get out at once?"

For insurance firms in particular, the kinds of yield being offered by the IFC and now by the statutory boards are simply too low. "We pay our policy holders a fixed return which makes our cost of funding almost 6% at the moment," says one institutional manager.

"We all want to buy long term paper with chunky yields and our hope is that only a certain number of issuers will be able to come at these levels before a level of resistance is felt that forces greater sense onto the market."

Insurance funds also had little to gain from the government's tax initiatives of the spring since their policy holders were already subject to 10% taxation levels. By contrast, major beneficiaries were cash rich corporates, standing to gain more from holding the bonds than keeping their surplus funds in cash.

"In selling this deal to the government-linked companies, it was emphasised that they shouldn't just look at the nominal price," explains one banker. "Although the IFC deal paid much the same rate as a time deposit, because it was subject to 10% rather than the normal 26% rate, it became much more attractive when grossed up."

Market infrastructure

While many observers argue that it is unfair to be unduly critical of a maiden transaction in a largely untested market, most are sceptical that the market can develop quickly unless a number of obstacles can be overcome.

By nature of their similarities, the same problems that Hong Kong-based capital markets practitioners have struggled to overcome look likely to vex those Singapore to an equally strong degree.

In both centres, competition from the bank markets has traditionally made bond issuance a less attractive proposition for the limited number of companies looking for fixed income funds.

So too, by dint of their small populations, question marks have also hung over the amount of investable funds available to domestic fixed income markets.

What Singapore has in its favour is a market that is shaping up to be extremely competitive -- with a number of banks trying to stake their claim, although so far Citicorp seems far ahead of the field.

While Hong Kong has seen the concept of committed market-making erode in tandem with the growing dominance of HSBC Markets, there is at least the possibility that a handful of banks in Singapore will provide enough depth to encourage some form of active secondary market support.

What Hong Kong has in its favour is an efficient swap market that until the authorities clamped down, was able to continue functioning effectively even at the height of speculation against the peg.

In Singapore, on the other hand, the swap market is extremely thin and bankers believe that it is likely to remain so until the government takes the unpalatable step of internationalising its currency.

As far as the IFC's deal was concerned, most observers remain convinced that Citicorp was its own counterparty based on a natural long position created by either its mortgage book or lending to corporate customers. None can quite believe that any bank could have handled an issue size of up to S$300m.

Says Schroders director Lee Soon Kie: "The problems of the swap market make life very hard, because it is difficult shifting even S$50m to S$100m."

He adds: "It is very difficult to hedge an underlying swap book, because there are hardly any derivatives and you can't short the bond market in any way."

Observers also believe that the current downward direction of interest rates will make it very difficult for banks to find willing counterparties for future deals.

"If the lead pays US dollar fixed to the borrower and receives US dollar floating in return, it needs to find a domestic counterparty willing to part with Singapore dollar fixed," says one trader.

"But with interest rates continuing to slide downwards, no-one is going to wanted to pay Singapore dollar fixed, because they will want to hold onto those positions for as long as possible."

But the major sticking point remains the government's determination not to open up its currency. "Until the government comes up with a credible policy on the internationalisation of the Singapore dollar, the market will never grow to the extent that it wants it to," argues one banker.

"It is simply impossible to deliver the sub-Libor funding targets of supranational issuers because of the restrictions on the swap market which make it very difficult to lend out funds to non-residents on the swap offer side."

But the government has remained adamant that it will not be altering its current stance. "As a small and open economy, we cannot afford to have our currency subject to manipulation or speculation," BG Lee said recently. "Even if the attacks ultimately fail because of our sound fundamentals, they may still do us considerable harm."

On the other hand, both Lee and Yeo stress that the provisions contained in MAS notice 757 are neither final nor permanent. The policy is subject to review after one year in the light of practical experience and the government says that its implementation of the non-internationalisation policy will continue to evolve.

Says Yeo: "We have taken one step and we will wait to see what happens. If the process is orderly and development stays in harmony with the economy than we will take another step. It is not a once and for all process. We have only just started and will proceed further when we believe the time is right."

To many observers, the government's attitude smacks too much of wanting to have its cake and eat it. Cynics observe that while the government is keen to attract business to Singapore, it remains less willing to give anything back.

"Clearly Singapore has upped the ante in its ambitions to be the regional financial centre," says one US investment banker. "But for an outsider, it is going to be difficult for us to view Singapore in this light if it is not even prepared to let the markets do anything in its own currency and certainly has no intention of creating a Euro-Singapore dollar sector."

Government officials have long learnt how to sidestep the issue when pressed. "London does not retain its position in the Eurobond market because sterling is the strongest currency," Yeo retaliates.

"Whether you can play the sterling markets or not has no bearing on its role as a syndication centre. This comes down to a mixture of geography and the skill sets available there."

Bond investors

In terms of funds under management, Hong Kong still far exceeds its southern rival -- with a total of roughly $200bn under management as at year end 1997 versus $76bn in Singapore, of which some S$21.1bn ($12.9bn) was invested in bond instruments.

Crucially, however, Singapore has tried to lure fund managers down to the Lion City with the promise of being able to manage up to $20bn of the $100bn in reserves handled by the Government of Singapore Investment Corporation (GSIC) and also the S$79.7bn ($49bn) in pension fund money handled by the Central Provident Fund (CPF).

Although the government has progressively deregulated its management criteria for the CPF, it has not to date proved very successful in getting Singaporean residents to switch funds out of their CPF balances and into approved unit trusts.

By the beginning of the year, only S$400m ($245m) had been invested in the 22 approved unit trusts, prompting the government to promote further liberalisation earlier this autumn.

Approving a further 24 fund management companies for inclusion under the CPF Investment Scheme, government officials stressed their hope that more members would make better use of professional fund management services.

As BG Lee put it: "Singaporeans prefer to punt individual stocks on their own, rather than entrust their money to professional managers. Unfortunately the record shows that few individual punters make money."

Because the CPF funds have generally under-performed non-CPF unit trusts because of strict investment guidelines, the government has also removed most of its investment caps permitting a wider range of assets to

diversify risk.

The domestic bond market, which was previously off-limits, has also been a major beneficiary. Under the new rules, all bond issues listed on the SEC are now classified as eligible investments, with JTC's pioneering transaction being the first to receive significant support.

Second to government-linked funds, the major investor base in Singapore is the handful of insurance companies which manage roughly S$20bn ($12.26bn) in funds.

Traditionally some of the largest investors in the Singapore dollar bond market, the insurance funds have been largely sidelined during recent events, because most managers have considered the yield levels too low.

While Hong Kong has largely been handicapped by an investor base which limited to a few government-linked funds with trustee limitations on investable securities, Singapore is hoping to open the door a little wider and already has a immense head start through the CPF.

"I wouldn't want to labour the point," says one banker, "but in Hong Kong, once you have discounted the Jockey Club, the Land Fund and a couple of ITICs [China's provincial government international trust and investment corporations] trust you run out of investor names pretty quickly."

He adds: "The Singapore government is trying to do the right things to foster the development of a proper investor base. The trick is to plant enough seeds in the field to grow wheat and not just one giant oak tree."

Regional ambitions

The Singapore government has acknowledged that if it is to ever become a world-class financial centre it needs to attract a broad range of issuers, investors and intermediaries.

"As our domestic economy is small, our capital markets can only grow by listing and trading more foreign equities and bonds," said BG Lee recently.

In essence the government believes that the Asian financial crisis presents Singapore with an unparalleled opportunity to maximise its immunity from the crisis by placing itself at the forefront of efforts to recapitalise the region. In becoming Asia's debt hub, the government hopes to dangle its own bond market as the lure.

Many investment banks' origination teams covering southeast Asia are already based in Singapore. Now the government hopes that they will move their entire investment banking teams as well.

But bankers remain sceptical. "Is there enough of an incentive to move down?" queries one. "It's certainly a very nice idea, but there is not necessarily the momentum behind it yet."

Hong Kong-based bankers argue that there never will be. "One of the reasons why Singapore is suddenly getting so serious is that it misjudged what would happen after the handover to China," states one banker. "It has now realised that Hong Kong is going to remain a major financial centre and that it will not be able to take away business to the extent that it thought it would."

In two major senses the Asian financial crisis has also played against Singapore's chances. In terms of cost, the crumbling yen and falling property prices in Hong Kong have made the region's two most expensive geographical centres much cheaper than they were a couple of years ago.

Second, the collapse of the Indonesian economy and the increasingly inward-looking stance of the Malaysian government have robbed the city state of its two major hinterlands.

Many observers have often argued that it is Hong Kong's links to China which are its most powerful weapon. The potential for business on the mainland is generally seen as the main reason why the investment banking community chooses to remain in Hong Kong.

While China's potential is undeniable, it has to date been largely felt in the bank market rather than the bond market. The overriding reason why Hong Kong has always ranked as Asia's main debt syndication centre -- and is likely to become so again -- largely stems from the fact that the Asian FRN market primarily existed as a banker to Korea.

For the Japanese banks and more latterly the Korean and Taiwanese banks which came to form the backbone of the Asian FRN market, Hong Kong is the more likely natural home.

As far as Singapore is concerned, the prospect of taking Singaporean names offshore remains a strong lure. Given that Singapore is the highest rated of any nation in Asia including Japan, there could be little doubt that triple-A and high double-A rated Singaporean names would be lapped up by international investors.

This was clear in late March when the government's investment arm Temasek Holdings guaranteed a $1bn exchangeable bond offering for Singapore Telecom.

Led by Morgan Stanley and DBS, the five year issue marked the largest ever issue of its kind from Asia (excluding Japan) and was able to achieve pricing that would have unthinkable for any other credit in the region.

Issued in the name of Fullerton Global Corporation, the par priced deal carried a redemption price of 122.5% and a yield of 150bp through Treasuries, with hard no call for two years and thereafter subject to a 130% hurdle.

But such issues are a rarity, with Singapore names reluctant to become more than fleeting players in the international debt markets. The most recent issuance from a Singaporean bank, for example, was in 1996 when Keppel Finance Ltd completed a $15m fixed rate and warrants issue on a private placement basis via Keppel Bank.

Before that, the last issue was back in 1986 -- when OUB raised $100m via a Standard Chartered led FRN, which had a 25 year final maturity and five year call at 12.5bp over six month Libor.

For many potential issuers, the costs of acquiring a rating and paying the necessary legal fees combined with the necessity of throwing open their financial statements to investor scrutiny have all acted as disincentives against tapping the capital markets.

When this is added together with the cheap availability of funds in the domestic bank market or cash rich balance sheets which preclude a funding need, it is hardly surprising that there has been little evidence of a growth in interest or activity.

And the region's financial crisis has, if anything, reinforced the reluctance of companies and banks to tap offshore markets. Given that few Singporean companies have a natural US dollar funding requirement, most have become even more wary of raising funds out of their home currency.

"All they have to do is look out of the window and see what happened on their own doorstep in Indonesia to go running straight back to bed," remarks one banker.

The major international investment banks have all looked at the market, but remain undecided about making a commitment. "If they believe that entering the domestic bond market will lever local companies into the international market, then they will almost certainly go ahead. But at the moment, the jury is still out," one banker comments.

Adds another: "Those companies which do actually need funds are generally all property related and the government does not deem them of good enough standing to fly the flag for Singapore.

"Those companies which do not really need funding have all talked about doing the odd issue, but what's the point for either themselves or the investor base? It would not prove cost-effective and, for an investor willing to put in the credit analysis, what is required is regular and liquid issuance."

But perhaps Singapore's most important challenge is to rid itself of its reputation for suffocating control. Lee characteristically stated that Singapore could not afford to be seen in the same light as free-wheeling and free-dealing Hong Kong.

"We had no track record or credibility. We had to earn it the hard way," he surmised back in August. "In this we were unlike Hong Kong, which had a British umbrella and hence could afford to be more tolerant of failures."

He joked: "It is said that in Hong Kong anything not expressly forbidden is permitted, whereas in Singapore anything not expressly permitted is forbidden." While he added that this approach had consistently promoted rather than hindered growth, the flipside has been a slowness to develop new products and markets.

"Too often the industry has waited for government to signal its acceptance of change or even to take the initiative, rather than leading developments and actively contributing their ideas," Lee argued.

Lee's many speeches indicate that the government has changed path. But the proof lies in the implementation and the foot soldiers will be slow to follow suit after decades of unquestioning compliance.

Locally-based bankers and fund managers still hesitate to speak their minds openly -- let alone be quoted -- for fear of MAS reprisals. So too, for observers used to being inundated with research material, Singapore presents a number of hurdles -- not least in banks' reluctance to divulge even the most basic of figures.

Few would disagree that capital markets work most effectively where there is freedom of capital and freedom of information. Despite recent efforts, Singapore is hardly in a position to claim either.

Yet the prevailing tone of the market is one of optimism, even if few believe that the government will able to achieve its most cherished aims within the near term.

"We feel extremely positive," says Martin Taylor, head of debt origination at HSBC Markets. "The government has put its weight behind the primary markets and within a year we should see a good mix of statutory boards, government-linked companies and pure corporates."

Citicorp's Lui adds: "We have an interest and a passion in these markets. The authorities are doing a wonderful job and we too have taken great pains to ensure that we creating solid foundations."

Singapore has much to prove. But where other countries have turned in on themselves as a result of the Asian financial crisis and banks have pulled back resources from the region, Singapore has seen the future and reached out to grasp it with both hands.

"For us in Singapore, the market feels unquestionably more vibrant than it has ever done in the past," Taylor continues. "Obviously it is never going to be comparable to the US Treasury market and for offshore players it undoubtedly still appears too small and restricted.

"But if that means that players like ourselves who have made a commitment here get a longer lead time to get our feet under the table, then so much the better." *

27 Nov 1998