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Chap11 Sin

Chap11 Sin

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bond markets
bond markets

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Published by: owltbig on Dec 21, 2010
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11Singapore
Tan Kok Hui
Executive Summary
As in other Asian countries, the domestic bond market in Singaporeis a relatively new phenomenon, whose development has been made allthe more pertinent in the wake of the regional crisis.The island city-state is one of the strongest economies in Asia,posting many years of strong growth since independence, and havingenjoyed huge scal surpluses and substantial reserves for many years.Though not nearly as severely a¬ected by the turmoil of 1997 asmany other Asian developing countries (ADCs), the economy in Singaporedid contract in the wake of the Asian crisis, with growth rate slowingsharply to just 0.3 percent in 1998. In response, the Government imple-mented packages to stabilize the economy, in June 1998 announcing a2 billion Singapore dollars (S$) o¬-budget package aimed at cushioningthe economic impact of the crisis and improving competitiveness. Asecond o¬-budget package of S$10.5 billion was introduced in November.Overall, basic policy in Singapore is driven by liberalization inthe nancial sector and promotion of the state as the international nan-cial center in Asia, and ultimately the debt hub in the region for arranging,underwriting, and trading bonds, both Singapore and non-Singapore dollar-denominated. It has many advantages in this area, such as its strategiclocation, high presence of foreign banks, and favorable tax treatment.Due to large budget surpluses, the Singapore Government Securi-ties (SGS) market is an articial market, which does not actually reectthe Governments budgetary conditions or needs. Supply of SGS to themarket is mainly to create a benchmark yield curve for the interest ratemarket as well as to meet the investment needs of the Central Providentund (CP) and banks mandatory reserve requirements.Apart from government securities, the bond market currently consistsof government agencies bonds, corporate bonds, and Asian dollar bonds.Before 1999, the Monetary Authority of Singapore (MAS) intro-duced two major revamping programs in the Singapore bond market,
 
488
Government Bond Market Development in Asia
rst in 1987 and then in 1998. There was further revision in 1999. The1987 program was targeted mainly at the SGS market, and did not havea signicant impact on the market, except for increasing volume of newissues of SGS over the years. In 1998, as part of an overall e¬ort todevelop the Singapore capital market, MAS moved on to inject freshfactors to the market. The aim was to develop Singapore as an internationaldebt center in Asia. Through a series of well-coordinated policies, MASexpects the bond market to grow further and deeper at a faster pace.The expansion of market size over the past few years has beenmainly due to the consistent e¬orts of MAS to issue more and longer-tenor SGS, and to ensure that the amount of issues have been substantiallylarger than the amounts maturing.The increase of supply of SGS has brought about a rapid rise inliquidity, with e¹ciency and volume of trading on the secondary markethaving greatly improved.Compared with developed markets, the size of the Singapore bondmarket remains small, however. Moreover, the majority of outstandingbonds are captured and locked away by institutional investors such asCP, resulting in a relatively inactive secondary market and loweredability to establish a responsive benchmark yield curve.In addition, some problems still distort the market, particularly inthe area of unfair tax incentives and compulsory subscriptions.Some recommendations to help further develop a smoothly func-tioning bond market include (i) extending tax incentives to individualinvestors to improve liquidity in the SGS market; (ii) reducing manda-tory holdings of SGS as a liquid asset, which currently a¬ect liquidityand distort the yield curve; (iii) encouraging more foreign banks to reg-ister as primary dealers to generate liquidity and expand the investorbase; (iv) making MAS play a more active role in the SGS repo market;(v) the launching of Singapore Government Bond utures Contracts bythe Singapore Exchange (SGX) to enable participants to hedge theircash positions and facilitate price discovery; (vi) disseminating real-time trade information to enhance price transparency and liquidity; and(vii) encouraging statutory board bonds to seek rating. To a certain ex-tent, the development of the Singapore corporate bond market will dependupon the success of statutory board issues. It is therefore important forthem to seek rating to set standard practice.
I.iscal Policy and Management
The main objective of Singapores scal policy is to promote long-term economic growth by providing a stable and conducive environment
 
Singapore
489
in which the private sector can thrive and remain competitive, i.e., byreducing costs and taxes, enhancing capabilities, raising technology lev-els, and promoting manufacturing and services.The Governments long-term target is to contain expenditure withinoperating revenue and run a modest budget surplus.The island city-state is one of the strongest economies in Asia,posting many years of strong growth since independence, and losingsteam only in two years (1985, when it su¬ered a recession, and 1998,when, along with the other economies in the region, it was mildly a¬ectedby the Asian bugironically due to its relatively strong currency, whicheroded its competitiveness).The Government has enjoyed huge scal surpluses and substantialreserves for many years, with revenue from 1986 generally at around 22percent of GDP, except in 1998 and 1999, when this dropped to 19percent and 17 percent. Nevertheless, budget surpluses of S$3.4 billionand S$3.2 billion, respectively, were still attained in these two years.Operating expenditures have been maintained at no more than 11 per-cent of GDP. As shown in Table 1, the surpluses have mainly been theresult of buoyant revenues and prudent expenditure.
TABLE 1Government Revenue and Expenditure
a
(S$ million, percent of GDP)OperatingDevelopmentOperating Revenue
b
Expenditure
c
Expenditure
d
Surplus/DecitYearS$% ofS$% ofS$% ofS$% omillionNominalmillionNominalmillionNominalmillionNominalGDPGDPGDPGDP199013,340.421.07,435.011.73,356.45.32,549.04.0199115,697.422.38,173.511.63,601.05.13,922.95.6199217,772.421.98,512.310.53,649.14.55,611.06.9199320,655.522.49,001.29.83,894.84.27,759.58.4199423,713.221.910,071.99.33,971.23.79,670.18.9199525,254.820.211,448.99.25,961.54.87,844.46.2199628,929.721.814,158.710.79,127.76.05,643.34.2199729,181.420.014,079.79.789,963.06.26,138.74.1199828,212.519.114,236.49.710,557.17.23,419.02.3
a
Nominal gures. inancial year: 1 April to 31 March;
b
Operating revenue includes taxrevenue, fees and charges and others;
c
Operating expenditures includes expenditure onmanpower, other operating expenditure, grants-in-aid and pensions;
d
Development expen-diture includes government expenditure, capital grants and public housing.
Source
:Singapore: the Budget for the inancial Year.

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