Interview with Tharman Shanmugaratnam, Asiamoney, February 2001.

Date: 1 Feb 2001

The Monetary Authority of Singapore (MAS) faces an uncertain future. Alone, the tiny island-state is unlikely to tempt international investors. Its only option to remain relevant may be to offer up its companies and banks to global players- providing an Asian headquarters of sorts.

Although MAS is aware of Singapore's need to restructure and is in the process of transforming the financial sector, it is still not keen for all of the country's banks to become foreign-owned. Below, Tharman Shanmugaratnam admits that, if competition dictates, MAS maybe forced to approve the formation of a transnational banking group.

Asiamoney: There has been considerable speculation regarding DPM Lee's comment that there might be room for only two main banks in Singapore. What is the Monetary Authority of Singapore (MAS)'s view on consolidation of the banking sector?

Shanmugaratnam: I don't think anyone seriously denies that scale is going to help. It's not all that's required to build up talent and successful capabilities, and you don't have to he a global megabank to stay in the game, but there's no question that scale is going to he an increasing advantage in banking.

We don't have a large economy- about half the size of Hong Kong- so there isn't scope for more than one or two large Singapore banks, capable of holding their own in a liberalized Singapore market as well as in Asia. That doesn't mean that every small player will be driven out of business. Some may remain profitable by striking up alliances with larger players or by providing services to their customers in niche areas.

It is for the banks to determine if they need the scale, and how they want to get there. They and their shareholders will have to decide if they should seek domestic consolidation, or mergers and acquisitions involving players abroad, or some combination of the two. It's not something that the government or the MAS is attempting to determine, or even wants to. The markets will judge the effectiveness of their strategies. But the pressure to consolidate, to avoid being marginalized, will increase as the domestic market opens up more fully, and as technology gains headway. We've only begun to see the pressure, and it will play out over the next three to five years.

Asiamoney: One alternative is for the banks to be acquired by foreign players. In such an event, what would be your attitude?

Shanmugaratnam: We have encouraged the local banks to explore strategic alliances with foreign players. It can mean a foreign player taking a significant stake in a Singapore bank. But we want to keep the Singapore character of the local banks intact. We have only five local banks. We want to see them retain their commitment to Singapore, and have Singapore shareholders with a significant interest in the bank. I think that's a reasonable proposition. There are few financial centres that do not have a number of significant domestic players, at least in commercial banking and retail banking, that can be relied on to keep the system on an even keel in times of crisis.

We would not be comfortable with foreign takeovers of Singapore banks at this point. But we are open to other possibilities, even a merger of equals with a foreign partner. MAS approval will depend on whether the merger will produce a stronger bank, one which will continue to have a major long-term stake in Singapore. Of course, it will also depend on the specifics of the transaction.

Over time, we will decide whether we need to go further. It will depend on how the banking industry develops globally. If becoming part of a transnational banking group turns out to be the best way to remain competitive and make an impact abroad, then we will be forced to consider that for our banks too.

Asiamoney: According to the MAS guidelines, the banks have three years to divest their non-core assets. How keen are the banks to implement these guidelines?

Shanmugaratnam: They're working on it. The chairmen, the boards and senior management of the banks have bought into this fully. They see that it is in the interests of their banks that they divest and focus on what they can do well. They know the old phase of growth within a protected domestic market is over, and want to see how they can best fit out their banks to compete in the future. So it's not a case of the MAS having to drag anyone kicking and screaming.

Asiamoney: But there is talk that UOB is reticent to sell off some of its assets.

Shanmugaratnam: People reckon that a family-owned bank and particularly a bank where the controlling shareholder is the CEO would somehow be more protective of its assets. That's impressionistic. Each of the banks is making its calculations carefully, on how to divest in a manner that maximizes benefits for the bank. UOB has proved from its record that it is not any less concerned than the other banks about returns.

Asiamoney: How can Singapore attract more regional companies to its equity markets?

Shanmugaratnam: It will always be principally Singapore companies that form the base of the listed market, but the Singapore Exchange (SGX) is getting a lot more active in courting foreign issuers and I think there's some prospect there. The MAS has removed the restrictions on foreign companies raising capital in Singapore dollars. We have also made good progress on the buy side, attracting more asset management activity to Singapore despite the overall retrenchment in Asian investments.

We don't have a large natural hinterland, but it's not unrealistic to want to be a major player in the Asian time zone for the trading and settlement of equities or other capital market instruments. Location will never be irrelevant. But technology is making geography less binding on the location of capital markets. What will count is whether we can provide services to investors and borrowers more conveniently and cheaper than elsewhere, and whether we can provide the environment in Singapore for the intermediaries to prefer to do business here. It's hard work but we are making progress.

Asiamoney: Is India a possible hinterland?

Shanmugaratnam: Market participants feel that there is a real opportunity to service Indian companies' needs, and we would encourage them to do so.

Asiamoney: The SGX is planning a link with Australia's stock exchange. Should we expect to see the two exchanges merge?

Shanmugaratnam: The SGX-ASX trading link will probably be the first off the block. They may take stakes in each other. I don't think they have considered merging.

Asiamoney: In other words, would it be the first of many such links?

Shanmugaratnam: The idea is not to have just one link, although the bilateral link will have its own benefits. The links becoming more interesting as more pieces are added within Asia, and possibly globally. We need a critical mass of products and investors. No one knows for sure how successful the links will be, how much they will enhance liquidity. But the larger the network of links the greater will be the potential for the players within it.

It will take time for an Asian network to emerge. There is still a fair amount of protective reasoning in domestic equity markets. But ultimately you either protect your own market at the expense of lower liquidity or you open it up to external players, force greater efficiency and benefit from the rising water level.

So it's a question of looking a few years ahead, knowing what the end point should look like in everyone's interests, and then working out the steps to get there. Rather than looking ahead one year at a time and thinking, well, let me keep this piece of the pie to myself. It's in everyone's interest that we pool liquidity in Asian markets, and especially in the interests of Asian companies seeking to raise capital.

Asiamoney: So what of linking up with the Hong Kong stock exchange?

Shanmugaratnam: There's certainly no lack of keenness at the SGX from what I can see. It makes sense if we want to spur the growth of the Asian market.

Asiamoney: There has been much effort put into developing Singapore's bond market over the past two years yet it remains small. What's your strategy for its further development?

Shanmugaratnam: We are being ambitious, no doubt about it. As with much else in Singapore, the challenge is in creating something that is not a given, and which could easily be done somewhere else. There are good examples of how it can be done though. London built up an extremely successful bond centre although it didn't have the largest indigenous market in Europe. The Swiss have created an active Swiss franc-denominated bond market that attracts both international issuers and investors. They have a larger economy than Singapore but not hugely so. So we have studied what it takes to develop the bond market, put in missing pieces like the longer maturities in the government securities markets and measures to develop the repo market, and liberalized the rules concerning the Singapore dollar to make it easier for issuers and market participants. We are looking at what more can be done to boost domestic investor demand.

Asiamoney: When you refer to liberalizing the Singapore dollar, there is talk of liberalization but non-internationalization. How do you draw that fine distinction?

Shanmugaratnam: We have reassessed the trade-offs in internationalizing the Singapore dollar in the last few years. We have given more weight to the potential benefits of liberalizing, and have been willing to take more risk by doing so. We hope that as we free up the controls and as the markets deepen, the risks will also lessen.

We have removed all the restrictions on the internationalization of the Singapore dollar except the one residual control that makes it difficult for entities outside Singapore to borrow Singapore dollars to short the currency. It is a control that has served us well, and there is no compelling reason to remove it.

Most market participants agree that allowing large leveraged speculation in the Singapore dollar would bring added risks with little benefit. We are a small, highly open economy, and the exchange rate matters greatly to economic stability and confidence. So we have taken large and determined steps to liberalize, but not a leap into the dark.

Asiamoney: How much do the difficulties faced by your South East Asian neighbours impact on your financial plans?

Shanmugaratnam: We hope our neighbours will recover soon. The panic factor has subsided and financial market participants now view the region as having positive prospects in the medium to long-term. They expect a range of opportunities to emerge as the region's economies recover: a mix of traditional financial activities such as the syndicated loan business, and new financial business arising from the restructuring of the region's corporate sectors, the inflow of new investors and the need to tap the capital markets. Asian capital markets are very much still in their infancy.

We have to take a long view of the region, but we cannot limit our sights to the region. Some areas of recent growth in Singapore's financial centre, such as in asset management, have been geared to the larger Asian canvas. And activities like derivatives trading, B-B payments and the back-end of financial business will always be part of a global network.

It's a continuous challenge. It keeps us on our toes. But we are determined to stay relevant and succeed.