Keynote Address by Mr Lim Hng Kiang, Minister, Prime Minister's Office, Second Minister for Finance and Deputy Chairman, Monetary Authority of Singapore, at the Swift International Banking Operations Banking Operations Seminar (SIBOS), 20 October 2003, Suntec Singapore International Convention and Exhibition Centre
"Challenges, Opportunities, Realities"
Over the last 25 years, SIBOS has developed to become a major financial services event. More than just a showcase for new products, SIBOS is an important forum where thought leaders in the industry share their views on the global financial landscape and the implications for their businesses.
2 I would like to talk about the realities and challenges facing us today. I will then share what Singapore is doing to remake our economy. In particular, I will focus on the financial sector, and highlight several initiatives that Singapore has undertaken to enhance the payments infrastructure.
3 SIBOS is here at an opportune time. The external environment has improved with the end of the Iraq war and there are signs of recovery in the G3 economies. Economic prospects for the region are considerably brighter. Capital is flowing back into the region. Net private capital inflow to the Asia-Pacific is projected to reach US$84 billion this year compared with US$66 billion in 2002. There are grounds for optimism, but clearly Asia must continue its restructuring efforts to ensure that we remain attractive to businesses.
4 In the third quarter, the Singapore economy rebounded a robust 15%, quarter-on-quarter, after a sharp decline of 11% in the second quarter. This momentum is expected to continue into the final quarter leading to an expected 0-1% growth in GDP for the full year. Barring unexpected adverse developments, Singapore's economy is forecasted to grow between 3% and 5% in 2004. Manufacturing will continue to ascend the value chain, supported by strong research and development capabilities. More emphasis will be placed on our growing services sector, especially on exportable services, to capture the increasing demand in the region. Areas like transport and logistics, infocomms technology and financial services will be strengthened to build Singapore into a global services hub.
New Global Challenges and Opportunities
5 Now let me touch on global trends that have emerged in recent years.
6 Cost management and reduction have become a priority. There has been a trend for companies to deconstruct their value chains and re-assign business processes to locations that can offer the best improvements to their bottomline. It is estimated that within the next 5 years global financial institutions will move 15% of their cost base offshore1. This translates to two million jobs in financial services migrating to offshoring centres.
7 This offshoring trend presents opportunities and challenges to different countries. Lower cost centres like India and China have successfully developed themselves as the preferred offshoring location for customer service activities such as call centres and IT operations. Others have responded by repositioning themselves as locations for activities further up the value chain. Dublin, Hong Kong, and Singapore for instance, continue to attract financial institutions to consolidate their securities and treasury operations, including trading, middle and back office functions.
8 Second, with rapid developments in infocomms technology, the world has become increasingly networked. Geography and time are no longer barriers to information flows. Developments on Wall Street are transmitted worldwide instantaneously. Capital flows across borders and continents with ease. As we saw during the Asian financial crisis, funds rushed out of affected countries, sending shockwaves across the region and beyond.
9 The contagion effects of this and the subsequent currency crisis in Latin America brought home the interconnectedness of the global financial system. More recently, terrorism, SARS, and the series of power failures across the US and Europe this past summer, have highlighted the vulnerability of the financial system in an increasingly networked world.
10 To some extent, the world has adapted to this new reality. Business continuity planning has become integral to all organisations. Building resilience in key infrastructure and implementing crisis management processes to deal with disasters are key priorities.
11 The third trend is the greater blurring of boundaries between banking, securities and insurance. Traditional investment instruments are being married with derivatives to create alternative solutions. Banks are offering a variety of structured products that have characteristics of both deposits and investments. They are also offering insurance products, undertaking catastrophic insurance risks and transferring some of their credit risks to insurers. Insurance companies are competing with investment banks by underwriting foreign exchange and other risks.
12 These developments underscore the riskier environment in which we are operating. Financial institutions need to assess their risk management practices and ensure that they have a robust framework in place. For regulators, the challenge is to keep pace with new uncertainties without burdening businesses with unnecessary regulation.
Remaking the Singapore Economy
13 Now let me briefly share what Singapore is doing to remake our economy and strengthen our financial sector.
14 The global changes in recent years have had a profound impact on small open economies like Singapore. If we are not nimble and competitive, we will soon find ourselves out of business. We must continue to adapt to the changing environment, build upon our strengths and move into areas where we have a competitive advantage.
15 What we have done, in recent years, included strengthening our external linkages, making ourselves more competitive and flexible, encouraging entrepreneurship, promoting manufacturing and services as our twin engines of growth, and developing our human capital.
16 In the area of financial services, which contributes about 12% to Singapore's GDP, the winds of change have been blowing strongly for the past six years.
17 Singapore has liberalised its financial services sector substantially, in particular, in retail banking, insurance and stock-broking activities. We are broadening and deepening the debt market and promoting asset management activities. In the area of regulation and supervision, the Monetary Authority of Singapore (MAS) has shifted its approach to risk-focused supervision within a disclosure-based framework.
18 As part of its efforts to promote a sound and stable financial system, MAS plays a key role in fostering a safe, progressive and efficient financial infrastructure. To reduce settlement risk, MAS has actively encouraged the adoption of open settlement infrastructure and promoted shorter settlement turnarounds. In addition, MAS has engaged the industry and other government agencies to facilitate the development of e-financial services and e-commerce. The Innovation in Financial Technology & Infrastructure Grant (ITIG) Scheme was set up to encourage innovation in financial technology and financial services infrastructure. These initiatives have helped position Singapore at the forefront of international developments and best practices.
19 Institutional investors and analysts have given us high marks for our infrastructure, skilled manpower, and our political and regulatory environment. We have managed to attract a number of global financial institutions, such as Citibank, The Bank of New York and Barclays Capital, to hub their universal processing centres for securities and treasury products in Singapore. These centres serve Asia, and in certain functions, beyond Asia.
20 In addition to our economic and political stability and well-developed infrastructure, Singapore's strategic geographic location is ideal for housing Disaster Recovery Centres. Singapore is neither subject to extreme weather conditions nor susceptible to other natural hazards. To encourage more companies to locate Disaster Recovery Centres in Singapore, the government has implemented an employment pass scheme to allow foreign professionals of companies in Singapore immediate entry into the country and commencement of work in the event that disaster recovery plans are activated.
Payments Infrastructure Initiatives
21 I would like to highlight two recent initiatives in the area of payments infrastructure that will further enhance our business environment.
22 Last month, the Singapore Dollar became one of the 11 eligible Continuous Linked Settlement (CLS) currencies. Today, CLS settles an average of 80,000 instructions daily, with a total gross value of about US$1 trillion. The introduction of CLS and the inclusion of the Singapore Dollar in CLS reduce the risk in settlement of FX trades and increase the range of options available for currency trading and settlement. This is a significant milestone in the development of Singapore as a global financial and FX trading hub, and underscores Singapore's readiness to invest in new technology and infrastructure.
23 CLS has been operating for just over a year and it is timely to take stock and assess the direction going forward. An area that warrants some attention is the settlement risk that remains with FX trades that do not settle in CLS. In this regard, CLS is bringing more settlement currencies into the system and also actively working with its members to offer third party services to financial institutions that are non-CLS settlement members. In particular, through innovative products, some settlement members are offering banks, including central banks, the ability to leverage on the CLS infrastructure while addressing their specific needs and concerns such as straight-through-processing capabilities and confidentiality of transactions.
24 The second initiative is the MAS Electronic Payments System (MEPS), Singapore's real-time gross settlement system. In about a year, MEPS will be replaced by a second-generation system called MEPS Plus (MEPS+). MEPS+ will have advanced features such as automated liquidity and flexible queue management functions to allow banks to manage their liquidity more efficiently.
25 MEPS+ will use SWIFTNET as the messaging backbone. The use of this industry-standard for communication will minimize the cost of entry for participants. More importantly, the use of this industry standard will enable participants to develop straight-through-processing that will lead to more efficient and less error-prone transaction processing.
26 The global financial industry has seen unprecedented changes in recent years. Competition and advances in technology have altered the way we do business. Governments and organisations have to face up to these challenges, restructure, retool and reinvent themselves to stay in the game. There are opportunities out there. We need to forge new partnerships to turn them into reality.
27 I wish you fruitful discussions.
1 Deloitte Research - The Cusp of a Revolution : How offshoring will transform the financial services industry