Download Financial Growth in Singapore

Financial Growth in Singapore
Cao Yong
&
Quek Lee Nah
Nanyang Business School, Nanyang Technological University, Nanyang Avenue, Singapore 2263
Fax: +(65) 792.4217, Tel: +(65) 799.1322, Email: [email protected]
Abstract This paper examines factors that contribute to rapid financial deepening in Singapore. We find
that economic growth (both domestic and regional), prudent government policies, other self-generating ‘pull’
factors coupled with the ‘push’ factors of other countries seem to contribute to Singapore’s financial growth.
On the other hand, statistical tests indicate that financial liberalisation in the form of freeing up interest rates
does not play a crucial role in financial growth.
1
INTRODUCTION
Two decades have passed since Singapore launched significant moves to develop as a
financial centre. Although it is not endowed with the advantages that other international
financial centres have, it has managed to earn a place on the world financial map.1 Its
status as a financial centre can be evidenced by the presence of institutions of international
repute, the introduction of new financial instruments, the availability of expertise and the
wide range and large volume of financial activities transacted in the Republic.
One interesting point worth noting is that the rapid financial development coincided with
financial reforms in the form of interest rates and exchange control liberalisation.
Advocates of the financial repression theories may attribute such outstanding
achievements to financial liberalisation. However growth in the financial sector also went
hand in hand with both domestic and regional economic growth. This raises the possibility
of a causal link between economic and financial growth. The purpose of this paper is to
study the financial policies of Singapore, its characteristics and difficulties faced and also
to determine statistically the possible factors that contribute to Singapore’s financial
development using time-series data analysis.
The rest of the paper is organised as follows. Section 2 describes the growth of the
financial sector; comparison will also be made with Korea. Section 3 highlights some of
the significant moves made by the Government in transforming Singapore into a financial
centre. It also identifies the constraints faced in conducting monetary policy and its impact
on the financial sector as well as the three primary objectives of the financial policies and
the dilemma faced by the government. The theoretical underpinnings and literature review
concerning financial deepening, financial repression and the relationship between financial
and economic growth will be taken up in Section 4. The chapter also states formally the
model that will be used to perform the statistical tests in Section 5. Section 5 will provide
1
The financial centre in London attained its status with the rise of the British Empire and has retained its
lead with its experience, expertise and innovation. New York derives its financial strength from corporate
conglomerates which have gone beyond national boundaries rather than by the design of the central bank or
federal government.
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some empirical evidence which may be useful in explaining financial development in
Singapore; this is followed by some concluding remarks.
2
OVERALL DEVELOPMENT OF THE FINANCIAL SECTOR
Growth of the financial sector has been one of the key contributors to national economic
growth of Singapore. The financial sector grew by 4.5 per cent in 1992, compared with
2.9 per cent in 1991. The improvement was due partly to a recovery in offshore lending
activities by financial institutions in Singapore. This was in line with the upturn in
international banking activities after a period of consolidation. The financial sector’s
expansion in 1992 was also fuelled by a healthy growth in risk and fund management
activities.
Table 1 provides an overview of the growth of the financial sector. Five indicators are
used to symbolise the development of the financial system. Since M1 and M2 include
various kinds of deposits, M1/GDP and M2/GDP will indicate how successful depository
institutions are in attracting deposits and creating money in the form of chequeing
accounts. This, in turn, may reflect the degree of financial intermediation of an economy.
A modern, complex, industrial economy cannot function without massive injections of
new capital equipment each year. For capital to be produced, the saving of individuals and
corporations must somehow be translated into investment in plant and equipment
necessary to keep production operating. It is this translation of saving into investment that
is the primary economic function of financial intermediaries. In addition, financial
intermediaries also help individual savers to diversify risk since being large, they gain
economies of scale in analysing the creditworthiness of potential borrowers, in processing
and collecting loans, and in pooling risks. Thus the existence of intermediaries greatly
increases money and capital market efficiency.
The extent to which banks can channel saving to investment can be observed from the
bank credit/GDP ratio. The fourth ratio indicates the degree of resource mobilisation; the
last ratio shows how well developed the securities markets are in raising capital for firms.
There can be no doubt about the spectacular financial deepening Singapore has achieved
over a span of just twenty years. In particular, M2/GDP and bank credit/GDP show very
impressive growth, experiencing almost a threefold increase from 1975-1993. These
figures illustrate the significance of the financial institutions in mobilising resources to
finance investments. The saving ratio of 44 per cent is one of the crucial factors in
sustaining Singapore’s spectacular economic performance. In fact Singapore’s saving rate
is the highest in the world, more than 3 times higher than the United States, as illustrated
in Table 2. In 1993, an average of about $140,000 million of funds were raised by the
stock market alone. This shows that the secondary market is very active and firms’ capital
does not just rely on debts.
Compared with Singapore, the financial system of Korea is much more ‘shallow’ (Table
3). Using 1990 as a reference year, all 5 ratios relating to Singapore are at least 7 times
greater than that of Korea, except the saving ratio. Such vast differences could be due to
the different policies pursued by both government. While the Singapore government
regards the financial sector as an important and potential sector in its own right, the
Korean financial system operates under the umbrella of an industrial policy. Such
embeddedness of finance in industrial policy implies that the financial sector merely plays
a secondary role, providing as many firms as possible with cheap financing in the belief
that low cost finance is essential to compete internationally.
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The role of financial institutions in the Singapore economy should be analysed in terms of
direct and indirect contributions. Over the period 1980 - 1992, GDP figures for the
financial and business services sector (F&BS) and for the economy as a whole had been on
the upward trend as shown in Table 4. The F&BS sector had been contributing an
increasing share to GDP from 16.8 per cent in 1980 to 24.6 per cent in 1992.
In 1992, of the persons aged 15 years and over employed in Singapore, 10.9 per cent were
working in the F&BS sector as shown in Figure 1. Despite the small percentage of the
workforce it constitutes, the sector is a major contributor to the GDP of Singapore, second
only to the manufacturing sector (Figure 2).
3
EVOLUTION OF SINGAPORE AS A FINANCIAL CENTRE
Unlike many other laissez faire financial centres in the world, Singapore’s financial
development was a conceived vision deliberately nurtured in a growing economy which
enjoyed political stability and was managed with administrative efficacy.
Before the 1970s the financial sector merely fulfilled a subsidiary role. However the
recognition of its potential as a major growth in its own right led to the formulation of a
conscious development strategy to transform Singapore into a financial centre not only to
serve the domestic economy but the region and beyond.
3.1
THE DEVELOPMENT OF FINANCIAL INSTITUTIONS
One of the notable milestones in the financial history of Singapore was the establishment
of Asian Currency Units (ACUs) in 1968 which enabled banks to carry out international
transactions under favourable and regulatory tax conditions. The most important result of
the formation of ACUs was the creation of the Asian dollar market (the Asian Equivalent
of the Eurodollar Market) which marked the commencement of internationalisation in the
financial industry in Singapore.
In order to conduct a more coherent monetary policy as well as to better manage the
financial sector, the Monetary Authority of Singapore (MAS) was set up in 1971 as a de
facto central bank. It functions as the financial agent and banker of the Government and
also a banker to banks and other financial institutions. In executing its supervisory and
regulatory functions, the MAS administers the Banking Act, Finance Companies Act,
Exchange Control Act, Development Loans Act, Local Treasury Bills Act and the
Insurance Act.
3.2
POLICY REFORMS TO ENCOURAGE DEVELOPMENT OF THE FINANCIAL SYSTEM
To enlarge banking operations in Singapore, a reversal of the then-prevailing policy of not
permitting entry of new foreign banks and financial institutions was adopted in 1970. As a
result of the selective but liberal policy of admitting reputable international institutions
almost all of the world’s top 100 banks have operations in Singapore. To avoid ‘overbanking’ due to the influx of foreign banks, the Monetary Authority of Singapore created
‘restricted’ and ‘offshore’ banking licenses to restrict the banking businesses of these
banks. The concept of offshore banks, introduced in 1973 has facilitated the entry of many
international banks into the Asian dollar market without creating undue competition for
the domestic commercial banks.
The Government also offers a host of favourable tax incentives and concessions targeted at
the financial sector. The more important ones include the exemption of interest received
from approved banks or approved Asian Dollar Bonds by non-residents, concessionary tax
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rate for ACU income and income from gold bullion, gold futures and financial futures and
exemption of income arising from syndicated offshore loans.
The progressive relaxation of exchange controls (with complete liberalisation in 1978)
constituted a significant move towards liberalising the financial structure. Restrictions on
capital flows, currency investment and profit repatriation were removed gradually.
In view of the increasing openness and internationalisation of banking in the Singapore
economy, the cartel system of interest rate quotations was abolished in 1975 to inject
greater competition and efficiency into the banking sector. Banks were then allowed to set
their deposit and lending rates freely. Such freeing up of interest rates and exchange
controls was also in line with the worldwide trend of deregulation in financial systems
which was first triggered by the United States and followed by Japan.
3.3
CONSTRAINTS IN CONDUCTING MONETARY POLICIES
The MAS is constrained by the ‘small’ and ‘open’ features of Singapore’s economy in
conducting monetary policy. Referring to Table 5, the absolute GDP of Singapore is only
a little more than half of the average GDP of the ASEAN countries and only 1.3 percent
and 0.8 percent compared to Japan and U.S.A respectively. These 1992 figures imply that
Singapore is a ‘taker’ or ‘follower’ in the world market, not a ‘setter’ or ‘leader’. Table 6
shows that the degree of openness2 of Singapore is a staggering 3.08 times more than the
value of GNP! The heavy reliance on imports also causes significant leakages in
Singapore’s flow of income. Policies designed to expand the economy are mitigated by
these withdrawals.
Under conventional monetary policy, the interest rate is endogenous. But such a policy is
inappropriate in the context of a small, open economy like Singapore since domestic rates
are tied to world’s major interest rates such as the London Inter-Bank Offer Rate (LIBOR).
Allowing the domestic rate of interest to differ from world interest rates would induce
large capital movements, leading to serious balance-of-payment problems and exchange
rate related problems. Similarly, since domestic prices are perfectly linked to world prices
through massive imports, the problem of imported inflation will also be encountered. For
these reasons, it is not possible for Singapore to practise independent monetary policy in
the conventional sense.
The Central Provident Fund (CPF) managed by the CPF Board (analogous to pension
funds in the United States or superannuation schemes in Australia) constitutes forty
percent of the workforce wages. The mandatory monthly contributions add up to a vast
sum and represent a major proportion of domestic saving mobilised for the financing of
public sector development projects. Being a national compulsory saving scheme, the
funds absorbed by the CPF is only partially recycled into the private sector. Coupled with
the CPF Board constitution, a large proportion of the liquidity are rechannelled into the
Post Office Savings Bank (POSB) and government securities. POSB is a Statutory Board
with its own constitution requiring it to maintain a minimum of 50 per cent of its assets in
Government securities. Thus one can see how liquidity is chanelled from the private
sector to the public sector through the CPF Board.
Such liquidity channelling also poses problems for the MAS. If left unchecked, the
shrinking money supply would lead to continual upward pressure on interest rates. This
2
The degree of openness is measured by the proportion of total trade which is the sum of exports and
imports to GNP.
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effect may result in balance-of-payment surpluses arising out of capital inflows that would
result in contractionary economic effects; thus, there exists the danger of offsetting other
economic incentives for growth. Another problem is that there is also pressure on the
Singapore dollar to appreciate, resulting in a loss of international competitiveness.
To mitigate these problems, the MAS must constantly re-inject transferred funds into the
system by purchasing securities from domestic financial institutions and engaging in
foreign exchange swaps to improve liquidity. This renders domestic open-market
operations one-sided; monetary policy needs to be continually expansionary to counterbalance the liquidity drain from the fiscal surpluses.
3.4
IMPACT OF CONSTRAINTS ON THE FINANCIAL SYSTEM
Operating under conditions of ‘smallness’ and ‘openness’, the international financial
centre in Singapore is extremely vulnerable to external shocks. While the domestic
monetary policy aims at providing a monetary environment that meets domestic needs, the
international aspect of monetary policy (i.e. exchange rate policy) strives to protect the
economy from negative foreign disturbances. Thus the choice of an appropriate exchange
rate becomes crucial; this was recognised by the MAS in 1981 when it officially
announced that it was moving away from setting domestic targets to exchange rate
targeting.
Another way by which the government insulates the domestic financial sector is by setting
up a ‘separation face’ as discussed in greater detail in section 3.5 below. Thus Singapore
has to trade-off vulnerability to external disturbances for its position as a premier
international financial centre.
3.5
PARAMOUNT CHARACTERISTICS OF FINANCIAL POLICIES
Ralph Byrant (1986) pin-points three paramount characteristics of the government policies
for the financial sector. First, the government vigorously encourages the location of
financial-intermediary activities in Singapore, thereby promoting the Republic as a
financial centre. The intent has been to induce financial intermediaries to conduct
business from Singapore offices that would otherwise have been conducted elsewhere.
The main approach pursued is to tax and regulate certain aspects of financial
intermediation in Singapore less heavily than other nations. These regulatory and tax
incentives became progressively stronger throughout the period since 1967.
The second important feature of government policies is an attempt to maintain differential
incentives and constraints between international and domestic financial intermediation. In
effect, a ‘separation fence’ shelters certain domestic financial activities from other, mainly
international transactions that are favoured by less stringent regulations and greater fiscal
incentives.
In other words, while taking policy actions to stimulate financial
intermediation in Singapore, the government has been reluctant to reduce regulations and
increase tax incentives for all types of financial intermediation. Nor has it been willing to
allow the untrammeled competitive characteristic of international banking to prevail on the
domestic side of the separation fence.
The most important consideration leading to the erection and maintenance of a separation
fence has been a desire to insulate Singapore’s domestic economy from possible world
turbulence. If successful, an insulating fence helps to foster more autonomy for domestic
monetary policy than would otherwise exist. Another consideration supporting the
maintenance of the separation fence has been a felt obligation to protect the local banks
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carrying out traditional domestic banking. The existence of restricted and offshore
categories of banking license bears witness to the strength of this force underlying the
government policy.
Tension between the goal of promoting the prosperity of the national economy and the
goal of shielding the economy from external forces inevitably exists, to some degree, for
any open economy. High financial interdependence with the rest of the world permits an
economy to be heavily buffeted by external developments. There is inescapably a tradeoff. High levels of financial activity can generate substantial benefits, but only at the
expense of increased vulnerability.
The separation fence analogy should not be interpreted too literally. Even when initially
created in the 1960s, the fence was not totally impenetrable. As the 1970s progressed,
some parts of the fence were lowered or dismantled. A fence of major significance still
exists. Nonetheless, the appropriate analogy is a partially porous hedge, not a solid,
insurmountable wall.
The third characteristic is the desire to preserve the soundness and resilience of
Singapore’s financial intermediaries. Prudential oversight by the MAS of the banks and
other financial institutions is regarded as the means to achieve this objective. However,
some of the foreign-owned financial institutions complain that MAS oversight is excessive
and counterproductive. Such criticism surfaces from time to time, especially appearing in
the overseas financial press. According to Ralph Byrant, the monetary authorities in a
major financial centre should maintain stringent standards of surveillance. The complete
absence of criticism from supervised institutions may, instead be a warning sign of
insufficient stringent oversight. Judged by international standards - including the 1983
Basle ‘Concorat’ on Principles for the Supervision of Banks’ Foreign Establishments - the
MAS record of prudential oversight stands up well to scrutiny. It is interesting to note that
in the 1970s and early 1980s, bankers in Hong Kong typically pointed to Singapore as an
instance of excessive regulation. However the conventional wisdom began to change
when a period of financial difficulties arrived and several large financial institutions
failed.3 Subsequently, 1984-85 witnessed the recommendation of significant strengthening
of prudential oversight by the Commission for Banking and Deposit-Taking Companies.
The continuing tensions between the three primary objectives put the Singapore
government into a dilemma. To maintain the separation fence and to exercise prudential
oversight, it is necessary to impose active regulation and supervision, and probably
taxation. Such constraints may at times need to bind strongly. However, the objective of
luring financial activity to Singapore that would otherwise be located elsewhere tends to
pull in the opposite direction. Searching for an appropriate balance among the three is
analytically and politically difficult. As circumstances change in Singapore and the world
at large, the appropriate balance may alter too.
3.6
A DEVELOPED FINANCIAL SYSTEM
The consequence of such government intervention is the emergence of a developed
financial system as evident by the number of financial institutions and financial markets
providing a wide range of financial services and instruments.
3
Confidence-eroding events in Hong Kong’s financial system included the failures of several deposit-taking
companies in 1982 in connection with the bursting of the speculative bubble in property prices, the failure of
the Hang Lung Bank in October 1983 and the failure of the Oversea Trust Bank in June 1985.
Financial Growth in Singapore
161
Figure 3 provides an overview of the financial structure of Singapore. The MAS and the
Currency Board are at the apex of the financial system with commercial banks, merchant
banks, finance companies, leasing companies, insurance companies, investment houses,
discount houses, stock brokers, etc. making up the skeleton of the system. The number of
financial institutions as at March 1993 in Singapore is illustrated in Table 7. Commercial
banks is the largest among the three categories comprised of commercial banks, merchant
banks and finance companies. Not only are they big in terms of numbers, but they also
occupy the lion’s share of the total assets of the entire financial system, second only to the
Asian dollar market.
The activities of the main financial institutions in Singapore and their relative importance
in terms of aggregate assets, deposits, loans, investment and growth rate of assets are
summarised in Table 8.
The presence of several financial markets (including the Asian dollar market, the Asian
dollar bond market, the money market, the foreign exchange market, the capital market,
the stock market, the gold market and the financial futures market) provides another useful
indicator of the degree of sophistication and development of the financial system. Many
new finance instruments have also made their appearance on the financial scene in
Singapore. The Asian dollar bond, the negotiable certificate of deposit (NCD), the fixed
rate U.S. dollar certificate of deposit, the floating rate certificate of deposit (FRCD), gold
certificates and the Asian Commercial Paper are some examples. New facilities such as
the Revolving Underwriting Facilities (RUF) and Notes Issuance Facilities (NIF) have also
been introduced. These financial instruments vary in terms of maturities and thus provide
investors with a wide range of investment options.
4
MODELING FINANCIAL GROWTH
4.1
FINANCIAL DEEPENING AND FINANCIAL REPRESSION
There is no precise definition available in the literature as to the meaning of ‘financial
development.’ However, the financial interrelations (FIR) ratio has been used by
Goldsmith (1969) and Little (1982) as an indicator of financial deepening (which involves
the monetisation of an economy and the rise of financial institutions). The FIR is
interpreted as the ratio of a set of financial assets to total wealth. In practice, however, a
narrower definition with M1 or M2 as the numerator and GNP as the denominator is
widely used as proxy due to the unavailability of data.
Financial deepening implies that savings are increasingly held in the form of financial
assets rather than non-financial assets. This is likely to improve the efficiency of
intermediation between savers and investors. The basic issue considered here is whether
real interest rates (defined theoretically as the difference between nominal rate of return on
all financial assets which are included in defining the size of the financial sector and the
expected inflation rate) significantly affect the size of the financial sector, however
defined. The hypothesis then is restated to imply that if the above relationship holds, the
policy implication immediately follows, namely, that financial repression in the form of
low nominal interest rates, combined with high and unstable rates of inflation, will retard
the process of financial deepening.
Accordingly the repressionists advocate that interest rates should be freed from
government control (usually in the form of interest-rate ceilings). Such liberalisation will
result in positive real interest rates which will encourage the growth of financial assets and
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liabilities. This in turn is likely to stimulate institutional development and encourage
individuals and savers to switch from the informal sector to the formal sector (thereby
integrating the two sectors) and from inflation hedges to monetary assets. Eventually the
range of financial instruments available would increase, and the overall result would be to
transform a narrow, inefficient, and fragmented capital market into a larger, more complete
and more efficient market. This in turn, it is argued, will tend to promote economic
development.
A survey of past empirical studies shows that there is no conclusive evidence regarding the
impact of financial repression on financial deepening. Goldsmith (1969) argued that the
size of a country’s financial structure, as proxied by the FIR was determined by its per
capita income, its rate of growth and actual inflation. Using cross-section and time series
data for the period 1880 to 1963, he tested his model for a set of developed and developing
countries. The model was able to explain less than half of the variation in the FIR. But
even more importantly, the actual rate of inflation turned out to be negative and significant
in only two cases. Thus assuming that the actual inflation rate is a good proxy for real rate
of interest, his results do not provide much support for the repressionist view. But it may
be legitimately argued that his implicit assumption that the actual inflation rate was an
appropriate substitute for expected inflation was not plausible, at least a priori.
Furthermore, his estimates were based on too high a degree of aggregation of the
developing countries which could have masked significant findings for sub-groups of the
countries covered.
Similar results were also obtained by Roe (1982) who estimated a four-equation model
(one of which being the FIR measured by M2/GDP). The model was estimated for three
geographical regions: Asia, Africa and Latin America using cross-section and time series
data for each group. For Asia, neither the actual inflation rate nor the nominal rate of
interest was statistically significant. For Africa, both the interest rate and the actual rate of
inflation exerted a small positive effect whereas for Latin America, none of the variables
carried a significant coefficient. The explanatory power, as measured by the R2, was 0.28,
0.26 and 0.014 respectively. His results, thus seem to offer very little support for the
repressionist hypothesis. Roe’s results, unfortunately, are not reliable for several reasons.
For example, there are substantial discrepancies between the model specified and the
model actually estimated, so that interpretation of estimated coefficients is not clear.
Contrary results were obtained by McKinnon (1973) and Fry (1978). In his test of the
repressionist hypothesis for Korea, McKinnon showed that the ratio of M2/GDP went up
from 0.09 in 1964 to 0.33 in 1970 while the real return on one year time deposits changed
from a decrease of 12.6 percent in 1964 to and increase of 12.6 percent in 1970, with
inflation falling from 35 percent to 9 percent over the same period. This evidence would
seem to lend resounding support for the repressionist hypothesis. But in the absence of
formal statistical tests in an appropriately specified model, it is difficult to say what
importance can be attached to this bivariate observation. Moreover, since he was using
actual instead of expected rate of inflation in calculating the real rate of return, his
interpretations should be treated with caution.
Fry estimated a pooled regression equation for M2 using time-series data for ten Asian
countries and found that the expected real rate of return on deposits was positive and
highly significant, thus providing support for the repressionist hypothesis. His approach
shares one shortcoming with all the studies reviewed above except Goldsmith’s, namely
that it adopts a rather narrow definition of the financial development index. It also suffers
Financial Growth in Singapore
163
from the problem of a higher degree of aggregation than may be desirable for purposes of
establishing significance of real interest rates.
4.2
FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH
There has been much controversy in the literature as pertaining to the direction of causality
between financial development and economic growth. Patrick (1966) distinguishes
between supply-leading and demand-following financial development. Accordingly,
‘supply-leading’ refers to the ‘phenomenon in which the creation of financial institutions
and the supply of their financial assets, liabilities and related financial services is in
advance of the demand for them, especially the demand of entrepreneurs in the modern,
growth-inducing sectors’. It represents a situation in which financial development causes
economic growth. Thus a developed and efficient financial sector is regarded as the means
to an end, the end being economic growth. The World Development Report (1989 p 1)
highlights the importance of financial systems in economic development:
A financial system provides services that are essential in a modern
economy. The use of a stable, widely accepted medium of exchange
reduces the costs of transactions. It facilitates trade and, therefore,
specialisation in production. Financial assets with attractive yield, liquidity,
and risk characteristics encourages saving in financial form. By evaluating
alternative investments and monitoring the activities of borrowers, financial
intermediaries increase the efficiency of resource use. Access to a variety
of financial instruments enables economic agents to pool, price and
exchange risk. Trade, the efficient use of resources, saving, and risk taking
are the cornerstones of a growing economy.
On the other hand, ‘demand-following’ is the ‘phenomenon in which the creation of
modern financial institutions, their financial assets and liabilities, and related financial
services is in response to the demand for these services by investors and savers in the real
economy. In this case, the evolutionary development of the financial system is a
continuing consequence of the pervasive, sweeping process of economic development.
Gurley and Shaw (1967) seem to be ‘demand-following’ supporters but they do mention
that there may also be a ‘retroactive impact of finance upon the real world’, implying a
two-way causality between financial and real growth. There are also writers who take the
contrary position, including Patrick (1966), Goldsmith (1969) and McKinnon (1973). The
findings were supported by a major study by Gupta (1984). By examining time series data
for each of fifty-six developed and developing countries, Jung (1986) has found only
moderate support for supply-leading relationships. It is thus clear that there is also
ambiguity in the development literature as to the direction of causality between financial
and economic growth.
4.3
MODELING FINANCIAL GROWTH FOR SINGAPORE
Following the model developed by Goldsmith, seven FIRs are used as indicators of
financial deepening for Singapore. Thus the general equation of the model is
FIRt = a0 + a1AINFt + a2GDPPCt + a3GDPGRt + ξt
where, AINFt = actual inflation
GDPPCt = GDP per capita
(1)
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GDPGRt = GDP growth rate
ξt = random error
The seven FIRs are:
•
M1GDP = M1/GDP
•
M2GDP = M2/GDP
•
CUGDP = currency in active circulation/GDP
•
DGDP = demand deposits/GDP
•
FGDP = fixed deposits/GDP
•
SGDP = savings deposits/GDP
•
STVGDP = value of stocks and shares/GDP
If interest-rate liberalisation plays a significant role in explaining Singapore’s financial
deepening, the t-ratios of all or most of the FIRs should appear to be statistically
significant. Otherwise, we may have to look for other explanations, noting that, in general,
Singapore’s growth in financial development went hand in hand with its economic growth.
This raises the possibility of a causal link between economic and financial growth. To
resolve the matter statistically, the Granger causality test is used to detect any possible
causal relationship. As indicators of financial and real growth, M2/GDP ratio and GDP
are used respectively.
The power of our statistical tests will be enhanced greatly if the M2/GDP and GDP series
exhibit a long-run tendency to move together. If such a relationship exists, a linear
combination of the two variables will be stationary. The idea is that deviations from this
long-run path are stationary. In such a case, the two variables are said to be co-integrated.
Thus to check for co-integration, one can first run an ordinary least squares regression on
the original series, M2/GDP on GDP and test whether the obtained residuals is a random
walk or white noise using the Dickey-Fuller (DF) test. If the residuals exhibit a random
walk, the two variables are not co-integrated. Besides the ‘white noise’ condition, the two
variables must also have the same order of integration (i.e. if equilibrium exists between
M2/GDP and GDP, they should change or move correspondingly over time).
Formally, denoting (M2/GDP)t and GDPt by Xt and Yt respectively, a linear combination
of Xt and Yt will be
Xt = λYt + νt
(2)
where νt represents the residual term and λ is the co-integrating parameter.
The long-run relationship will then be judged by whether νt is stable or stationary. If the
absolute value of the test statistic exceeds the critical DF value, the null hypothesis that νt
is a random walk can be rejected which implies that Xt and Yt are co-integrated. If the
result shows otherwise, the entire procedure will be repeated but on differenced series of
Xt and Yt instead, bearing in mind that the level of differencing also be identical. The
empirical evidence presented in Section 5.2.2 will show that both series need to be
differenced once to achieved stationarity.
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The first differenced series will be used to conduct the Granger causality test which
involves the application of an F-test to determine whether lagged information on a variable
At has any statistically significant role in explaining another variable Bt in the presence of
lagged Bt. Within our financial-economic growth context, the test is as follows:
I
J
i =1
j =1
M t = α + ∑ βiM t − i + ∑ γjS t − j + εt
K
L
k =1
l =1
(3)
S t = δ + ∑ µk S t − k + ∑ πlM t − l + ωt
(4)
where Mt and St are the first differenced series of Xt and Yt respectively εt and ωt are
white noise error terms with mean zero and variance σ2. Both equations (3) and (4) were
run with and without St-j and Mt-l variables included respectively. The Wald F-test is
performed to test the null hypothesis that
J
∑γ
j =1
L
j
=0
∑π = 0
l =1
l
The F statistics is denoted by:
(Ru − Rr)/m
2
2
(1 − Ru)/(n − k )
2
≈
F
m,(n − k )
(5)
where R2 = R2 from the unrestricted regression
R2 = R2 from the restricted regression
m = the number of linear restrictions imposed
k = the number of parameters estimated in the unrestricted
regression including the constant term
n = the number of observations
For instance, referring to equation (3), if the F statistic is greater than the corresponding
critical value, then the omitted S variables have a significant effect on M. Thus, S is said
to ‘Granger-cause’ M. For the empirical application of equations (3) and (4), 4 past values
of the variable itself and 8 past values of the other variable were used.
5
EMPIRICAL EVIDENCE FOR SINGAPORE
5.1.
DATA REVIEW
As a recap, it is mentioned before that Singapore freed its interest rates in 1975. A cursory
glance at Figure 4 reveals that although real interest rates for both 12-month time and
savings deposits have been largely positive since liberalisation, they seem to be on a
downward trend after 1982. On the other hand, the financial deepening proxy, M2/GDP
ratio grew quite rapidly, despite the falling real interest rates. This evidence would seem
to refute the repressionist hypothesis but a more rigorous finding would require the
confirmation of formal statistical testing.
The data analysed are quarterly figures for Singapore, covering the period from the first
quarter of 1975 to the third quarter of 1994.
166
Cao and Quek
5.2
EXPLANATION OF EMPIRICAL RESULTS
5.2.1
Insignificance of interest rate liberalisation
Using ordinary least squares regression techniques, the following equations in Table 9 are
obtained (with the t ratios in parentheses).
As shown by Table 9, the explanatory power of the model is fairly high, ranging from 0.5
to more than 0.9. Out of the seven equations only two (i.e. the second and sixth) indicate a
negatively significant impact of inflation. Thus the statistical findings seem to confirm our
earlier observation that the support for the repressionist view is not overwhelming. In
other words, financial liberalisation (in the form of removal of interest-rate control seems
not to play a significant role in accounting for the rapid financial deepening in Singapore.
The result is also consistent with the econometric study of Singapore data (1960-83)
conducted by Wong (1986) which reveals that although the interest rate exerts a positive
impact on saving, but it is not statistically significant. The insignificant impact could be
due to the presence of other more attractive alternatives such as shares and property
investments.
However, the model is not without flaws. For instance, the results would be more
powerful if expected inflation instead of actual inflation were used. Nonetheless, since the
inflation rate in Singapore has been fairly stable and kept under control, this may help to
mitigate the difference between expected and actual values. On the other hand, the study
avoids the aggregation problem since there is only one country, namely, Singapore. The
seven FIRs adopted provide an adequate definition of financial development.
5.2.2
Demand-following financial development
Table 9 also reflects another important result: the coefficient of GDPPC is positive and
significant in all seven cases. This leads us to explore domestic growth as a more valid
candidate to account for financial development.
Referring to equation (2) on co-integration between Xt and Yt, the DF test results are
tabulated in Table 10. It is obvious from from this table that the absolute value of all test
statistics (regardless of whether testing νt as a random walk with or without trend) are
smaller than the corresponding critical value at the 10 per cent significance level, hence the
null hypothesis that νt is a random walk is not rejected.4 This implies that Xt and Yt are
not co-integrated.
The above result necessitates differencing Xt and Yt in order to establish the long run
relationship. For a start, both were differenced once and the DF test results are as shown
in Table 11.
In contrast to Table 10, the absolute value of all the test statistics shown in Table 11
exceed the critical values, leading to the conclusion that a long run relationship exists
between the first differenced series of M2/GDP and GDP. Accordingly, Mt and St will be
used for the causality test.
Using the formula stated in equation (5), the F-statistics for equations (3) and (4) and the
corresponding critical values are presented in Table 12.
4
For a greater discussion about random walks, see Pindyck and Rubinfeld (1991).
Financial Growth in Singapore
167
As shown, the first hypothesis is rejected while the second is not. Thus economic growth
(proxied by first differences of GDP) ‘Granger causes’ financial development (which is
represented by the first differences of M2/GDP); the converse, however, is not true. Using
the terminology of Patrick (1966), financial development in Singapore is demandfollowing. Hence the evidence shows that real domestic growth plays a significant role in
Singapore’s financial development.
5.2.3
Second factor: regional growth
However, as vividly shown in Figure 5, the financial activity is much too large in size to be
explicable only in terms of the domestic economy and financial system of Singapore.
Since 1973, the ratio of ACUs to GDP has not only surpassed but grows much more
rapidly than the assets of all financial intermediaries excluding the ACUs to GDP ratio. In
particular, the growth of banking through the ACUs cannot be attributed solely to
economic trends within Singapore itself.
Figure 6 plots the end-year values, for 1976-1983, of the net asset position (net liability
position if negative) of the ACUs vis-à-vis seven regions (i.e. Singapore, combined with
the remaining countries of Asia and the Pacific, Europe, North America and Latin America
combined, countries in the Middle East, and All Other Countries (primarily Caribbean
nations)). The Asian-Pacific region as a whole is unambiguously a net recipient of savings
transfer (through ACUs) to the rest of the world. These funds provide a valuable source of
financing for the rapid economic growth of many developing nations in the region,
especially when some of them could not self-generate sufficient funds due to their
undeveloped capital markets. One must examine the economic and financial activity
within the larger regional area in which Singapore is located.
Many parts of Asia and the Pacific, like Singapore, experienced rates of growth that were
well above the world average. Indonesia, Malaysia, Thailand, Hong Kong, Korea and
Taiwan as well as Singapore achieved annual growth rates of real GDP of 7 percent or
more over the period 1965-83. Japan’s growth rate was only slightly below 7 percent. The
corresponding growth rates for the six largest industrial economies of Europe and North
America varied between a low 1.9 percent (United Kingdom) and a high 3.8 percent
(France). Real GDP in the United States in this period only grew 2.7 percent.
Rapid output growth in Asia and the Pacific leads naturally to the possibility that financial
development in Singapore has been associated with, and stimulated, by regional realsector activity. Output growth in the region would have required and attracted financing
support of some sort. With the influx of non-financial customers increasingly setting up
production and sales facilities in Asia, larger banks in the industrial countries would have
increasing incentives to establish their physical presence somewhere in Asia to support
these customers’ activities with a range of financial services. Once a sufficient momentum
of financial activity has been built up in a given geographical area, economies of scale and
various positive externalities tend to reinforce this momentum (Braudal (1984)). Many
financial institutions chose Singapore as a base for their overseas ventures in response to
the attractive policy-incentives offered by the government. As the 1970s progressed,
Singapore benefitted from such virtuous-circle forces that favoured concentration of
financial services in a ‘financial centre’.
5.2.4
Other self-generated factors
Other self-generated pull factors may include a strong Singapore Dollar, strategic location,
political stability, favourable time-zone considerations and the relative availability of
168
Cao and Quek
communications technology, transportation facilities, support services, skilled labour and
attractive living accommodation.
5.2.5
The ‘push’ factors
The regulatory-tax-supervisory arrangements in other Asian countries may also constitute,
to varying degrees, a ‘push’ away from those countries. Most of the other Asian
governments had provisions inhibiting foreign-controlled banks from large-scale
operations within their national jurisdiction. For certain types of transactions, especially
those with nonresidents or denominated in foreign currencies, even locally-controlled
banks were subjected to various restrictions. The ‘home’ policy environments in Europe
and North America are yet another contributing element. The general phenomenon is that
banks with head offices in countries with relatively stringent policy environments had
incentives to escape the parent-country environments to conduct intermediation activities
they could not otherwise carry out, or carry out in as an unrestricted and profitable way.
Thus these constraints interacted with the pull of the policy environment in Singapore to
induce the establishment and expansion of Asian operations in Singapore.
6
CONCLUDING REMARKS
The past couple of decades have witnessed spectacular financial development in
Singapore. The financial system as it is today is much more sophisticated compared to
what it was two decades ago. Improvement in the financial system has facilitated the flow
of funds into the economy and widened the scope for various financing activities. The
financial system is relatively free of restrictions. The regulations which do exist are
largely to ensure that financial institutions are prudent in their operations and that
depositors are protected.
Three primary objectives of the government financial policies can be identified: promoting
Singapore as a financial centre, maintaining a separation fence to insulate certain domestic
financial activities from international influences, and protecting the soundness and
resilience of financial intermediaries. Each goal has been accorded high priority, but
tensions between the three objectives pose a continuing dilemma for the Singapore
government.
The notion that financial development is a key element in economic development forms
the crux of the financial liberalisation hypothesis. The empirical analogue of this
analytical proposition is that movements in the real interest rate enhance the aggregate
saving rate and induce financial deepening. While there is no doubt that the rapid financial
deepening in Singapore coincided with interest rates and exchange control liberalisation,
the empirical findings, however, suggest that interest rate policy did not play a central role.
Instead, real growth both domestically and regionally coupled with the home ‘pull’ factors
including various financial incentives and the ‘push’ factors of other countries seem to be
the major contributors to Singapore’s financial development and deepening. Credit must
also be given to the government in shaping and fostering the financial development.
The benefits to Singapore residents of the evolution of Singapore as a financial centre in
the last two decades have been sizable. Income and employment are undoubtedly at higher
levels than would have been observed in the absence of the vigorous financial growth.
Moreover, the heightened risks and vulnerability that accompany increased financial
interdependence have not in practice caused comparably large problems for the Singapore
domestic economy. Even if the financial interdependence facilitated the transmission of
Financial Growth in Singapore
169
the world recession to Singapore in 1981-83 and even if the financial interdependence
contributed to a worsening of Singapore’s internally generated economic difficulties in
1984-85, the balance of benefits over costs is still likely to be substantially positive.
However, the journey to such excellent achievement is not without obstacles. For
instance, the Singapore policy-makers have been, from time to time, criticised for being
too omnipresent, thereby inhibiting innovation. This will result in Singapore’s financial
industry losing its competitive edge because the government has emphasised control rather
than innovation; it has failed to keep pace with the world-wide trend toward deregulation
(Duthie (1986)).
Sometimes, one can also hear a resentment expressed to the effect that Singapore has
enjoyed (and also Hong Kong) financial prosperity at the expense of its Asian neighbors.
Such resentment, however, is usually based on a faulty premise. The rest of Asia should
have reaped substantial net benefits from the financial growth of Singapore as can be seen
from the huge sum of funds made available to them via the ACUs. Moreover, Singapore
has been a net supplier of funds to the ACUs. This fact alone contradicts the view that
Singapore’s banks have siphoned savings from other Asian countries for use within
Singapore.
The constraints faced in conducting monetary policy and the dilemma arising out of the
three primary objectives of the financial policies pose additional problems for the
government. Nonetheless, Singapore has emerged as a regional financial centre; financial
growth in Singapore in the past two decades has been substantial. With the world
gradually coming to terms with the issue of international standards for the regulation,
taxation and the supervision of financial institutions, the Singapore authorities should not
ignore these longer-term issues as they frame their policies in the short run. As one of the
major financial centres in Asia, Singapore will have corresponding important
responsibilities for contributing to the development of an appropriate set of standards for
the world financial system.
170
Cao and Quek
REFERENCES
Alice H. Amsden and Yoon-Dae-Euh (1993), “South Korea’s 1980s Financial Reforms:
Good-bye Financial Repression (Maybe), Hello New Institutional Restraints,” World
Development, Vol 21 pp 379-390.
Chowdhury, Anis and Iyanatul Islam (1993), The Newly Industrializing Economies of East
Asia.Routledge.
Central Provident Fund (1991), Annual Report.
Luckett, Dudley G. Money and Banking, 3rd ed.Mc-Graw Hill, 1984.
Luckett, Dudley G., David L. Schulze, and Raymond W. Y. Wong, 1994, Banking,
Finance and Monetary Policy in Singapore McGraw-Hill.
Berndt, Ernst R. (1991), The Practice of Econometrics: Classic and Contemporary,
Addison Wesley.
Brigham, Eugene F. and Louis C. Gapenski (1991), Financial Management: Theory and
Practice, 6th ed., Dryden Press.
Braudal, Fernard (1984), The Perspective of the World: Civilization and Capitalism: 15 18th Century, Harper and Row, vol 3.
Byrant, Ralph C. (1986), The Evolution of Singapore as a Financial Center, The
Brookings Institution.
Duthie, Stephen (1986), “Singapore Panel Urges Policy Overhaul to Foster Growth as
Financial Centre,” Asian Wall Street Journal Weekly, January 13, p13.
Ernst and Young (undated) Financial Institutions in Singapore.
Fry, Maxwell. J.(1978), “Money and Capital or Financial Deepening in Economic
Development,” Journal of Money, Credit and Banking.
Goldsmith, Raymond W. (1969), Financial Structure and Development Yale University
Press.
Gupta, K. L. (1984), Finance and Economic Growth in Developing Countries Croom
Helm.
Gurley, J. G. and Shaw E. S. (1967), “Financial Structure and Economic Development,”
Economic Development and Cultural Change.
Jung, W. (1986), “Financial Development and Economic Growth: International Evidence,”
Economic Development and Cultural Change.
Kitchen, Richard L. (1986), Finance for the Developing Countries, John Wiley and Sons.
Lee Sheng-Yi (1990), The Monetary and Banking Development of Singapore and
Malaysia, Singapore University Press
Little, I. M. D., (1982), Economic Development, Basic Books, New York.
McKinnon, R. I., (1973), Money and Capital in Economic Development Brookings
Institution, Washington.
Monetary Authority of Singapore (1992/93), Annual Report.
Monetary Authority of Singapore (various issues), Monthly Statistical Bulletin.
Financial Growth in Singapore
171
Ng Beoy Kui (1994), “Financial Reforms in the Asian Countries: Some Exciting
Experiences and Useful Lessons,” presented at the International Symposium of AsiaPacific Economic Development and Co-operation held at Beijing, Hangzhou and
Guangzhou, 17-23 January.
Patrick H. T. (1966), “Financial Development and Economic Growth in Underdeveloped
Countries,” Economic Development and Cultural Change.
Pindyck, Robert S. and Rubinfeld, Daniel L. (1991), Econometric Model and Economic
Forecasting, 3rd ed., Mc-Graw-Hill.
Post Office Savings Bank (1994), Annual Report.
Roe, Alan R. (1982), “Financial Intermediaries and Economic Development: An Empirical
Investigation,” Mimeo.
Tan, Chwee Huat (1989), Financial Markets and Institutions in Singapore, 6th edition,
Singapore University Press,
Wong, K. (1986), “Saving, Capital Inflow and Capital Formation,” in Lim, C. and Lloyd
P. (eds) Singapore: Resources and Growth, Singapore Oxford University Press.
World Bank (1994), World Development Report.
172
Cao and Quek
TABLE 1
GROWTH OF THE FINANCIAL SECTOR OF SINGAPORE (UNIT: %)
Notes:
1975
1978
1980
1985
1990
1993
M1/GDP
65.1
76.5
82.2
89.2
100.9
113.5
M2/GDP
156.7
171.7
202.4
275.7
400.1
436.7
Bank Credit/GDPa
151.1
185.4
252.2
380.8
392.4
407.9
GDS (as % of GDP)b
-
33.9
37.2
40.7
42.6
44.3
Stock Mkt Capitalisation/GDPc
-
-
-
-
692.9
761.5
a Bank credit refers to loans and advances of banks.
b Gross Domestic saving (GDS) = GDP - Private Consumption Expenditure - Government Expenditure.
c Ordinary Shares listed on Main Board of the Stock Exchange of Singapore.
Sources: Department of Statistics
MAS, Monthly Statistical Bulletin
Stock Exchange of Singapore Ltd, Fact Book
TABLE 2
COMPARISON OF SINGAPORE’S SAVING RATE
(% OF GDP) WITH SELECTED COUNTRIES
United States
15
France
21
Germany
28
Switzerland
29
New Zealand
20
Canada
19
Singapore
48
Hong Kong
30
Malaysia
31
Taiwan
27
China
36
Source: Asia week 20 January 1995
Financial Growth in Singapore
173
TABLE 3
GROWTH OF THE FINANCIAL SECTOR OF SOUTH KOREA (UNIT: %)
1975
1978
1980
1985
1990
M1/GNP
11.7
11.3
10.4
10.4
9.5
M2/GNP
31.3
33.1
34.2
39.2
40.8
Domestic Credit/GNP
39.5
36.4
45.8
58.4
56.1
National Saving (as % of GNP)
18.2
29.7
23.1
29.1
35.5
Stock Mkt Capitalisation/GNP
-
-
6.9
9.0
60.6
source: Ministry of Finance, Fiscal and Financial Statistics, Pt. 1 (1992)
TABLE 4
CONTRIBUTION TO GDP BY THE F&BS SECTOR
Year
F&BS (S$m)
Economy (S$m)
% share
1980
4,296.0
25,603.8
16.8
1985
8,803.1
40,920.9
21.5
1990
14,954.0
60,099.1
24.9
1991
15,770.8
64,165.9
24.6
1992
16,624.9
67,617.3
24.6
Source: MAS Monthly Statistical Bulletin
174
Cao and Quek
TABLE 5
COMPARISON OF SINGAPORE’S GDP WITH SELECTED COUNTRIES (1992)
Country
GDP (US$m)
Per Capita (US$)
Singapore’s GDP as %
Indonesia
126,364
686
36.4
Malaysia
57,568
3,095
79.9
Philippines
52,462
816
87.7
Singapore
46,025
16,438
100.0
Thailand
110,337
1,902
41.7
ASEAN
392,756
1,197
11.7
78,551
-
58.6
Japan
3,670,979
29,486
1.3
USA
5,920,199
23,180
0.8
23,060,560
4,240
0.2
ASEAN Average
World
Source: World Development Report, 1994
TABLE 6
DEGREE OF OPENNESS OF SELECTED COUNTRIES (1992)
Country
Value of Exports (US$m)
Value of Imports (US$m)
Degree of Openness
Indonesia
33,815
27,280
0.49
Malaysia
40,705
38,361
1.52
Philippines
9,790
15,465
0.51
Singapore
63,386
72,067
3.08
Thailand
32,473
40,466
0.68
ASEAN
180,169
193,639
1.00
Japan
339,492
230,975
0.16
USA
420,812
551,591
0.16
Note:
Degree of Openness is calculated as the sum values of exports and imports divided by GNP.
Source: World Development Report, 1994
Financial Growth in Singapore
175
TABLE 7
NUMBER OF FINANCIAL INSTITUTIONS IN SINGAPORE
Commercial Banks
Local
Foreign
Full banks
Restricted banks
Offshore banks
128
13
115
22
14
79
(Banking offices including head offices and main offices)
Representative Offices
Commercial banks
Merchant banks
Finance Companies
52
50
2
27
(Finance companies’ offices including head offices)
Merchant Banks
ACUs
Commercial banks
Merchant banks
78
195
118
77
Source: MAS Annual Report 1992/93
TABLE 8
TOTAL ASSETS, DEPOSITS, LOANS, INVESTMENTS AND GROWTH RATES
OF FINANCIAL INSTITUTIONS AS AT END 1993
$ Million
Deposits of
Loans to
Investments
Total Assets
Non-Bank
Customers
Non-Bank
Customers
(Securities and
Equities)
Annual
Growth
Rate of Assets
1988-93
1. Commercial Banks
170,250.4
85,400.8
72,618.4
17,976.0
76.5
2. Finance Companies
14944.4
10,567.8
11,516.8
845.5
76.3
3. Merchant Banks:
(i) Domestic and ACU Operation
(ii) Domestic Unit Operation (DBU) only
42,205.3
6,711.3a
11,545.8
13,547.4
14.3
6,859.0
1,185.2a
1,398.0
479.7
-17.1
3,521.4
16,750.3
10.3
40,495.8
32.9
(1987-90)
3,617.5
176.6
34,968.9d
37.7
15181.4
20,289.4
5. Central Provident Fund (1990)
41,798.5
40,646.4b
6. Insurance Companies (life & General)
10,840.7c
-
4. Post Office Savings Bank
7. Asian dollar market
Notes :
386,103.0
62,669.0
-
1,210.7
136,857.4
a Refer to “borrowing from non-bank customers” which include deposits and deposits-substitutes.
b Refer to members’ balance. The growth rate of the assets of CPF is from 1987-90.
c Refer to Singapore Insurance Fund.
d Refer to other assets.
Sources: MAS, Monthly Statistical Bulletin, May. 1994.
Post Office Savings Bank, Annual Report, 1994 and various issues.
Central Provident Fund, Annual Report, 1991
176
Cao and Quek
TABLE 9
REGRESSION RESULTS
Dep Var
Constant
AINF
GDPPC
GDPGR
R2
M1GDP
0.51007
0.32696
0.00009
0.11425
0.8941
(29.29)
(0.594)
(24.907)
(0.284)
-0.13856
-5.09555
0.00076
-1.84888
(-1.761)
(-2.050)
(44.063)
(-1.018)
0.35097
0.10209
-0.00003
-0.57771
(24.884)
(0.229)
(10.967)
(-1.775)
0.17961
0.23037
0.00007
0.87053
(11.021)
(0.447)
(18.407)
(2.315)
-0.4126
-0.92085
0.00048
-2.76672
(-5.261)
(-0.372)
(27.803)
(-1.534)
-0.21558
-4.58186
0.00017
-0.24427
(-6.381)
(-4.292)
(23.641)
(-0.313)
-0.30316
1.06848
0.00009
3.13659
(-6.088)
(0.679)
(8.608)
(2.729)
M2GDP
CUGDP
DGDP
FGDP
SGDP
STVGDP
Note:
0.9635
0.6212
0.8268
0.9128
0.8874
0.5414
Dep var refers to dependent variable.
TABLE 10
TEST OF CO-INTEGRATION BETWEEN XT AND YT
Variable
Test Statistic
Critical value, 10%
Xt (no trend)
0.21
-10.84
Xt (trend)
-6.96
-17.12
Yt (no trend)
0.87
-10.85
Yt (trend)
-0.10
-17.15
Financial Growth in Singapore
177
TABLE 11
TEST OF CO-INTEGRATION BETWEEN MT AND ST
Variable
Test Statistics
Critical value, 10%
Mt (no trend)
-42.55
-10.83
Mt (trend)
-44.73
-17.11
St (no trend)
-17.17
-10.85
St (trend)
-34.31
-17.15
TABLE 12
TESTING THE RELATIONSHIP BETWEEN FINANCIAL
DEVELOPMENT AND ECONOMIC GROWTH
F - statistic
Critical value, 5%a
=0
3.068
2.1
∑π = 0
1.115
2.1
Null hypothesis
J
∑γ
j =1
L
l =1
Note:
j
l
Degrees of freedom for the numerator and denominator are 7 and 57 respectively
178
Cao and Quek
FIGURE 1
EMPLOYMENT SHARE FOR 1992 BY SECTORS
F inancial &
T ransport &
Business
Communication
S ervices
10%
11%
Other S ervices
22%
Manufacturing
27%
Commerce
22%
Construction
7%
Utilities
1%
FIGURE 2
PERCENTAGE CONTRIBUTION TO GDP BY INDUSTRY FOR 1992
Commerce
16%
T ransport &
Communication
14%
ConstructionUtilities
6%
2%
Manufacturing
27%
F inancial &
Business
S ervices
25%
Other S ervices
10%
O FFSH O RE
RESTRICTED
LICEN SED
BA N K S
FULLY
LICEN SED
BA N K S
LEG EN D :
BA N K S
BA N K S
FIN A N CE
CO M PA N IES
A CU
IN SURA N CE
CO M PA N IES
IN TERN A TIO N A L
M O N EY BRO K ERS
LEA SIN G
CO M PA N IES
SES
SESD A Q
ED B
V A RIO US FIN A N CIA L
A SSO CIA TIO N S
SIM EX
IN STITUTIO N A L
ECICS
O FFICES
PO SB
TH E FIN A N CIA L SECTO R
IN TH E PUBLIC SECTO R
CPF
O TH ER O RG A N ISA TIO N S IN
FIN A N CIA L IN STITUTIO N S
BO C C
REPRESEN TA TIV E
FIN A N CIA L IN STITUTIO N S:
M AS
SIN G A PO RE REIN SURERS'A SSO CIA TIO N S,SIN G A PO RE M ERCH A N T BA N K ERS'A SSO CIA TIO N ,LEA SIN G A SSO CIA TIO N O F SIN G A PO RE.
V A RIO US FIN A N CIA L IN STITUTIO N S A SSO CIA TIO N S -TH E A SSO CIA TIO N O F BA N K S O F SIN G A PO RE,G EN ERA L IN SURA N CE A SSO CIA TIO N S O F SIN G A PO RE,TH E FIN A N CE H O USE A SSO CIA TIO N S O F SIN G A PO RE,LIFE IN SURA N CE A SSO CIA TIO N ,
ECICS -EX PO RT CRED IT IN SURA N CE CO RPO RA TIO N O F SIN G A PO RE
ED B -ECO N O M IC D EV ELO PM EN T BO A RD
SIM EX -TH E SIN G A PO RE IN TERN A TIO N A L M O N ETA RY EX CH A N G E
SESD A Q -STO CK EX CH A N G E O F SIN G A PO RE D EA LIN G & A UTO M A TED Q UO TA TIO N M A RK ET
SES -STO CK EX CH A N G E O F SIN G A PO RE
179
FIGURE 3
FINANCIAL STRUCTURE OF SINGAPORE
FIN A N CIA L IN STITUTIO N S IN TH E PRIV A TE SECTO R
BO CC -BO A RD O F CO M M ISSIO N ERS O F CURREN CY,SIN G A PO RE
BA N K S
LICEN SED
M ERCH A N T
CO M M ERCIA L
Financial Growth in Singapore
180
Cao and Quek
FIGURE 4
COMPARISION OF REAL DEPOSITS RATES & FINANCIAL DEEPENING
8
6
4
2
0
-2
-4
Y ear
T DR
Notes:
S DR
M2/GDP
M2/GDP is measured in terms of hundreds of percents
TDR = Real 12-month time-deposit rate
SDR = Real 12-month saving-deposit rate
Sources: ADR from Key Indicators of Asian and Pacific Developing Countries (various issues)
IMF, International Financial Statistics (various issues)
MAS, Monthly Statistics Bulletin (various issues)
Department of Statistics
Financial Growth in Singapore
181
FIGURE 5
ASSETS OF FINANCIAL INTERMEDIARIES RELATIVE TO GROSS GDP
800
Assets of ACUs
700
600
500
400
300
200
Assets of FIs excluding ACUs
100
0
68
76
84
Y ear
92
182
Cao and Quek
FIGURE 6
NET ASSET POSITION OF THE ACUs INCURRED IN SINGAPORE
VIS-A-VIS OTHER MAIN GEOGRAPHICAL REGIONS, 1976-1983.
15
10
5
0
76
77
78
79
80
81
82
83
-5
-10
Y ear
S eries 1
Notes:
S eries 2
S eries 3
S eries 4
S eries 5
S eries 6
S eries 7
Series 1: Asian and Pacific Nations, excluding Singapore; Series 2: Africa; Series 3: Singapore;
Series 4: North and South America; Series 5: All Others; Series 6: Middle East; Series 7: Europe.