Download Singapore Financial Cluster

Singapore Financial Cluster
COURSE: MICROECONOMICS OF COMPETITIVENESS
ANASTASSIYA TORGOVYKH
RACHEL WEINBLUM
ROBIN ALEXANDER MÜLLER
MORITZ MAIER
JANUARY 2013
TABLE OF CONTENTS
COMPETITIVENESS OF SINGAPORE
3
ECONOMIC GROWTH
3
POPULATION, LABOR FORCE AND FACTOR PRODUCTIVITY
3
GLOBAL COMPETITIVENESS
4
CLUSTER COMPOSITION (ECONOMY / MIX OF ECONOMIC ACTIVITY)
6
MACROECONOMIC, POLITICAL, LEGAL AND SOCIAL CONTEXT
8
NATIONAL DIAMOND
10
FINANCIAL SERVICES
12
HISTORICAL EVOLUTION
12
DESCRIPTION OF THE DIFFERENT SERVICES
14
THE PRIVATE BANKING CLUSTER IN SINGAPORE
17
RISE OF THE PRIVATE WEALTH MANAGEMENT INDUSTRY IN ASIA
17
SINGAPORE, A WEALTH MANAGEMENT POWERHOUSE
18
INVESTMENT FRIENDLY JURISDICTION
19
MONETARY AUTHORITY OF SINGAPORE
19
FAVORABLE TAX REGIME
20
SINGAPORE’S BANKING SECRECY AND CONFIDENTIALITY
21
CONCLUSION
22
STRATEGIC ISSUES AND RECOMMENDATIONS
22
PRIVATE BANKING IN SINGAPORE COMPARED TO SWITZERLAND
23
ABBREVIATIONS
29
REFERENCES
30
FIGURES
32
-2-
COMPETITIVENESS OF SINGAPORE
ECONOMIC GROWTH
The figures of the Global Competitive Report of 2012-13 (World Economic Forum, 2012) show that Singapore’s
GNI (PPP) per capita outperformed the average level of advanced economies since 1994 (Figure 1). In 2011,
Singapore had a GNI per capita of $59,380 and an annual economic growth rate of 4.9%, whereas the United
States saw its economy growing by only 1.7% and experienced a GNI per capita of $48,82 1 . Given that
Singapore is a small island-state, it owns very little natural resources; therefore, all the economic wealth
generated in the last forty years since its independence, is created and not simply inherited.
Figure 1: GNI (PPP) per Capita, 1990–2011, Source: Global Competitiveness Report 2012-2013
POPULATION, LABOR FORCE AND FACTOR PRODUCTIVITY
According to the official figures of the national statistic authority2 Singapore’s population counted 5.3 million
people in 2011. The labor force participation rate of the population, aged 15 and above is 66.1% with an annual
growth in labor productivity of 1%. Seventy per cent of the workforce is employed in the service sector whereas
1
World Bank data indicators:
http://data.worldbank.org/indicator/NY.GNP.PCAP.PP.CD/countries?page=6
2
Department of Statistics Singapore: http://www.singstat.gov.sg/
-3-
the remaining 30% percent work in manufacturing, construction and other industries. Since 2001, unemployment
never exceeded the rate of 3.6%; the average unemployment rate amounts for 2.0% (2011).
As it is the trend in other developed economies, the country faces a low fertility rate of 1.2 children per female
and consequently suffers from an ageing society. The country’s population shows a literacy rate of 96.1% and
more than half of the population posses’ secondary or higher education qualifications.
GLOBAL COMPETITIVENESS
Figure 2: The global Competitiveness Report, Source: Global Competitiveness Report 2012-2013
Figure 3: Pillars of Global Competitiveness, Source: Global Competitiveness Report 2012-2013
According the global competitiveness report of 2012-2013 (World Economic Forum, 2012) Singapore is rated
the second most competitive country in the world, behind Switzerland and followed by Finland and Sweden. The
-4-
ranking of the global competitiveness index (GCI) is based on 12 pillars, which are bundled in the following
three categories: basic requirements, efficiency enhancers and innovation factors (see Figure 2). Singapore’s
high ranking is a result of an outstanding performance throughout the three categories of the index. For instance,
the country’s public and private institutions as well as the efficiency of its goods and labor markets are ranked
best on a global level. Another factor that makes Singapore very competitive is its world-class infrastructure,
with excellent roads, ports, and air transport facilities. The sophisticated overall performance of Singapore
classifies the country’s economy as innovation driven (see Figure 3).
Figure 4: Global Competitiveness and GDP per Person in 2012, Source: World economic Forum
Nevertheless Singapore has a lower expected GDP per person forecast for 2012 than Norway, Luxembourg and
Sweden, it outperforms those countries with its Global Competitiveness Index score. This illustrates that
Singapore has successfully passed the phase of an emerging economy and now competes with developed
economies, such as the United States and Germany (see Figure 4). In order to maintain its competitiveness in the
next 10 years, the Economic Strategy Committee of Singapore has defined the following three priorities:
Strengthen innovative driven economy further, upgrade the capacity of the skilled workers and industries and
enable Singapore to become a global city (Economic Strategies Committee, 2010).
-5-
CLUSTER COMPOSITION (ECONOMY / MIX OF ECONOMIC ACTIVITY)
According the Economic Development Board (EDB) 3 , the 1960’s mark the starting point of Singapore’s
industrialization process. At that time, the Singaporean government invested heavily in creating an environment
for industrial development. The main industries were consisted of factories producing garment, textiles and
wood products. From the 1970s’s on, the government has promoted more capital and technology-intensive
projects from companies such Shell Eastern Petroleum and the National Iron and Steel Mills. Along with the
development of export-oriented industries a solid manufacturing base has emerged. More and more factories
were built, capital was invested increasingly in skilled manpower and industries were diversified. Eventually
during the 1980’s, the government adopted a high-wage policy to accelerate the move away from labor-intensive
industries to high-technology industries. During the 1990s the service industry started to flourish along with
companies intensifying their use of technology. The government shifted its focus from basic manufacturing to
strengthen the new key industries such as chemicals, electronics and engineering, namely the development of
biomedical sciences. This enabled Singapore to become a host for businesses in higher value-added activities. It
became not only a hub of skilled manpower but as well gained attractiveness for foreign direct investors (Seetoh
et al., 2008). At the turn of the century, Singapore’s economy could be classified as an innovation driven
economy. In 2006, the government has invested more than $13 billion in R&D. Singapore has created a strong
network of public and private sector R&D centers in order to enhance and commercialize new technologies and
processes to companies.4
According to the Ministry of Trade and Industry of Singapore (2011), goods producing industries make up
26.6% of the overall economic structure, services producing industries amount for 69% and ownership of
dwellings for 4.4%.
For the whole of 2011, the economy grew by 4.9 per cent. The sectorial breakdown of the goods and service
producing industries shows that the manufacturing sector grew 7.6%, the construction sector 2.6 % and the
wholesale and retail trade sector posted a marginal gain of only 1.1%. The accommodation and food services as
well as other services industries grew by 5.8 per cent and 6.7 per cent respectively (see Figure 5).
3
EDB website: http://www.edb.gov.sg/content/edb/en/why-singapore/about-singapore/our-history.
EDB website: http://www.edb.gov.sg/content/edb/en/why-singapore/about-singapore/ourhistory/1960s.html.
4
-6-
Figure 5: GDP and Sectorial Growth Rates Source: Economic Survey of Singapore (2011)
In sum, all the previous listed sectors contributed to the country’s economic growth (see Figure 6). However,
manufacturing, with 2.0 percentage-points, was the largest contributor to the overall real GDP growth, followed
by finance and insurance with a 1.1 percentage-points contribution. Accommodation and food, construction and
information and communication represent the smallest share (0.1 percentage-points each) of the overall GDP
growth.
Figure 6: Percentage-Point Contribution to Growth in real GDP Source: Economic Survey of Singapore (2011)
Investment commitments continued growing in 2011 despite a volatile economic environment. In total
manufacturing and services sectors attracted $13.7 billion in fixed asset investments (FAI).
According to the Economic Survey of Singapore (Ministry of Trade and Industry Republic of Singapore, 2011),
the biomedical manufacturing constitute the biggest and most promising cluster in the manufacturing sector,
followed by the precision engineering and the transport engineering cluster.
-7-
MACROECONOMIC, POLITICAL, LEGAL AND SOCIAL CONTEXT
On Aug 9, 1965, Tunku Abdul Rahman, the Prime Minister of Malaysia issued a proclamation that Singapore
would cease to be a part of Malaysia and would become independent. Lee Kuan Yew was the first Prime
Minister of Singapore and kept the office for three decades. Lee played an important role in the transition of
Singapore from an underdeveloped country to a first world economy. During 1959-1990, he and his
administration raised the standard of living and transformed the Singaporean economy from a factor-driven to an
innovation-driven economy. Shortly after the independence, Prime Minister Lee Kuan Yew has implemented a
large public housing program, created strategies to improve the economic infrastructure and focused on building
a strong national identity in order to minimize the potential for racial outbursts and create national unity.
5
Singapore has evolved from a low-income country with a GNI per capita of less than US$320 to a developed
high-income country with a GNI per capita of $59,380, within only forty years since its independence. 6
Today’s Prime Minster is Lee Hsien Loong, Lee Kuan Yew’s son and was elected in 2004, succeeding Goh
Chok Tong who was Prime Minister between 1990-2004. According to Tan (2008), the People’s Action Party
(PAP), which dominates the Singaporean parliament since the general election in 1963, has used meritocracy as
the main ideological tool for justifying an authoritarian and restrictive government style. Even though some
concessions to a more consultative style of government were made in the past, a wholesale change is yet
unthinkable (The Economist, 2012).
The domestic political agenda is increasingly framed by deepening the integration to the Association of
Southeast Asian Nations ASEAN, which aims to strengthen regional economic and political ties. Another
important role has the Economic Strategies Committee ESC, which was established by the Prime Minister Lee
Hsien Loong in 2009. Its main task is to develop long-term and sustainable economic strategies. The ESC report
of 2010, which contains the main economic strategy for the next 10 year, points out three key priorities. First to
invest and attract high skilled people, second to strive for an innovative economy and third to create a distinctive
5
EDB website: http://www.edb.gov.sg/content/edb/en/why-singapore/about-singapore/ourhistory/1960s.html
6
World Bank data indicators:
http://data.worldbank.org/indicator/NY.GNP.PCAP.PP.CD/countries?page=6
-8-
global city. Further the report recommends seven key strategies to achieve the goals for 2020, which consist of
creating an Asia hub for manufacturing and services, upholding a smart energy economy, endearing home,
growing through skills and innovation, enhancing land productivity and generating innovation as well as divers
corporate ecosystems (see Figure 7).
Figure 7: Key Strategies Source: Report Of The Economic Commitee (2010)
Singapore’s rise in prosperity over the past two decades has not been shared equally across its citizens. Figures
of the CIA World Factbook7 show that inequality measured by the Gini Coefficient has risen consistently since
the mid 1980’s. Even though it remains near the level of the US it is still much higher than the average level of
the European Union.
Singapore’s population consists of 76.8% Chinese, 13.9% Malay, 7.9% Indian and 1.4% other. The ethnic
heterogeneity of the Singaporean population and increasing immigration play a major role in public policy
making. In particular, the increase in low-skilled migrant labor caused widespread concern about the growing
pressure on public services and housing. However, as the average level of unemployment remains low, the
Singaporean economy heavily depends on migrant labor (Wong et al., 2010).
The racial riots of 1950s and 1960s highlighted how ethnical and communal tensions could easily erupt into
violence. Since this incident, the Singaporean government focuses on promoting cultural diversity and social
7
CIA World Factbook: https://www.cia.gov/library/publications/the-world-factbook/geos/sn.html
-9-
cohesion. The three core principles of meritocracy, secularism and multiculturalism form the basis for organizing
the Singaporean society and political system. The government also makes use of constitutional and legal
provisions in order to guarantee social harmony and equal rights (Oswin, 2012).
NATIONAL DIAMOND
According to Porter (1990), differences in national values, culture, economic structures, institutions, and
histories all contribute to the competitive success of countries. In the case of Singapore, the ASEAN
Competitiveness Report 2010 (Wong, 2011) states that the country is highly competitive across microeconomic
and macroeconomic competitive categories. In terms of its national business environment (microeconomic
competitiveness) it is ranked among the best.
In order to evaluate the determinants of Singapore’s national business environment we will look at Porter’s
(1990) Diamond model of competitive advantage. It consists of four main attributes that shape the national
business environment, which are factor inputs conditions, context for strategy and rivalry, demand conditions
and related and supporting industries. The report (Wong, 2011) illustrates that the two categories, input
conditions and context for strategy and rivalry constitute the primary sources for Singapore’s microeconomic
competitive advantage. In fact the country’s efficient labor market, low rigidity of employment and salaries,
which are tied to productivity are the reason for good factor inputs conditions. Additionally, the sophisticated
administrative and logistical infrastructures play an important role in Singapore’s level of attractiveness. With an
expansive base of leading global logistics players, world-class infrastructure and excellent global connectivity,
Singapore is the preferred logistics and supply chain management hub for leading manufacturers across
industries, such as LVMH, Novartis, Panasonic, and Siemens Medical Instruments. 8
8
http://www.edb.gov.sg/content/edb/en/industries/industries/logistics-and-supply-chainmanagement.html
- 10 -
Figure 8: Strengths and Weaknesses of the Singaporean Business Environment
In the context for firm strategy and rivalry, the Doing Business report (World Bank, 2013) outlined the following
strengths: Singapore offers an attractive tax incentive regime, a friendly regulatory environment for FDI, strong
investor protection and enforcement of intellectual property rights, low burden of government regulations and
efficient customs procedures. Further, the report (World Bank, 2013) states that the time needed to start a
business is very short and takes only 3 days, costs 0.6% of income per capita and requires paid-in minimum
capital of 0.0% of income per capita. Nevertheless, Singapore business environment also entails some
weaknesses such as, low intensity of local competition and market distortion due to state owned enterprises.
Given that Singapore’s domestic demand is relatively small, firms should target international, rather than
domestic markets (World Bank, 2013). The export market measured as a percentage of GDP can serve as a
- 11 -
proxy for the relative importance of international demand (Moon et al., 1998). Singapore’s exports of goods and
services accounted for 209% of GDP in 20129, which indicates the existence of an important and sophisticated
international demand. In regard to the related and supporting industries the government encourages collaborative
projects between private sector firms and public research institutions to enhance selected cluster development
and overcome the small economy disadvantage (Kuchiki, 2010).
FINANCIAL SERVICES
HISTORICAL EVOLUTION
Over the last few decades Singapore achieved an impressive success in changing a young developing nation into
one of the most prosperous economies globally. Among many individual factors that played a role in changing
the nation, Singapore always had the willingness to constantly review its position in an international perspective.
Singapore has been able to take action and implement change in response to global challenges.
The Singapore financial sector has gone a long way of developing and providing fair competition to foreign
institutions. The starting point of the financial sector was in 1958, when ABN Amro settled their first operations
in Singapore. At this time, most of the banking activities were concentrated in European and Chinese
communities. The majority of the available resources were used for financing trade, building infrastructure, and
fund construction projects. The demand of trans-shipment in trade during the 1960s nurtured the financial
industry in Singapore. In the l970s, the boom of the Euro-Dollar market and the trend of international capital
flow in Asia boosted activities, mainly in Singapore and Hong Kong. Singapore adopted a two-pronged strategy
with regards to its financial sector (Montes 1999). First, the administration had the aim to support growing
industries, like the financial cluster. Secondly, the financial sector itself wanted to become a key industry in line
with the government’s effort to promote manufacturing and shipping industries. Since 1968, the Singapore
government has provided incentives and preferential tax treatments for the development of the Asian Currency
Units (ACU) (Tan 2002) in order to cultivate an Asian Dollar Market (ADM). This supported Singapore to
develop as a financial center.
9
World Bank indicators: http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS/countries
- 12 -
Since the 1970s Singapore fulfilled this purpose within setting up attractive conditions for investors with
introducing all needed funds into building its manufacturing base.
Since the 1980s, Singapore competed with other cities in developed countries to attract in the world’s biggest
multinational corporations and organizations. The financial service sector started contributing significantly to the
GDP. Technologies and human resources were insufficiently developed on this time and the allocation of
resources embodied a high risk within developing of financial sector.
After a few decades, the financial service sector had developed significantly. Singapore’s financial sector and
banking provide basic offers with a sophisticated, technology and innovation driven service. The growth of
financial service sector was interrelated with the growth of Asian Currency Unit, the Asian Dollar Bond market
and the Singapore Dollar Corporate Bond market.
In late 90's, Singapore has a status of a robust city with a significant financial center. Ng (1998) noted that with
the trend of growing globalization between the 1980s and the 1990s, the establishment of Singapore as an
international financial center had increasing effect towards centralization. This view is also echoed by other
authors (Poon 2003 and Schenk 2002) whereby the global fincial revolution of the finance industry had led
towards the trend of concentration to a few large financial centers, complemented by smaller centers with
specialized focuses. Given the favorable business enviroment, Singapore was the natural choice for the influx of
multinational corporations’ operational headquarters in the 1990s. Singapore’s success was owed to its status as
a regional financial center for the whole South East Asian region.
In 1997, the Asian financial crisis hit the region and their economies like Indonesia, Philippines and Thailand.
Singapore and was not spared from the effects of the crisis. However, due to it robust financial systems as well
as prudent fiscal and monetary policies, guarded longlasting damages.
Followed by the global financial crisis was the boom and bust of the dot com era, when equity valuations for ITlinked companies skyrocketed and then plummeted when investors realized the optimistic expectations on such
firms were mostly empty dreams.
Tragedy struck on September 11 in 2001, which led to another financial turmoil for businesses all over the
world. The onslaught of the Severe Acute Respiratory Syndrome (SARS) took its toll to the Asian financial
markets, affecting airlines, tourism, retail, and trade. Despite the turbulent environment, the financial industry in
- 13 -
Singapore had weathered through the difficult times.
In 2005, Singapore’s banking system is among the strongest in the world. The banking sector is engaged in a
wide range of financial services including traditional lending and deposit-taking functions as well as corporate
and investment banking activities. As for March 2005, there were 110 commercial banks, 47 merchant banks and
3 financial companies in the financial sector, with the total assets of commercial banks standing at S$413 billion.
6 banks have been awarded and qualify for full bank licenses.
Nowadays, Singapore offers several advantages including a sound financial infrastructure, an excellent
communications network, a stable government and a favorable strategic geographical location.. Singapore is now
home to over 600 financial institutions, ranging from banks to insurance companies to fund managers. A
growing number of international financial institutions have also chosen to base their operational headquarters in
Singapore. Assets under Management have grown to a total asset size of more than US$1 trillion. The Asian
Dollar Market has been critical to Singapore’s role in financing regional growth. Banks in Singapore draw in
non-SGD deposits globally, and deploy these funds to serve the financing and treasury needs of individuals,
corporates and institutions in Singapore and beyond.
DESCRIPTION OF THE DIFFERENT SERVICES
Despite its small domestic market, Singapore’s economy is heavily engaged in the global marketplace. The
Heritage Foundation’s Index of Economic Freedom ( ) ranks it as the world’s second most open economy.
Additionally, it is one of the most stable economies, with no foreign debt, high government revenue and a
consistently positive household surplus. Singapore has no natural resources and a very small land area. The
economy is driven by (a) exports in electronics manufacturing and machinery, (b) financial services, (c) tourism,
(d) the world’s largest cargo seaport.
It is important to highlight Singapore’s financial services industry. Its business-supportive environment and
political stability has attracted many multi-national banking and investment firms. In the process, the knowledge,
technology and skills that multi national corporations MNCs bring are transferred into the domestic market. One
- 14 -
can assume that every major bank and investment firm from the US or Europe operating in Asia would be
headquartered in Singapore or Hong Kong, the main rival.
Figure 9: Singapore GDP development by Industry
Financial market infrastructures FMI are facilitating the clearing, settling, or recording of payments, securities,
derivatives or other financial transactions are key components of the financial system, and play a critical role in
fostering financial stability. If FMIs are not properly managed, they can pose significant risks to the financial
system and be a potential source of contagion. The Monetary Authority of Singapore is supervisor of FMIs in
Singapore.
- 15 -
Financial Structure in Singapore
Monetary authority
Monetary Authority of (MAS)
Currency issuer
MAS – Currency Department
Three-tier structure
Full licensed bank
Whole Sale licensed bank
Offshore licensed bank
Non-Bank financial institutions
Merchant bank
Finance company
Finance holding company
Money broker
SGS Market Dealers Insurance company/broker
Central Provident Fund (CPF)
Other
Representative office
Figure 10: Monetary Authority of Singapore
The banking sector in Singapore has a three-tier structure, which comprises full banks, wholesale banks and
offshore banks. They are collectively known as authorized institutions.
- 16 -
THE PRIVATE BANKING CLUSTER IN SINGAPORE
RISE OF THE PRIVATE WEALTH MANAGEMENT INDUSTRY IN ASIA
Over the last decade, Singapore has become one of the worlds leading private wealth industry centers, in Asia
and globally. There are a several parameters, why High net worth individuals (HNWI’s) choose Singapore for
their private banking needs and which are responsible for growth and the shift of the private wealth industry
towards Singapore.
One of the key factors responsible for this growth is interconnected with the economic development of China,
India and other Nations in Asia. China, being the figurehead of Asian growth, has an estimate of one million
millionaires and six hundred billionaires. Those numbers are constantly rising and some estimations claim that
half the world's billionaires will come from China within the next decade (Business Insider, 2012).
Figure 11: Increase in millionaires by global region (Wealth report, 2012)
Moreover, Asian countries were relatively unaffected by the sub-prime crisis in 2008. There are five main
factors, which are accountable for this subject, pointed out by Khor and Kee (2008):
1. The macroeconomic fundamentals improved, compared to the previous decade;
- 17 -
2. Corporate balance sheets gained strength;
3. Several nations reformed their banking system;
4. Asia had a strong external position; and
5. Asia had comparatively modest property price compared with the US and Europe.
This stability, when US and European markets were struggling, created an opportunity for the private wealth
industry in Asia as a whole. Due to stability and steady growth, investments from Europe and the US were
shifted to Asia. As a result, international private banks increased their presence in Asia, because of the rise of the
local HNWI’s, and the shift of assets.
SINGAPORE, A WEALTH MANAGEMENT POWERHOUSE
In an annual survey, the Monetary Authority of Singapore publishes an estimate of the assets under management.
By the end of 2011, total assets under managed decreased to some extent by 1.2% to 1.34 trillion Singapore
Dollars. However, the 5-year average growth rate of assets under management accounts for 11%. Interestingly,
more than 70% of total the assets are sources outside Singapore (MAS, 2012). This demonstrates Singapore’s
major position as international financial center (MAS, 2012).
The difference between discretionary and advisory assets is the degree to which the client is involved in the
management of a portfolio. With a discretionary mandate, the asset manager makes all the day-to-day investment
decisions on your behalf once you have decided your aims.
Figure 12: Assets under Management (MAS, 2011)
- 18 -
In Asia, there are two competing wealth management and financial hubs: Singapore and Hong Kong. We should
now explore, how Singapore gained its position as one of the worlds leading private wealth management
industry centers.
INVESTMENT FRIENDLY JURISDICTION
Singapore remains in second position in the Global Competitiveness Report 2012-2013. Numerous other top
rankings in studies underpin Singapore’s aspiration to be an attractive city for foreign direct investment. This
investment friendly jurisdiction facilitated a key success factor of the wealth management growth and the
transformation of the manufacturing focused economy in the 1970s to an international financial centre.
Numerous Swiss and international private banks and wealth managers opened branches and hubs in Singapore.
MONETARY AUTHORITY OF SINGAPORE
Singapore started a strategic review of their financial cluster in 1997. As a result the Monetary Authority of
Singapore liberalized key financial industries including retail banking and investment banking to enhance the
local asset management services. The Monetary Authority of Singapore is responsible for the development of
Singapore as a financial hub. To reach this aim, they have opened department in London and New York.
During the last decade, the Singapore government and the central bank, the Monetary Authority of Singapore
had taken further proactive steps to endorse and facilitate the growth of private wealth management in
Singapore. The Monetary Authority of Singapore issues three distinctive banking licenses (MAS, 2008):
Full bank license
As defined by the Banking Act 25, a holder of a full bank license can take on the whole variety banking.
- 19 -
Wholesale bank license
The proprietor of a wholesale license can engage in the whole variety of banking, except some restrictions on
Singapore dollar business.
Off-shore bank license
An off-shore bank license possessor cannot carry on Singapore dollar-denominated savings accounts and fixed
deposits for Singapore residents. The deposit for non-Singapore-citizens should not be less than 250’000
Singapore dollars.
A bank can also request to operate as a merchant bank. With the approval of the Monetary Authority of
Singapore, they can operate with an Asian Currency Unit. As a result, they can conduct non-Singapore dollardenominated banking business.
Most of the private banks in Singapore possessing a wholesale banking license, or have obtained the
authorization of operating as a merchant bank in Singapore, because of the off-shore character and the high
deposits of the HNWI.
FAVORABLE TAX REGIME
As already explained, Singapore has a competitive tax regime, with one of the lowest personal and corporate
taxes in Asia and no estate duty. The tax rates are enforced on the income. The tax rate for Singapore residents is
caped and can reach not more than 20 per cent (Singapore, 2012). Non-residents are taxed at a maximum of 15
percent and the Singapore corporate tax rate is 17 percent (Singapore, 2012), as a comparison Singapore's
corporate tax is approximately less than half of the US corporate tax. In addition, there is no capital gains tax.
This means that gains, which are considered non-income in nature, are not taxable.
- 20 -
Figure 13: Corporate tax rates of selected countries (OECD, KPMG, 2012)
SINGAPORE’S BANKING SECRECY AND CONFIDENTIALITY
Singapore has developed strict bank secrecy and administrated and monitored by the Banking act. As a
consequence, it is prohibited to disclose any banking costumer information by a financial institution or other
persons. Additionally, there are also confidentially guaranteed trough the Trust Companies Act, which does not
allow to disclose any information of a trust or the beneficiary, by any company or employed person. The intact
banking secrecy through the Banking Act and the Trust Companies Act, allowed Singapore to create a
competitive advantage.
In 2006–2007, when the economy was booming, Singapore had a strong boost of the private banking industry.
Many western countries perceived Singapore as a tax heaven.
Tax authorities, mainly in the western hemisphere, have been worried about the shrinkage of their taxes. As a
result, they have undertaken the prosecution of tax offenders. This can be done through exchange of information,
through tax treaties or by way of a separate tax information exchange agreement. Those possibilities allow the
countries to build up a case against tax avoiders. Hence, Singapore announced in 2009 the pledge to the OECD
and created a standard for the international exchange of information. Granted by the parliament, the exchange of
bank and trust information upon due process, came into function in beginning of 2010 (Singapore, 2012).
- 21 -
CONCLUSION
The wealth management industry in Singapore has grown to one of the most important private banking centers in
Asia and globally. One of the key factors is location, being that Singapore is one of the beneficiaries of the Asian
growth. The government of Singapore enhanced the cluster by creating an attractive environment, with
regulatory compliances, favorable tax regimes and an intact banking secrecy and confidentiality. Consequently,
the safe-haven status has supported the wealth management industry. The authors believe, with this set up,
Singapore’s wealth management industry will continuously experience growth.
STRATEGIC ISSUES AND RECOMMENDATIONS
In order to keep the competitive advantage and further enhance the private wealth management cluster,
Singapore needs to focus on the strengths of political stability, healthy economy and a regulated financial
system. The favorable tax environment is a key element in order to attract firms and professionals. We
recommend further tax decline to improve on Singapore’s competitiveness as a wealth management centre. If
possible Singapore should attract more financial institutions, which then create interdependencies among the
sectors. An enhanced private wealth management industry will have a positive impact on other financial sectors,
like capital markets. However, the global pressure to pursue tax offenders, calls for a proactive responsive legal
and regulatory framework. Those effects will force Singapore to develop a financial industry and wealth
management cluster, which is not just depended on location. Instead Singapore should be more focused on
creating an industry, which is known for their cutting edge technology and know-how. We propose that
Singapore should focus and invest in education and training for wealth managers in order to create a domestic
pool of talents.
- 22 -
PRIVATE BANKING IN SINGAPORE COMPARED TO
SWITZERLAND
In order to compare the two clusters, Singapore and Switzerland, we have to take a look at the Swiss cluster first.
The Swiss Private Banking sector is highly competitive. In terms of global asset management, Switzerland
commands a 9.1% and ranks third in the world after the U.S. and U.K. The Swiss private banks have continued
pulling in new money over the past three years (in aggregate), despite the financial crisis and controversy over
bank secrecy. UBS may have suffered outflows of 83.4 billion Swiss francs ($77.12 billion) between 2008 and
2009, but most Swiss private banks continued to report inflows. For example, Bank Sarasin saw net inflows up
17% in 2008 to 14.5 billion francs. That suggests some money pulled from UBS was transferred to other Swiss
banks. Once the crisis was survived, the in the meantime state backed bank UBS could report a net inflow of
CHF 40 billion for the year 2011 (UBS, 2012).
Private banks in Switzerland could benefit from a developed financial system. The two big banks, UBS and
Credit Suisse are amongst the global market leaders. With a value added of nearly CHF 62.8 billion or 11.6%
of gross domestic product (GDP), the financial sector was among the key business sectors in Switzerland
again in 2008. The banking sector contributed CHF 41.3 billion to the real value added, which corresponds
to 7.6% of GDP. The insurance industry contributed CHF 21.5 billion or 4% of the GDP:
- 23 -
Figure 14: Value added of the banking an insurance sector (2008) Source: SBA
The SIC is operating a very sophisticated system for interbank payments. The system was extended to the
European zone, since Switzerland is not part of the Euro. This system enables real-time payments in Swiss
Francs and Euro.
Swiss private banking is renowned for its quality services and consistently ranking in top 3 of global private
bank ranks, has become one of the few options that sophisticated clients seeking quality service may choose
from. 40% of the value proposition of Swiss private banking revolved around the quality and comprehensiveness
of its service. The Swiss Financial Market Supervisory Authority (FINMA) and the Federal Banking
Commission regulate Swiss banks.
The Swiss private banking sector enjoys ample sources of talent and draws substantial human resources from
various educational institutes and specialized training programs. Education for bankers starts with basic
commercial banking training at the secondary education level. This commercial training lasts three years, and is
part of the Swiss Bankers Association’s bank apprenticeship model. At the tertiary level, universities offer
competitive programs in economics and law, which are directly applicable for banks and financial institutions.
Swiss universities are also strong in mathematics and IT. Students can also choose a highly specialized course in
Banking and Finance HFBF, a practice-oriented course of study that results in a federal diploma in Banking and
- 24 -
Finance HF. On the post-graduate level, Switzerland is home to two highly competitive MBA programs, IMD
and St. Gallen.
Analyzing the cluster diamond for the Swiss private banking sector is showing the following:
Figure 15: The Swiss private banking cluster diamond, Source: Own
Context for Firm Strategy and Rivalry:
As in most other countries, international investments are a key factor for economic growth and prosperity in
Switzerland. Switzerland’s macroeconomic environment is among the most stable in the world. Swiss-based
companies have traditionally exported not just industrial goods and services but also capital, particularly in the
form of direct investment. At the same time, Switzerland has successfully positioned itself as a location for
capital investment from abroad. According to the Swiss National Bank, the stock of direct investment by Swiss
- 25 -
companies in production, distribution and research facilities abroad stood at CHF 809 billion by the end of 2008.
In addition to large-sized enterprises, there are also several thousand SME's that have contributed. Combined,
they employ nearly 2.44 million people outside of Switzerland. In comparison, foreign direct investment (FDI)
in Switzerland currently stands at CHF 467 billion (2008), which corresponds to roughly 242,000 jobs.
Compared to other countries, Switzerland maintains relatively high levels of foreign direct investment (FDI).
This can be seen in the ratio between the level of Swiss foreign direct investment (FDI) and gross domestic
product (GDP). According to the Swiss National Bank, the ratio at the end of 2008 was 149%. The importance
of foreign investment for the Swiss economy can also be seen from a historical perspective as the stock of Swiss
FDI has quadrupled since 2000 (UNCTAD, 2010).
Switzerland has introduced innovation friendly policies targeting excellence in research. There is for example
CTI, Venture Lab, supporting research and technology driven innovation as well as Universities of applied
Sciences, funded through block grants by the Confederation. Cantons are funding their own universities with
supplementary funding through the state based on the number of students.
According to the Global Competitiveness Report 2012-2013, which assesses the competitiveness landscape of
144 economies, Switzerland is topping the overall rankings. Switzerland therefore retains its 1st place position
again in 2012 as a result of its continuing strong performance across the board. The country’s most notable
strengths are related to innovation and labor market efficiency, where it tops the GCI rankings, as well as the
sophistication of its business sector, which is ranked 2nd. Moreover, public institutions in Switzerland are among
the most effective and transparent in the world (5th). Governance structures ensure a level playing field,
enhancing business confidence; these include an independent judiciary, a strong rule of law, and a highly
accountable public sector.
Demand Conditions
Switzerland is having a very strong pension fund system - a mandatory occupational pension system, financed
via pension funds, introduced in 1985. Swiss law requires that, at a minimum, employers should provide a cashbalance plan. Employees whose annual earnings exceed CHF 19 890 with the same employer are required to join
the pension fund established by their employer. The system is voluntary for self-employed persons and those not
eligible for mandatory insurance. According to OECD in 2007 606.4bn Swiss Francs, which is 119.4% of the
GDP were invested from around 2600 different funds.
- 26 -
Switzerland is attracting many rich people, as we will see in the section for factor conditions. They are
increasing the demand for private banking services.
Factor Conditions
Due to the low corporate tax policy, many headquarters of large international companies are based in
Switzerland. The very high living standard combined with well-known, famous, and world-class touristic
destinations as Gstaad, St. Moritz, etc. are furthermore attracting rich individuals to remain in the country.
Switzerland’s scientific research institutions are among the world’s best, and the strong collaboration between its
academic and business sectors, combined with high company spending on R&D, ensures that much of this
research is translated into marketable products and processes reinforced by strong intellectual property
protection. This robust innovative capacity is captured by its high rate of patenting per capita, for which
Switzerland ranks a remarkable 2nd worldwide. Productivity is further enhanced by a business sector that offers
excellent on-the-job-training opportunities, both citizens and private companies that are proactive at adapting the
latest technologies, and labor markets that balance employee protection with the interests of employers.
Switzerland has an excellent infrastructure, a well-functioning goods market, and highly developed financial
markets.
Related and supporting industries
Swiss private banking benefits to a large extent from other financing services located in Switzerland.
Switzerland is still attracting companies with low tax policies. Furthermore it is an international long-standing
trading hub and center for financial settlements. The BCBS is a committee of banking supervisory authorities
that was established by the central bank governors of the Group of Ten countries in 1974. Its objective is to
enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The
Committee also frames guidelines and standards in different areas - some of the better known among them are
the international standards on capital adequacy, the Core Principles for Effective Banking Supervision and the
Concordat on cross-border banking supervision (Basel accords 1-3).
- 27 -
NGO's such as the United Nations, the Red Cross, and the World Trade Organization (Switzerland hosts a total
of 29 international organizations) are headquartered in Switzerland. These international organizations are active
in fields as varied as humanitarian aid, commerce, human rights, the environment and sustainable development,
training and education, peacekeeping and security meteorology, intellectual property, nuclear research, health,
telecommunications and labor. Their presence and activities are a stamp of approval and guarantee of
Switzerland’s global authority over neutrality, political stability and international regulations, an ideal
environment for private banking.
Last but not least Switzerland has a very strong tourism industry, attracting thousands of tourists every year,
independent of the season. Switzerland’s highly equipped training of the international workforce, the
multilingual capabilities and cultural openness, are all qualities that are important to the private banking industry
at Switzerland.
A direct comparison between the Singapore and Swiss clusters for private banking is showing that location
specific benefits are very important. The private wealth industry is flourishing in locations with a stable
macroeconomic environment. Similarities are could be found on both, low corporate and income taxes. Highest
education standards, governmental policies enabling R&D and innovation are attracting a very educated and
skilled workforce, who is increasing the demand for private banking services. A high amount of foreign direct
investments are also beneficial for the sector.
In the private banking sector however, we assume the most important factor are the policies for banking secrecy
and confidentiality, which prohibited to disclose any banking costumer information by a financial institution or
other persons. Switzerland has similar policies and therefor the toe locations could build a very strong
competitive advantage.
- 28 -
ABBREVIATIONS
ACU
Asian Currency Unit
ADM
Asian Dollar Market
ASEAN
Association of Southeast Asian Nations
BCBS
Basel Committee on Banking Supervision
CPF
Central Provident Fund
CIA
Central Intelligence Agency
CTI
Commission for Technology and Innovation
EDB
Economic Development Board
ESC
Economic Strategies Committee
FAI
Fixed Asset Investment
FDI
Foreign direct Investments
FMI
Financial market infrastructure
GCI
Global Competitiveness Index
GDP
Gross domestic product
GNI
Gross National Income
HNWI
High net worth individuals
LVMH
LVMH Moët Hennessy - Louis Vuitton S.A.
MAS
Monetary Authority of Singapore
MNC
Multinational Corporation
NGO
Non Government Organization
OECD
Organization for Economic Co-operation and Development
PPP
Purchasing Power Parity
R&D
Research & Development
SARS
Severe Acute Respiratory Syndrome
SDCB
Singapore Dollar Corporate Bond
SIC
Swiss Interbank Clearing
SMI
Small- and Medium sized Enterprise
US
United States of America
- 29 -
REFERENCES
Economic Strategies Committee. 2010. ECS Recommendations. Available online at
http://app.mof.gov.sg/esc.aspx. (Retrieved 10 January 2013)
Kassel M., 2012. The Wild Lives Of China's Young New Millionaires. Available at:
http://www.businessinsider.com/china-wealth-2012-4?op=1 (accessed 27 December 2012)
Khor. H.E. and Kee, RX. 2008. Asia: A perspective on the subprime crisis. Munich Personal RePEc Archive,
paper no. 9995, Germany.
Kuchiki, A. 2010. From agglomeration to innovation: upgrading industrial clusters in emerging economies.
Basingstoke: Palgrave Macmillan
Ministry of Trade and Industry Republic of Singapore. 2011. Economic Survey of Singapore. Available online at
http://www.mti.gov.sg/ResearchRoom/Pages/Economic-Survey-of-Singapore2011.aspx?cat=Economic%20Survey%20of%20Singapore.
(Retrieved 13 January 2013)
Monetary Authority of Singapore, 2011. 2011 Singapore Asset Management Survey. Vaiable at:
http://www.mas.gov.sg/en/News-and-Publications/Surveys.aspx (accessed 27 December 2012)
Monetary Authority of Singapore, 2012. Guidelines for Operation of Offshore Banks. Available at:
http://www.mas.gov.sg/resource/legislation_guidelines/banks/guidelines/Offshore%20Banks%20Guidelines%20
-%208%20Jul%2008.pdf (accessed 27 December 2012)
Moon, H. C., Rugman, A. M. and Verbeke, A. 1998. “A generalized double diamond approach to the global
competitiveness of Korea and Singapore”, International Business Review. 7:135-150
- 30 -
Oswin, N. 2012. "The queer time of creative urbanism: family, futurity, and global city Singapore". Environment
and Planning. 44:1624-1640
Porter, M.E. 1990. The competitive advantage of nations. New York: Free Press
United Nations Conference on Trade and Development UNCTAD. 2010. UNCTAD World Investment Report
2010.
Seetoh, K. C. and A H F Ong, A. H. F. 2008. Achieving sustainable industrial development through a system of
strategic planning and implementation: The Singapore model. In: T. C. Wong, B. Yuen and C. Goldblum (ed).
Spatial Planning for a Sustainable Singapore. Dordrecht & London: Springer, pp.113-134
SwissBanking. (2006). The Swiss Banking Sector. Retrieved January 22, 2013, from Swiss Bankers Association:
http://shop.sba.ch/11116_e.pdf
Tan, K. P. 2008. „Meritocracy and Elitism in a Global City: Ideological Shifts in Singapore“. International
Political Science Review. 29:7-27
The Economist. Nov 21st 2012. The world in figures: Countries, Singapore. Available online at:
http://www.economist.com/news/21566576-singapore. (Retrieved 15 January 2013)
The Global Competitiveness Report 2012–2013: Country Profile Highlights. Available online at:
http://www3.weforum.org/docs/CSI/2012-13/GCR_CountryHighlights_2012-13.pdf (Retrieved 24. January
2013)
Wong, M-H., Shankar, R. and Toh, R. 2011. ASEAN Competitiveness Report 2010, Singapore: Asia
Competitiveness Institute. Available online at http://www.spp.nus.edu.sg/aci/home.aspx. (Retrieved 10 January
2013)
- 31 -
World Bank. 2013. Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises.
Washington, DC: World Bank Group. Available online at
http://www.doingbusiness.org/data/exploreeconomies/singapore/. (Retrieved 01 January 2013)
World Economic Forum, 2012. Global Competitiveness Report 2012-2013. Available at:
http://www.weforum.org/issues/global-competitiveness (accessed 27 December 2012)
World Wealth Report, 2012. Available at: http://www.thewealthreport.net/ (accessed 27 December 2012)
FIGURES
Figure 1: GNI (PPP) per Capita, 1990–2011, Source: Global Competitiveness Report 2012-2013 ....................... 3
Figure 2: The global Competitiveness Report, Source: Global Competitiveness Report 2012-2013 ..................... 4
Figure 3: Pillars of Global Competitiveness, Source: Global Competitiveness Report 2012-2013 ........................ 4
Figure 4: Global Competitiveness and GDP per Person in 2012, Source: World economic Forum ....................... 5
Figure 5: GDP and Sectorial Growth Rates Source: Economic Survey of Singapore (2011) ................................. 7
Figure 6: Percentage-Point Contribution to Growth in real GDP Source: Economic Survey of Singapore (2011) 7
Figure 7: Key Strategies Source: Report Of The Economic Commitee (2010) ...................................................... 9
Figure 8: Strengths and Weaknesses of the Singaporean Business Environment ................................................. 11
Figure 9: Singapore GDP development by Industry ............................................................................................. 15
Figure 10: Monetary Authority of Singapore ........................................................................................................ 16
Figure 11: Increase in millionaires by global region (Wealth report, 2012) ......................................................... 17
Figure 12: Assets under Management (MAS, 2011) ............................................................................................. 18
Figure 13: Corporate tax rates of selected countries (OECD, KPMG, 2012) ....................................................... 21
Figure 14: Value added of the banking an insurance sector (2008) Source: SBA ................................................ 24
Figure 15: The Swiss private banking cluster diamond, Source: Own.................................................................. 25
- 32 -