DEVELOPMENT LOAN BILL

Order for Second Reading read.

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Deputy Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The reasons for this Bill go back to July 1985. That was when plans were initiated by the MAS to activate the market for Government securities as part of its mission of developing a competitive and progressive financial sector. Advice was sought from officials and ex-staff of the Federal Reserve Bank of New York which presides over the largest and, reputedly, the most efficient government securities market in the world. Our people have considered what best to adopt from the older and more developed markets - the US securities market as well as the UK gilt market which underwent some radical modernization recently. The MAS has been working with representatives from commercial banks and the financial community to establish a market structure that will be suitable for Singapore. Essentially, the Singapore Government securities market will be a domestic market. Non-residents are free to invest in Singapore Government securities but interest earned will be subject to withholding tax.

In developing the Government securities market in Singapore, the Government's objectives are as follows:

First, to provide investors with an additional liquid investment alternative which carries no risk of default. At present, the main investment instruments are stocks and shares, bank deposits and real estate.

Second, a liquid Government securities market will provide the base for growth of a debt securities market; this will bring together our corporate debt issuers who want to raise funds and investors who will buy the securities. The benchmark for pricing will be the yield curve on Government bonds, the best credit in the market.

Third, the development of the market will encourage the growth of skills relating to fixed income securities - from traders to market makers, bond salesmen and investment managers. These skills can be applied to offshore and other fixed income markets and would contribute to broaden the spectrum of financial services available in Singapore.

Currently, a Government securities market exists, but in a fairly rudimentary form. The CPF holds about three quarters of the outstanding debt, another 20% or so is in the hands of banks, discount houses and insurance companies, which are required by regulation to hold these "safe" assets. The concentration of securities in the hands of such long-term holders has left little scope for trading activity. Moreover, the maturity of the bonds, mostly 20 years, was not attractive to other investors who might have been expected to deal more actively in the market. The infrequency of bond issues exacerbated the lack of liquidity necessary for the development of a bond market.

These obstacles have been examined and resolved. A programme of regular issues of Government securities, initially of up to five years' maturity, carrying market- related yields will be offered. The minimum denomination is $1,000 for the notes and bonds, well within the reach of individual investors and $10,000 for the Treasury Bills which cater for corporate investors. Eight primary and registered dealers have undertaken to make markets in order to ensure liquidity. The would-be investor in Singapore Government securities can obtain price quotes from the primary and registered dealers as well as those commercial banks who elect to provide the service. Investors may also transact through stockbroking firms.

The new Government securities market is ready to be launched. Among the changes required are those pertaining to the Development Loan Act. The changes are necessary for the following reasons:

1. The Development Loan Act, 1983, which came into operation in March 1983, authorized a sum of $15,000 million to be raised by way of loan for the purposes of the Development Fund. So far, loans totalling $6,130 million have been raised under the Act, leaving a balance of $8,870 million. This remainder will be used up entirely when bonds are issued to absorb the CPF's advance deposits which totalled $13,900 million at the end of February 1987. In addition, new floating rate bonds will be issued to the CPF to replace their existing holdings of fixed rate bonds. The CPF Board's earnings would then match the floating rate of interest paid to depositors, without incurring the risk of capital loss due to price depreciation on investments in fixed rate securities, in the event of rising interest rates.

In addition to the needs of the CPF come the needs of the activated Government securities market. Regular issues will be made to meet the demand of banks, insurance companies, other financial institutions and corporate and individual investors.

If approved, the new legislation would authorize the raising of a sum of $35,000 million. This is expected to satisfy demand for Government securities over the next four years. It is estimated that about 80% of the Government stocks issued will be to the CPF Board.

In case Members are wondering whether the Government intends to channel the additional funds into increased expenditure, let me assure Members that budgetary requirements are determined separately from funding requirements. So funds raised in excess of Government's budgetary requirements will be recycled back to the financial system, largely through the MAS.

2. At present, physical certificates are issued to purchasers of Government securities. In the new legislation, a book-entry registration and clearing system is envisaged to eliminate the need to handle physical certificates. The advantages to be gained lie in reducing storage and handling costs and paper work; reducing the danger of loss, theft, destruction and counterfeiting; and permitting greater speed and efficiency in handling a large volume of transactions. Instead of securities certificates having to travel back and forth at each transaction, with side-trips to MAS, a computerized system for updating records in a central register maintained by the MAS will be substituted. Commercial banks and primary and registered Government securities dealers will each have two securities accounts with MAS, one for their own holdings and the other for holdings on behalf of their customers.

The other change proposed in the Development Loan Bill is to provide more flexibility in administering the payment of interest on advance deposits. At present, the interest rate on deposits placed in advance of an issue of Government securities is tied to the coupon of the bonds finally issued. But if financial conditions change, the final coupon rate may not reflect conditions in the intervening period. The problem is that as financial markets have evolved, greater volatility now prevails than at the time when this provision of the Act was first drafted. I am now seeking to update it. The Development Loan Bill will authorize interest on advance deposits accepted by the MAS to be paid at such rates as may be determined by the MAS. As a result, advance deposits will be paid appropriate market-related interest rates.

Sir, I beg to move.

Question proposed.

Dr Augustine Tan: Mr Deputy Speaker, Sir, hon. Members should welcome this Bill as another step in the development of our capital market here in Singapore. The loans which the Government raises each year go partly to finance development expenditure and partly to augment our reserves abroad. It is the latter feature, the second feature, that causes us some problems on the liquidity front.

The move towards the issue of floating rate bonds and shorter maturity bonds will help the liquidity problem but will not eliminate it altogether, unless we get to the stage where Treasury Bills of three months' duration or so are issued, because such bills are acceptable by MAS as part of the bank's liquidity ratio, the assets that count as liquidity ratio. But I do not know whether the five-year maturity bonds and the floating rate bonds of longer maturity will count in this direction. If it does not, then the liquidity problems will still persist.

What happens now is that when Government raises a loan from the private sector, whether it be CPF or whatever, funds are transferred from private holders to MAS ultimately, and that causes a contraction of the local money market which, in turn, would attract funds from abroad causing our Singapore dollar to appreciate in value. It is then that the intervention by the MAS in buying up the foreign currency that comes in releases back some of the liquidity into the system. If MAS does not do the intervention correctly, then there would be a shortage of liquidity. If it overdoes it, there will be an excess of liquidity. But I believe that if the shorter term Treasury Bills are eventually issued, this would alleviate somewhat this problem.

Another observation I have relates to the issue of stock, bearer bonds and book-entry Government securities. Why do we need to continue issuing stock and bearer bonds that bear the signature of the Minister, that is, actual scrips when we are moving towards the book-entry system on government securities and earlier on in terms of Treasury Bills? Why do we not dispense with the scrips altogether and rely upon the book-entry system?

My final comment has to do with page 8, sub-clause (3) of clause 17, which says:

'The Minister may at any time apply all or any part of the moneys in the sinking fund created under this section to the purchase of trustee stock or local stock or of any other stock, fund, security or investment mentioned in section 7 (3) of the Financial Procedure Act.'

This seems to be a very liberal provision and I wonder whether some constraints or some safeguards should not be built into this particular clause. Trustee stocks are fine because these are deemed to be relatively safe. But it says "local stock", and presumably penny stocks or second-tier market or Sesdaq tax stock would count. "Or any other stock or fund", that means from any other stock market in the world including Timbuktu, if there is one. Whereas I recognize that usually the people who manage our funds are very responsible people, but one never knows what happens in the future. So when one enacts legislation, it will be wise to put in the appropriate safeguards.

Sir, I support this Bill.

Dr Richard Hu Tsu Tau: Mr Deputy Speaker, Sir, on the question whether MAS will be issuing short-term bills which would provide liquidity, item 5 on the Order Paper later this morning addresses this question. The answer is, yes. It is the intention of MAS to issue short-term (up to one year) maturity bills for this purpose.

On the overall question of whether Government borrowings will reduce the liquidity in the markets, I think the Member is aware that the bulk of the bonds are issued, to the CPF. Funds which come in through the CPF system, and are unutilized by members for purchase of houses and other approved uses, will come to Government and be exchanged for bonds. Liquidity in the financial market is managed by the MAS through the money market system and through swaps in the local market. I can assure the Member that the MAS keeps a very close watch on liquidity conditions in the market to ensure that there is no pressure on interest rates.

As to whether the Finance Minister has too much discretion, I think it would be difficult to define exactly what he should or should be allowed to buy because of the large range of securities which are available. I think we ought to leave it to the discretion of the Finance Minister. Perhaps the most effective way of ensuring that thing do not get out of hand is to make sure that the right person is appointed in the first place.

Dr Augustine Tan rose.

Mr Deputy Speaker: Dr Tan, you have spoken once already.

Dr Augustine Tan: Point of clarification. First, he did not answer one question on the issue of Government stock and bearer bonds which require scrips. Why not do without the scrips. Secondly, it is of material concern where the money is invested by the Finance Minister. If it is invested locally, the money gets channelled back into the system; if it is invested abroad, it is a leakage out of the system, and the quality of stocks obviously would be important.

Dr Richard Hu Tsu Tau: On the first question, the intent is to move entirely to a scripless system. I have, in fact, said this in my speech. But we still have a residue of stocks which are issued in certificate form which would over time expire. But the intention is to move entirely to a scripless form.

On the question of where the money should be invested, I have in my Budget round-up mentioned that any excess of savings which cannot be invested locally in a form which is attractive, because we have not the capacity to invest locally, would be invested offshore in secure securities. We only invest inforeign Government bonds, top quality equities and prime real estate. These offshore investments return an income stream to the Government which, in our current Budget, has helped to avoid the need to impose additional taxes.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Dr Richard Hu Tsu Tau].

Bill considered in Committee; reported without amendment; read a Third time and passed.