FOREIGN CORPORATIONS (Listing of shares and issue of bonds in Singapore dollars)

Mr Low Thia Khiang asked the Deputy Prime Minister what are the pros and cons of allowing (i) foreign companies to list their shares in Singapore dollars and (ii) unrated foreign corporations and sovereigns to issue Singapore-dollar denominated bonds.

BG Lee Hsien Loong: Mr Speaker, Sir, in 1998, MAS revised its guidelines on the non-internationalisation of the Singapore dollar (S$) to make it easier for foreign companies to list their shares in S$. The aim was to attract foreign companies to list in Singapore to add depth to our capital market. As a precaution, MAS required the foreign companies listing in S$ to have at least 20% of their revenues, profits or expenses attributable to their Singapore operations. But few foreign companies came, as most of those eligible to list have little or no operations in Singapore. While they could still list here in foreign currencies, not many were interested in doing so, because foreign currency listings generate less trading interest than S$ shares.

Therefore, in November 1999, MAS lifted the 20% requirement, and allowed foreign companies to list their shares in S$ on the Singapore Exchange (SGX), provided they met SGX's listing requirements. However, they had to keep the S$ proceeds from the share issue with a bank in Singapore, and convert them into foreign currency before using them outside Singapore.

In 1998, MAS also revised its guidelines to allow foreign entities of good credit standing to issue S$ denominated bonds, provided they swapped the S$ proceeds into foreign currency. This has boosted the development of the Singapore bond market. It provided a greater variety of debt papers to investors, in addition to the traditional Singapore Government and Singapore based corporate issuance. So far, a total of S$3 billion of foreign bond issues have been launched.

Industry players have fed back to MAS that further widening the range of instruments allowed would offer investors more opportunities to diversify their holdings. Thus MAS announced in November 1999 that it would allow foreign companies and sovereigns, both rated or unrated, to issue S$-denominated bonds. For unrated bonds, the investor base is restricted to sophisticated investors.

There are indeed risks when Singaporeans buy bonds issued by unrated foreign entities. For bonds that are rated by internationally reputable and independent rating agencies, investors have the benefit of their analyses to guide their decisions. While some unrated issuers are indeed financially strong, investors at large may not have the benefit of independent analyses to aid them in their decision making. Also, such issuers are not necessarily subject to internationally accepted disclosure rules. Investors must therefore do their own homework to make an informed decision. That is why we have decided to restrict the sales of unrated bonds to sophisticated investors. These are investors and corporations who have high net worth or incomes, and who should be able to make their own financial decisions with fewer constraints.

The changes to the equity and bond markets will bring more international participation in our capital markets, adding depth and critical mass. Listings of foreign companies increase the capitalisation and turnover of Singapore's stock market, expand the universe of investible stocks to investors, and attract more research analysts, fund managers and underwriters to base here. For the bond market, the changes will broaden the credit spectrum of foreign entities tapping the Singapore bond market. A vibrant bond market in Singapore will provide corporations here and in the region with another efficient avenue to raise funds, on top of bank borrowings and equity issues. It will help Singapore to develop as an international financial centre.

The thrust of our policy on the non-internationalisation of the S$ is to prohibit non-residents from borrowing S$ for activities which are unrelated to the Singapore economy. This could lead to the build-up of a pool of S$ abroad, potentially jeopardising the effective management of our exchange rate. To minimise this risk, we have maintained our requirement that the S$ proceeds raised by foreign companies, either through a share listing or a bond issue, be converted into foreign currency before they can be used outside Singapore.

We have assessed the potential impact of the above changes to our effective management of the S$ exchange rate. While they may make the S$ exchange rate more volatile, MAS' assessment is that the movements can be managed. These initiatives will make Singapore more attractive for foreign companies to tap our capital market, while strong economic fundamentals, sound policies and ample reserves should enable us to withstand any market fluctuations.

Mr Chng Hee Kok (East Coast): Mr Speaker, Sir, the Deputy Prime Minister says in the long term, to be a leading financial institution, the internationalisation of Singapore Dollar is inevitable. At the end of the day, I think that as long as we have a strong economy, and he has mentioned about the surpluses to keep the Singapore Dollar strong, how do we on the one hand become a leading financial institution, like New York and London, and at the same time hold on to the Singapore Dollar and not internationalise.

BG Lee Hsien Loong: Mr Speaker, Sir, that is another issue. Increasing internationalisation in the long term, as Mr Chng says, is inevitable. But it is not something that happens overnight and it is not a black and white issue - you are either open, or you are not. It is a matter of degree. It is a matter of time. It is a question of what safeguards you can put in, even partial safeguards, in order to deter excessive capital flows - sudden amounts coming in or sudden amounts going out - which can push the exchange rate either very high or very low and affect our exports, our trade, our real economy and our jobs. It is not easy to do because even a big country, like Japan, finds the Yen pushed in directions which are against its basic real economy. And when the Yen is high at 90, or at one stage below 90 to US$, their manufacturing exports suffered, and many of their industries became uncompetitive. Then market sentiment changed and the Yen moved to 150 and they became worried that this was going too far and they intervened. So even a big country does not have full control.

We are a small country, a very open economy, so we cannot have full control. But we can have a significant degree of control, firstly, because our economy is basically sound. Secondly, because we are running significant physical surpluses, that means, there is no reason for anybody to lose confidence. And thirdly, we have significant reserves. So if the exchange rate is pushed in the wrong direction, we are not defenceless. We have resources with which to intervene. Of course, you must judge that you are right, and the exchange rate has gone in the wrong direction. So anybody who wants to speculate in the Singapore Dollar has to take that into account. That has served us well for a long time and I think that continues to be our approach. We have in a controlled way liberalised. That is why we took a first step in 1998. Then we took a year. We watched the experience. Some companies listed. There were some bonds. Quite a number of foreign entities issued S$ bonds. We gained confidence in the new position, we took a further step. So we will take it incrementally and carefully.

Mr Low Thia Khiang: Mr Speaker, Sir, in view of the fact that foreign companies are allowed to list in Singapore, and I think a lot of investors in Singapore may not know very much of what is happening overseas, ie, the companies that are based overseas, what would be the risk involved and what is the Government's advice to investors?

BG Lee Hsien Loong: The Government's answer is if you do not understand, better do not gamble. That is a problem, whether it is a foreign company or a Singapore company. Because even with many Singapore companies, their investors do not really know what the risks are, but they stand there, look at the TV screen behind the glass, and get photographed for television, and they hope that they will predict the next wiggle in the chart before everybody does. But CPF statistics show that most of them do not outperform. Many of them underperform. That is why our advice is, whether it is a Singapore stock or a foreign stock, unless you know what you are doing and you can absorb the risk, do not punt. Far better, put it in a fixed deposit or a unit trust with the appropriate risk profile or, as a last resort, leave it to CPF. From MAS' point of view, we would like more Singaporeans to take an active responsibility to manage their funds and put them outside of the CPF. But that is a decision which individual Singaporeans have to make for themselves.