Singapore: navigating economic uncertainties
20 February 2024
Singapore might be one of the most prosperous countries in the world and an international financial centre, but in securities finance, market activity remains muted. Sophie Downes reports
Image: stock.adobe/nuttawutnuy
The appeal of Singapore is apparent: cultural hub, visionary airport, major financial centre. As reported by the International Monetary Fund, the country’s GDP per capita exceeded US$91,000 in 2024. Nonetheless, a closer examination of the region highlights muted activity and vulnerabilities felt by market participants, even as sustainable initiatives pose the country as a significant environmental figurehead.
Singapore in context
The Monetary Authority of Singapore (MAS) believes that the global financial environment is a key concern for financial institutions in Singapore. In their Systemic Risk Survey, conducted in October 2023, the regulatory body reported that “macrofinancial risk arising from the cumulative effects of restrictive monetary policy by major central banks, slower global economic growth, and contagion from a slowdown in China remained the top-cited risk” by financial businesses.
Matthew Chessum, director at S&P Global Market Intelligence, highlights the same concerns when discussing Singapore’s place in the wider context of the Asia Pacific (APAC) region. Like MAS, he believes that a slowdown in China's economic activity has been “weighing heavily” on the Singaporean markets, as evidenced through the slower volumes recorded in securities lending. The lack of conviction in Southeast Asian markets, due to uncertainty around China's economic data and future, has led market participants to be more cautious when investing.
“The APAC region presents interesting dynamics due to country-specific factors affecting securities lending,” contends Chessum. Singapore and some Southeast Asian markets have been more muted due to economic uncertainty from China's slowdown, while countries such as Taiwan, South Korea and Japan have seen strong activity. Singapore is one of the smaller lending markets across the Asia Pacific region, with a similar market capitalisation to Thailand and Indonesia. However, during 2023, Singapore equities generated slower returns than usual, reporting US$16.3 million in securities lending revenues.
“Despite the market being one of the more straightforward markets across the APAC region to transact in, securities lending revenues in Singapore have been in decline over the last few years,” Chessum observes. “Revenues have reduced over the last four years as average fees have fallen across the market.” The decline in average fees has taken place against a backdrop of growing supply, with average lendable assets growing from US$45.6 billion in 2020 to US$62.8 billion in 2023. Balances have increased over the same period, growing from an average of US$1.97 billion in 2020 to US$2.40 billion during 2023. This growth in balances has kept utilisation stable at around three per cent over the period.
Market Activity
In Singapore, there are a handful of stocks that remain popular among borrowers, all of which have experienced sustained demand for a number of months. For an indication of size, highly shorted stocks in Singapore typically have around five per cent of outstanding shares on loan, compared to around 40 per cent for highly shorted stocks in the US.
Investment holding company AEM Holdings Ltd (AWX) was the top shorted stock, with 12.32 million shares borrowed and 3.99 per cent of SI Outstanding. This was closely followed by Singapore Airlines Ltd (C6L) with 117.73 million shares borrowed and 3.96 per cent SI Outstanding. While Chessum acknowledges that data from Singapore is regularly included in weekly S&P reports of top five shorts in the APAC region, “activity is limited in comparison to larger markets due to the smaller size of companies listed on the Singapore exchange”.
The low valuations can also be attributed to the respective challenges facing companies in their various sectors. He suggests that the pandemic is responsible for the “underwhelming” profits reported by AEM Holdings as the semiconductor sector struggles following a post pandemic dip in demand: “Factories have reinstated their inventories post-Covid-19 and requirements for semiconductors have fallen as the demand for electronic goods has declined.”
Similarly, Nanofilm Technologies continues to suffer from ongoing macroeconomic challenges, such as persistent inflationary pressures, high interest rates and geopolitical tensions. Chessum believes that these challenges “have led to reduced consumer discretionary spending that has impacted demand, especially given the softer than expected economic recovery in China”.
Singapore Airlines currently has 3.96 per cent of its market capitalisation on loan (STI average of 0.43 per cent). “Despite air travel picking up recently, a lot of airline stocks are still trading far away from their pre-pandemic levels,” explains Chessum. “An increase in interest rates is expected to hit consumer spending and leisure travel, if a recession does kick in as a result.”
Chessum’s forecast may be assuaged by the government’s recent announcement of a 30-Day Visa-Exemption Arrangement between Singapore and The People’s Republic Of China. The mutual agreement is expected to bring opportunities to investors by boosting the tourism, hotel and entertainment industry as more people visit. The impact may be seen on representative stocks such as Singapore Airlines and Genting Singapore.
SFTs
Nonetheless, MAS has provided a positive outlook for securities finance transactions (SFTs) in its Financial Stability Review of 2023. The SFT market in Singapore, primarily consisting of bond repos and securities lending, has experienced significant growth. From March 2017 to June 2023, figures have expanded from US$106.4 billion to US$287.2 billion, representing 4.9 per cent of national financial system assets.
The majority of domestic SFT activity occurs between banks, while cross-border SFTs constitute 86 per cent of transactions involving Singapore-based entities. Domestic banks are prominent in both domestic and cross-border transactions, often engaging with foreign banks as counterparties. Domestic hedge funds, on the other hand, primarily transact with foreign banks and dealers.
The proportion of SFTs collateralised by government securities has increased from 58 per cent in 2017 to 66 per cent in 2023. MAS argues that this is “possibly reflecting cash lenders’ increased preference for relatively safer and more liquid instruments in view of heightened macrofinancial uncertainty”. The trend indicates a shift towards more risk-averse investment strategies in response to market conditions.
Going for green
Singapore is extending the focus of its environmental policies as sustainable initiatives have been implemented across multiple sectors. The country’s ‘Green Plan 2030’ was implemented in 2021, with their ambitiously named ‘green economy’ being one of five pillars that the country is working on to promote sustainable development. As part of the Enterprise Sustainability Programme, Singapore businesses will be supported on sustainability initiatives by promoting training workshops, capability and product development projects and key enablers such as certification and financing.
Moreover, as the securities finance industry becomes increasingly technological, Singapore is demonstrating the way in which automation can be adapted to bolster environmental policy. “Technology will not slow down for anyone,” Cecilia Skingsley, head of the BIS Innovation Hub, stated in January 2024. “As the financial industry adopts new technologies, we need to understand how they affect central banks’ core work.” Technological imperatives include Project NGFS Data Directory 2.0, led by the Singapore Innovation Centre. The project plans to build on the data directory platform of the Network for Greening the Financial System to make climate-related data gaps more accessible as a public resource.
Elsewhere, the push for sustainable initiatives is being seen on a macrocosmic level across the financial sector as industry figureheads spearhead the movement. In their 2023 Financial Stability Review, MAS pledged: “Going forward, MAS will step up its efforts to improve internal and industry capabilities in climate risk assessments. This will enable financial institutions to better factor the implications of climate change and the climate transition.”
Meanwhile, in a sustainability report conducted in November 2023, the Singapore Exchange (SGX) recorded that almost all companies had improved on their commitment to environmental initiatives. Based on the Task Force on Climate-related Financial Disclosures (TCFD) framework, 73 per cent of companies had provided some form of disclosure about practices in the workplace for the first time. While this still leaves room for improvement across the Exchange, it is evident that ESG initiatives are becoming increasingly visible across technology and regulation.
Future forward
In MAS’ Systemic Risk Survey, there were two other areas of concern for financial institutions going forward: geopolitical and cyber. The survey reported that respondents were concerned “that a further escalation of geopolitical tensions, such as the US-China strategic rivalry or the war in Ukraine, could lead to sharp market and commodity price volatility, and cause supply chain disruption”.
Likewise, fears around technology and cyber risk were also pertinent following the recent banking service disruptions in Singapore. In response to these fears, the regulatory body says that it will use the report to inform risk assessment and “work closely with the industry to manage identified risks through supervisory engagements and policy reviews”.
Tan Boon Gin, CEO of the Singapore Exchange Regulation, believes that there is a lot to be working on. Referring to 2023 as “a year of firsts”, he outlined his focuses for 2024: “Getting climate reporting, board renewal, and shareholder rights right all call for lots of details, lots of data and lots of deliberation. These are not the only things that we are going to do, just what we are going to start doing first.”
Singapore in context
The Monetary Authority of Singapore (MAS) believes that the global financial environment is a key concern for financial institutions in Singapore. In their Systemic Risk Survey, conducted in October 2023, the regulatory body reported that “macrofinancial risk arising from the cumulative effects of restrictive monetary policy by major central banks, slower global economic growth, and contagion from a slowdown in China remained the top-cited risk” by financial businesses.
Matthew Chessum, director at S&P Global Market Intelligence, highlights the same concerns when discussing Singapore’s place in the wider context of the Asia Pacific (APAC) region. Like MAS, he believes that a slowdown in China's economic activity has been “weighing heavily” on the Singaporean markets, as evidenced through the slower volumes recorded in securities lending. The lack of conviction in Southeast Asian markets, due to uncertainty around China's economic data and future, has led market participants to be more cautious when investing.
“The APAC region presents interesting dynamics due to country-specific factors affecting securities lending,” contends Chessum. Singapore and some Southeast Asian markets have been more muted due to economic uncertainty from China's slowdown, while countries such as Taiwan, South Korea and Japan have seen strong activity. Singapore is one of the smaller lending markets across the Asia Pacific region, with a similar market capitalisation to Thailand and Indonesia. However, during 2023, Singapore equities generated slower returns than usual, reporting US$16.3 million in securities lending revenues.
“Despite the market being one of the more straightforward markets across the APAC region to transact in, securities lending revenues in Singapore have been in decline over the last few years,” Chessum observes. “Revenues have reduced over the last four years as average fees have fallen across the market.” The decline in average fees has taken place against a backdrop of growing supply, with average lendable assets growing from US$45.6 billion in 2020 to US$62.8 billion in 2023. Balances have increased over the same period, growing from an average of US$1.97 billion in 2020 to US$2.40 billion during 2023. This growth in balances has kept utilisation stable at around three per cent over the period.
Market Activity
In Singapore, there are a handful of stocks that remain popular among borrowers, all of which have experienced sustained demand for a number of months. For an indication of size, highly shorted stocks in Singapore typically have around five per cent of outstanding shares on loan, compared to around 40 per cent for highly shorted stocks in the US.
Investment holding company AEM Holdings Ltd (AWX) was the top shorted stock, with 12.32 million shares borrowed and 3.99 per cent of SI Outstanding. This was closely followed by Singapore Airlines Ltd (C6L) with 117.73 million shares borrowed and 3.96 per cent SI Outstanding. While Chessum acknowledges that data from Singapore is regularly included in weekly S&P reports of top five shorts in the APAC region, “activity is limited in comparison to larger markets due to the smaller size of companies listed on the Singapore exchange”.
The low valuations can also be attributed to the respective challenges facing companies in their various sectors. He suggests that the pandemic is responsible for the “underwhelming” profits reported by AEM Holdings as the semiconductor sector struggles following a post pandemic dip in demand: “Factories have reinstated their inventories post-Covid-19 and requirements for semiconductors have fallen as the demand for electronic goods has declined.”
Similarly, Nanofilm Technologies continues to suffer from ongoing macroeconomic challenges, such as persistent inflationary pressures, high interest rates and geopolitical tensions. Chessum believes that these challenges “have led to reduced consumer discretionary spending that has impacted demand, especially given the softer than expected economic recovery in China”.
Singapore Airlines currently has 3.96 per cent of its market capitalisation on loan (STI average of 0.43 per cent). “Despite air travel picking up recently, a lot of airline stocks are still trading far away from their pre-pandemic levels,” explains Chessum. “An increase in interest rates is expected to hit consumer spending and leisure travel, if a recession does kick in as a result.”
Chessum’s forecast may be assuaged by the government’s recent announcement of a 30-Day Visa-Exemption Arrangement between Singapore and The People’s Republic Of China. The mutual agreement is expected to bring opportunities to investors by boosting the tourism, hotel and entertainment industry as more people visit. The impact may be seen on representative stocks such as Singapore Airlines and Genting Singapore.
SFTs
Nonetheless, MAS has provided a positive outlook for securities finance transactions (SFTs) in its Financial Stability Review of 2023. The SFT market in Singapore, primarily consisting of bond repos and securities lending, has experienced significant growth. From March 2017 to June 2023, figures have expanded from US$106.4 billion to US$287.2 billion, representing 4.9 per cent of national financial system assets.
The majority of domestic SFT activity occurs between banks, while cross-border SFTs constitute 86 per cent of transactions involving Singapore-based entities. Domestic banks are prominent in both domestic and cross-border transactions, often engaging with foreign banks as counterparties. Domestic hedge funds, on the other hand, primarily transact with foreign banks and dealers.
The proportion of SFTs collateralised by government securities has increased from 58 per cent in 2017 to 66 per cent in 2023. MAS argues that this is “possibly reflecting cash lenders’ increased preference for relatively safer and more liquid instruments in view of heightened macrofinancial uncertainty”. The trend indicates a shift towards more risk-averse investment strategies in response to market conditions.
Going for green
Singapore is extending the focus of its environmental policies as sustainable initiatives have been implemented across multiple sectors. The country’s ‘Green Plan 2030’ was implemented in 2021, with their ambitiously named ‘green economy’ being one of five pillars that the country is working on to promote sustainable development. As part of the Enterprise Sustainability Programme, Singapore businesses will be supported on sustainability initiatives by promoting training workshops, capability and product development projects and key enablers such as certification and financing.
Moreover, as the securities finance industry becomes increasingly technological, Singapore is demonstrating the way in which automation can be adapted to bolster environmental policy. “Technology will not slow down for anyone,” Cecilia Skingsley, head of the BIS Innovation Hub, stated in January 2024. “As the financial industry adopts new technologies, we need to understand how they affect central banks’ core work.” Technological imperatives include Project NGFS Data Directory 2.0, led by the Singapore Innovation Centre. The project plans to build on the data directory platform of the Network for Greening the Financial System to make climate-related data gaps more accessible as a public resource.
Elsewhere, the push for sustainable initiatives is being seen on a macrocosmic level across the financial sector as industry figureheads spearhead the movement. In their 2023 Financial Stability Review, MAS pledged: “Going forward, MAS will step up its efforts to improve internal and industry capabilities in climate risk assessments. This will enable financial institutions to better factor the implications of climate change and the climate transition.”
Meanwhile, in a sustainability report conducted in November 2023, the Singapore Exchange (SGX) recorded that almost all companies had improved on their commitment to environmental initiatives. Based on the Task Force on Climate-related Financial Disclosures (TCFD) framework, 73 per cent of companies had provided some form of disclosure about practices in the workplace for the first time. While this still leaves room for improvement across the Exchange, it is evident that ESG initiatives are becoming increasingly visible across technology and regulation.
Future forward
In MAS’ Systemic Risk Survey, there were two other areas of concern for financial institutions going forward: geopolitical and cyber. The survey reported that respondents were concerned “that a further escalation of geopolitical tensions, such as the US-China strategic rivalry or the war in Ukraine, could lead to sharp market and commodity price volatility, and cause supply chain disruption”.
Likewise, fears around technology and cyber risk were also pertinent following the recent banking service disruptions in Singapore. In response to these fears, the regulatory body says that it will use the report to inform risk assessment and “work closely with the industry to manage identified risks through supervisory engagements and policy reviews”.
Tan Boon Gin, CEO of the Singapore Exchange Regulation, believes that there is a lot to be working on. Referring to 2023 as “a year of firsts”, he outlined his focuses for 2024: “Getting climate reporting, board renewal, and shareholder rights right all call for lots of details, lots of data and lots of deliberation. These are not the only things that we are going to do, just what we are going to start doing first.”
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