Q&A with Singapore Senior Minister of State, Josephine Teo

IFC: How do you explain Singapore’s economic success?

Josephine Teo: Singapore is a small city-state with no natural resources.  The only natural advantage we have is geography. We are located at the crossroads of major trade routes and in the heart of Asia, where we are close to the world’s major growing economies.

I see four main factors fundamental to our economic success: Connectivity, Trust, Knowledge, and Liveability.

First, we boost our connectivity by building an extensive network of trade agreements, logistics capabilities and financial capabilities. We’ve developed a vibrant economic ecosystem with an extensive and mutually-reinforcing network of firms along various parts of the global value chain.  This provides companies with easy access to resources necessary to build and manage their business activities in the region and beyond.

Businesses need a stable and reliable environment to thrive. We have got a strong legal and regulatory framework, and zero tolerance against corruption, which has built trust in the country’s economic and social stability.  This allows companies to make long-term investment decisions and bring in high-technology investments.

A trusted business environment needs to be supported by a skilled workforce. We invest heavily in education and talent development. Today, Singapore has a globally adaptive workforce that is well-equipped to serve the diverse needs of high-value businesses.

Finally, a high-quality and sustainable way of life is important for us as well.  Singaporeans and foreigners alike appreciate our safe streets, good schools, clean and green environment, good quality of life and cultural vibrancy. Being a highly liveable city attracts talent from across the world to Singapore. This in turn brings expertise to our shores and further boosts the quality of our workforce.

IFC: International corporate taxation has come under intense scrutiny in recent times – how does Singapore balance the need for transparent and ‘fair’ corporate taxes with maintaining a thriving corporate hub?

JT: Fair corporate taxes and a thriving corporate hub need not be mutually exclusive. Singapore has a competitive tax rate at 17 per cent for corporates and up to 20 per cent for individuals for now, but by no means lowest in the world. Singapore is able to keep its tax rates low because we are fiscally prudent and have a diversified tax base. We are one of the very few countries that have consistently maintained a balanced budget.

Singapore is a responsible jurisdiction with an economy built on real business activity, with strong rule of law. As is the case in many other countries, corporate income tax is part of the fiscal toolkit to promote investments in key strategic areas or sectors and to build up expertise and capabilities. However, Singapore’s appeal to businesses is based on a variety of factors, certainly more than competitive tax rates alone.

As a global business city, Singapore is a natural gateway for companies looking to expand in emerging Asia.  Businesses use us as a hub to invest into the region, leading to regional growth and development. When companies decide to locate in Singapore, they are choosing to operate in a business-friendly environment which creates value for them. Their presence here in turn creates highly skilled jobs and direct investment in our economy.

As a responsible country in the international community, Singapore is committed to upholding internationally accepted tax standards. Singapore does not condone aggressive tax avoidance, and we work with other countries to improve global tax rules to counter cross-border contrived tax avoidance and profit shifting practices.

IFC: How important is the financial services sector to the Singapore economy?

JT: A robust and well governed financial sector has been one of the key drivers of Singapore’s economic growth. The financial sector is an important link between Singapore and the global economy and markets. 

Businesses today locate different parts of their operations in different countries to maximise their profitability. A globalised value chain helps grow the pie for all parties by improving market access, increasing operations efficiency, bringing in new goods and services.

These activities trigger a growing demand for long-term growth capital from investors and cross-border financing by companies venturing overseas to seek new markets. Companies are sourcing from resource-rich countries such as Indonesia, manufacturing in countries like China and Vietnam, and coordinating management, design and logistics through Singapore. To enable these flows, the financial sector provides capital for growth and investment, and tools for companies to run their businesses efficiently.

IFC: How do you think Singapore is placed in the Asian and global financial architecture? How important are international finance centres and in particular Singapore to emerging economies?

JT: International financial centres like London and New York support global economic growth through the provision of a broad suite of financial services to global and regional markets across different time zones.

Singapore seeks to complement and build on the services offered in these centres.  For example, Singapore has become the third largest foreign exchange centre globally, with an average daily turnover volume of US$383 billion (BIS Triennial Survey 2013[1]), which complements trading in London and New York as it operates in a different time zone.

In Asia, we offer unique strengths in private wealth management, debt capital markets and foreign exchange. Singapore is recognised as one of the leading asset management centre in Asia. We have total assets under management of over S$1.8 trillion as at end 2013.

Singapore has also forged a leading role as the regional commodity trading hub in Asia. There’s a strong base of players, and good access to global and domestic futures markets and OTC clearing services. In particular, Singapore has a clear lead in insurance, especially in more offshorable segments such as reinsurance, where gross premiums written in Singapore are more than double that of comparable centres in Asia. And this is despite us having a smaller domestic market. Most Asian risks, including entire large reinsurance programmes and specialty risks, can be fully underwritten and placed in Singapore.

Regional gateway for RMB

In terms of Singapore’s role as an international financial centre to emerging economies, let’s take China for instance. Singapore’s RMB market has grown strongly. Today, Singapore is the largest offshore RMB centre in the world[2] and offers a comprehensive range of RMB-denominated products. RMB deposits grew more than 40 per cent year-on year to about RMB 280 billion in December 2014 while average daily RMB foreign exchange turnover more than doubled to US$76 billion in the same period.

China and Singapore are expanding financial cooperation to encompass capital markets and insurance, following the latest high-level Joint Council for Bilateral Cooperation meeting in October 2014. We foresee a greater role for Singapore to support the growing trade and investment linkages between ASEAN and China.

IFC: What does the future hold for Singapore as an international finance centre?

JT: With Asia as a driver of global economic growth, more financial institutions are looking towards Asia for growth and expansion opportunities. We see great potential for Singapore as an international finance centre, particularly in two main areas – insurance and infrastructure financing.

The insurance business in Asia is projected to grow at about eight per cent per year. Asia is likely to account for almost 40 per cent of the global market by 2020. Singapore operates from a position of strength as the leading re/insurance hub in Asia-Pacific. Large and complex risks are expected to continue to gravitate to Singapore in a free market, because most Asian countries are still in the process of developing local capacity and expertise to assume such risks.

On infrastructure financing, I estimate emerging Asia will need around US$1 trillion in infrastructure investments annually, and that is just in order to maintain current levels of economic growth. In ASEAN alone, an estimated US$60 billion is needed annually until 2022 to fulfil the basic infrastructure needs in the region.

Singapore can contribute meaningfully to the region’s infrastructure development. We are home to a critical mass of international and regional banks with project finance specialisations. About 60 per cent of ASEAN infrastructure projects are lead-managed by Singapore-based project finance teams. This is complemented by our growing ecosystem of infrastructure companies, professional services providers and multilateral development banks which can provide end-to-end solutions across a project’s lifecycle.

Within Singapore, we have undertaken a few broad initiatives to continue to build itself as a world-class financial centre:

• The first initiative is to promote the hubbing of high value-added services, such as infrastructure finance, treasury activities, commodities trading, wealth management and risk management.

• Another initiative is to leverage Singapore’s position as a Global-Asia business hub to grow activities which emphasise integration across different areas. For instance, financial institutions specialising in shipping finance have leveraged on Singapore’s location as a trans-shipment hub to tap on the opportunities brought about by the increasing trade linkages between Asia and the world.

• The third initiative is to provide the appropriate physical infrastructure, such as the Marina Bay Financial Centre, to cater for long-term growth. 

IFC: How has Singapore diversified its economy to attract such investment?

JT: As mentioned previously, Singapore’s success as a global financial hub is underpinned by many factors. Many global financial institutions use Singapore to access investors and investments in the region. They undertake substantive economic and high value-added activities, including locating their strategic business functions, here.

Singapore has been a strong supporter of the global effort to combat money laundering, including that relating to cross-border tax fraud and tax evasion. We see this as consistent with our reputation as a trusted jurisdiction, which is one of our key advantages. Along with the G20 and other financial centres, Singapore committed to implement the new global standard of automatic exchange of information (AEOI) by 2018. This will no doubt raise compliance costs in the industry, but as this is a global standard, financial institutions will not be put at a competitive disadvantage.

Over the past decade, Singapore has also developed itself as an established private banking centre for high net-worth individuals globally and in Asia. They choose Singapore for a number of reasons. There are sound fundamentals, such as economic and political stability, a reputation for high standards of regulation and supervision, and a robust legal and judicial framework. You also have a breadth and depth of players here, which offers ready access to global and regional financial markets and deep fund management expertise, particularly in the area of Asian investments.

[1] Triennial Central Bank Survey (Feb 2014) (http://www.bis.org/publ/rpfxf13fxt.pdf)

[2] According to SWIFT’s July 2014 report, Singapore was ranked the largest RMB payments centre (ex-China/HK).