Six ways Singapore has set the bar for developing deep capital markets

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SINGAPORE (April 12): Many emerging market (EM) policymakers are still struggling with the hurdles of implementing the changes required to create vibrant and well-performing capital markets, despite understanding how important it is to do so in order to support the real economy.

According to McKinsey & Company, the challenges range from limitations in private sector engagement, to vicious cycles of underdevelopment resulting from a piecemeal approach to deepening capital markets.

In its April 2017 banking & finance report, Deepening capital markets in emerging economies, the global management consulting firm shares a six-step approach on how EMs might carry out a successful transformation.

Implementing all six of the suggested measures, says McKinsey, has enabled Singapore to achieve its dream and more – from aspiring to be the financial centre of Asia, to becoming the third-ranked financial centre in the world, after London and New York.

Although the city state ranks fourth with a score of 3.4/5 in the recent McKinsey Asian Capital Development Index as compared to South Korea (3.45) and Australia (3.95), which follow behind Japan’s top score of 4, Singapore has nonetheless been highlighted as a “powerful example” of the type of concerted approach policy makers can adopt.

The six action areas as detailed by the agency are as follows:

Articulate long-term goals and build consensus
Visions with clear, measurable objectives should first and foremost be set before aiming to achieving concrete economic and social outcomes, in addition to crafting specific messages targeted at different stakeholders.

This was accomplished by Singapore in the late 1990s, where a top-down vision was set by its then-Prime Minister and Deputy Prime Minster to make the city state into Asia’s premier full-service financial centre. The vision, which was made a national priority, was then linked to achieving social objectives of job creation, as well as economic objectives of gross domestic product (GDP) growth.

Build momentum by identifying and unlocking catalysts of change
McKinsey believes “early wins in the right areas” is the distinguishing factor between a successful programme and a theoretical vision, as these would build conviction and resolve among those whose support and involvement is needed.

For example, Singapore’s stock exchanges were merged and demutualised, while its government bond market was modernised to deepen broader debt markets. The nation also transformed its fund management and private banking industry by using government-linked investment funds to allocate more money to external managers across different styles.

Create and empower regulatory institutions
It is often important to create a coordinating body as well as its relevant mechanisms and communication processes, to harness and orchestrate the efforts of multiple regulators. It is also imperative that the entire setup must be bespoke, in McKinsey’s view. In Singapore’s case, ownership to execute its government’s economic vision was entirely given to Monetary Authority of Singapore (MAS), which was empowered by the government to take all necessary measures to achieve the vision.  

Leverage a broad set of stakeholders
No matter how big or small, all stakeholders play an important role in the development of capital markets, and hence their engagement is crucial. McKinsey recalls how Singapore’s private sector was actively engaged for inputs regarding policy formulation and implementation, and this was achieved with the set-up of private sector committees over 1997 and 1998. The agency opines that such committees “generated an overwhelming number of ideas”, many of which were implemented.

Additionally, the government employed incentives to attract the private sector via means such as tax exceptions, while foreign financial institutions were also invited to provide advice, with the Financial Sector Review Group (FSRG) established to oversee this change.

Ensure long-term availability of talent and build capabilities
This is an important yet often-overlooked priority in developing capital markets, says McKinsey, as there is much policymakers can do to address short-term issues and prepare for the long term. The ‘Contact Singapore’ program to welcome foreign talent to Singapore in 1997, as well as the ‘Singapore Talent Recruitment’ (STAR) Committee formed in 1998, were some instances which have contributed significantly to building Singapore’s financial services industry.

In addition to setting up the Financial Sector Development Fund (FSDF) to subsidise staff training in financial institutions, the government also launched numerous initiatives to reinforce financial and business management capabilities at the undergraduate and graduate levels – while also encouraging foreign schools such as INSEAD and University of Chicago to set up their Asian campuses within Singapore.

Invest in strategic promotional activities
While marketing and sales is rarely a core function of regulatory institutions, McKinsey emphasises that promotional activities and efforts represent “the critical last mile” to development work. Singapore’s government participated in extensive promotion and transparency in its media involvement and public announcements, according to McKinsey. A separate promotions department, the Financial Markets Development Department, was also established in MAS for handling roadshows and investor campaigns.