You are here
Singapore's hook as a site for corporate treasuries
IN the first half of this year, numerous geopolitical events highlighted the importance of political stability and a transparent legal system and regulatory framework.
From the US-China trade dispute, Brexit and the more recent Hong Kong protests, these events have dented business confidence and made their mark on the economy, going by news reports about businesses moving funds or even their operations and companies to alternative locations.
For example, it has been reported that companies have been prompted to relook at their supply chains or production base due to the trade dispute. In the UK, the EY Financial Services Brexit Tracker revealed that 63 per cent of universal banks, investment banks and brokerages were considering or had confirmed relocating operations or staff to Europe.
Closer to home, a CNBC news report during the recent Hong Kong protests indicated that "anecdotally, 'increasing numbers' of companies are also relocating their regional headquarters from Hong Kong to other parts of Asia, 'most particularly' to Singapore".
The decision to expand business operations or companies to alternative locations is not an easy one, and can have far-reaching implications. From a corporate perspective, the choice of location for the regional headquarters will influence how organisations structure their operations, for example, and where they anchor their corporate treasury centres.
Over the past decades, multinational corporates have been centralising their treasury functions across various legal entities and geographical jurisdictions to maximise the internal sources of liquidity to fund business growth. Traditionally, these global and regional treasury centres are in locations that have a sophisticated financial ecosystem and mature regulatory system, such as New York and London.
With the rise of the "Asian Century" and as multinationals become more focused in expanding their treasury footprint in Asia, Hong Kong and Singapore are two leading preferred treasury locations in the region. It is well-recognised that Hong Kong is preferred by companies with a heavy focus on China, while Singapore is well-regarded for those seeking to serve the wider Asia-Pacific region.
A recent EY study, Singapore: a strategic regional treasury location, reviewed the key factors that influenced treasuries to set up in Singapore and found that proximity to the regional headquarters and the presence of a well-developed financial ecosystem are two key drivers.
Proximity to the regional headquarters allows for better engagement with regional management, as the corporate treasurers plan the funding and investment requirements over a long-term horizon while balancing intercompany borrowings, and manage the central and in-country banking relationships in the most efficient manner.
At the same time, it also enables a faster response time for crucial funding decisions.
Also, given that regional treasuries require unimpeded access to funding and hedging solutions and related advisory support in managing exposures, investments and cross-border fund flows, access to a well-developed, well-regulated and open financial ecosystem is essential.
At the same time, the wider finance ecosystem - including financial and professional services organisations - that provides treasuries advice and consultancy solutions, goes some way in promoting the conduct of more sophisticated treasury activities in hedging, risk management and foreign exchange transactions.
Singapore's strength on both fronts are evident. With 4,200 regional headquarters based in the city-state, the Republic is home to the largest number of regional headquarters in Asia-Pacific.
The Global Financial Centres Index 2018 had ranked it as the fourth most competitive financial centre globally.
Additionally, Singapore is ranked the largest foreign-exchange centre in the Asia-Pacific, the third-largest market for over-the-counter foreign-exchange transactions globally, and the second-largest over-the-counter interest-rate derivatives centre in Asia-Pacific by trading volume.
Further, according to the EY study, the respondents perceived Singapore favourably when considering the secondary criteria in selecting treasury locations. These criteria include a simple and effective tax system and availability of incentives, good livability and a diverse workforce and large pool of talent; the Singapore government's initiatives to enhance employee competency and upskilling in areas of technology and innovation are welcomed.
RISING INFLUENCE OF POLITICAL STABILITY
Just as important on the list of secondary criteria - and perhaps even more so today, given the volatility in geopolitical climate - is the presence of a transparent legal system and regulatory framework with business-friendly government approach, and political stability.
In the EY study, corporate treasurers commented that political stability paves the way for greater consistency and predictability in long-term economic and fiscal policies.
The economic fallout from geopolitical events indicates that there is a nexus between political stability and business confidence. With nationalistic views creating greater divides between - and even within - nations, the presence of the oft-quoted political stability and transparent legal and regulatory system could well be that powerful strategic competitive advantage that keeps Singapore compelling and relevant for businesses today.
- Tan Bin Eng is Partner, Business Incentives Advisory, at Ernst & Young Solutions LLP.
Seah Li Yun is Partner, Financial Services, at Ernst & Young LLP.
The views here are the writers' own and do not necessarily reflect the views of the global EY organisation or its member firms.