Economics of Banking and Finance Singapore Financial System

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Economicsof Banking and Finance: Singapore Financial System

Table of Contents

Economics of Banking and Finance: Singapore Financial System 3

1.0: Introduction 3

2.1: Components of the financial system 3

2.2: Financial institutions 4

2.3: Financial markets 5

2.4: Financial instruments 5

2.5: Financial services 6

2.6: Money 6

3.0: Services and products offered by Singapore financial intermediaries 7

3.1: Credit and deposit taking services 7

3.2: Clearing services 7

3.3: Foreign exchange services 8

3.4: Money transfer 8

3.5: SWIFT services 9

3.6: Internet-only banking 9

3.7: Advisory services 10

3.8: Underwriting of stock 10

4.0. Thai Beverage business 10

5.0: Cash flow analysis 11

5.1: Cash flows from operating activities 13

5.2: Investment activities 13

5.3: Financing activities 14

6.0: Conclusion 14

List of references 15

Economicsof Banking and Finance: Singapore Financial System1.0:Introduction

Thefinancial system in any jurisdiction is considered ad a critical toolthat facilitates the transfer of funds from those who wish to save tothose who wish to borrow. Financial systems vary in size andefficiency depending on their adherence to the rules as well as thepolicies set by the international organizations, such as the WorldBank and the IMF (Bernstorff, 2008, p. 1). The success of the anycompany can be positively associated with the strength of thefinancial system of the jurisdiction in which it operates within.This paper will address the financial system of Singapore byanalyzing its components, services and products, Thai Beverage’sbusiness, and the analysis of Thai Beverage’s cash flows.

2.1:Components of the financial system

Singapore’sfinancial system has been ranked as among the largest systems in theworld. A report released in 2013 by the International Monetary Fund(IMF) indicated that the financial sector of Singapore is among themost developed in the world and it is well-regulated in accordancewith the IMF’s requirements (Monetary Authority of Singapore, 2015,p. 1). In addition, the IMF acknowledged the financial system forbeing very efficient, in spite of its large size. There are threemajor characteristics that contributed towards the ranking of theSingapore’s financial system as among the best globally. First,players in the sector comply with the standards set by theinternational organizations, such as the World Bank (MAS, 2015, p.1). Secondly, stress tests indicated that the financial institutionsare resilient to macroeconomic risks, which give investors andcompanies (such as Thai Beverage) confidence since the chances ofbeing affected by the financial crisis are minimal. Third, a strongcrisis management system allows the financial system to remain strongirrespective of the economic conditions.

2.2:Financial institutions

Financialinstitutions are broadly categorized into two groups, namely thebanking and non-banking institutions. The financial system ofSingapore is dominated by the commercial banks, which implies thatcompanies operating in Singapore depend largely on financial servicesoffered by banks. Currently, Singapore has a total of 122 banks wherefive of them are local, one foreign subsidiary, and 116 of them areforeign branches (IMF, 2014, p. 9). Domestic banks represent about 30% of assets in the national banking sector foreign branches representabout 65 %, while foreign subsidiaries represent about 5 % of thetotal assets (IMF, 2014, p. 9). Although foreign financialinstitutions dominate Singapore’s financial system, this can be anindication that the international investors have a confidence inSingapore’s economy. These banks facilitate a meeting betweenborrowers and investors, which implies that Thai Beverage can have aneasy access to debt financing.

Thenon-banking institutions found in Singapore include insuranceorganizations, savings and provident funds, and mutual funds. Out ofthe three major categories of non-banking institutions, insuranceorganizations are most critical for large companies, such as ThaiBeverage. This is because profitable companies need to protect theirassets from unexpected risks, which is accomplished by transferringthe risk to insurance companies. Singapore’s insurance sector ranksthe second in size in the list of the financial institutions. Theinsurance sector started growing faster in the year 2000 when themarket was open to the international insurance corporations, such asAlliance AG, Asian Insurance Company, Great Eastern Life, and EulerHermes (Singapore-German Chamber, 2015, p. 2). Currently, Singapore’sinsurance sector accounts for about 48 % of the national GDP (IMF,2014, p. 9). The availability of large and well established insurancefirms implies that large organizations (including Thai Beverage) canreduce investment risks and gain the confidence of their shareholderssince their assets are secured.

2.3:Financial markets

Thefinancial market of Singapore is ranked position six globally interms of stability. The country has a per capita GDP of $ 38,972, atotal financial asset of $ 789.1 billion, inflation rate of 4.3 %,and a GDP growth rate of 1.2 % (Panandikar, 2015, p. 2). Thefinancial market is regulated by the central bank. Singapore’sfutures market has been growing steadily in spite of a 50 % declinein the financial market of neighboring financial markets during the2008 global financial crisis (Panandikar, 2015, p. 6). The foreignexchange market is ranked position six globally, where 90 % of alltransactions are carried out via Saps and Spot transactions(Panandikar, 2015, p. 7). Being one of the most efficient financialmarkets, Singapore provides an opportunity for corporations to tradetheir financial securities, fungible items, and commodities easily.Therefore, Singapore’s financial market provides financialconvenience and assist in the allocation and creation of liquidity aswell as credit.

2.4:Financial instruments

Singapore’sfinancial system has a wide range of financial instruments that seekto address different needs of credit seekers and investors. Apartfrom the ordinary types of financial instruments (such as shares,bond, and debentures), Singapore’s financial system as additionaltypes of instruments that include leasing, buyer’s credit,inventory financing, supplier credit, factoring, post shipmentfinancing, pre shipping financing, letters of credit (Trade Chakra,2008, p. 1). These financial instruments meet the needs of foreign aswell as domestic investors, large and small companies. For example, alarge corporation (such as Thai Beverages) may use the factoringinstrument to discount its debt assets or accounts receivablesperiodically in order to get immediate cash and secure its liquidityin different economic conditions. Therefore, a wide range offinancial instruments enhances the efficiency with which corporationscan enhance their liquidity while operating in Singapore’s economy.

2.5:Financial services

Financialservices that are offered by the financial intermediaries inSingapore bridge the gap between the market and investors. Inaddition, financial services help companies (such as Thai Beverage)access the funds that they need to finance their strategies(Universal Teacher, 2015, p. 1). The range of financial servicesavailable in the market determines the combination of financing thatan organization can use in each of its strategies or projects. Inessence, financial services help companies in purchasing and sellingsecurities, borrowing funds, investing and lending, allowing andmaking payments, and taking care of different risk exposures. Acombination of these financial services has made a significantcontribution towards an increase in efficiency of Singapore’sfinancial system.

2.6:Money

Moneyis the most liquid type of asset. Companies operating in Singaporeuse the Singaporean Dollar (SD). In addition, Singapore has anefficient currency exchange market that is ranked the fourth globallyin terms of size (Panandikar, 2015, p. 7). This implies thatinternational traders can easily access the Singapore dollar byexchanging their foreign currencies. All the G3 currencies are alsoaccepted by large companies operating in Singapore, especially thosethat engage in export business.

3.0:Services and products offered by Singapore financial intermediaries3.1:Credit and deposit taking services

Thetwo types of services that go hand in hand, are the main functionscarried out by the financial intermediaries operating in Singapore’smarket. The three-tier banking system allow some banks to operate asdeposit taking institutions while the full licensed banks offer allbanking services, including money lending (Huat, 2004, p. 5).Deposits made by the customers avail funds that are needed bycompanies like Thai Beverage as loans to finance their businessstrategies. Therefore, the financial intermediaries are a meetingpoint for those who wish to save and those who would like to borrow.The Singapore’s central bank uses a system known as Sibor(Singapore interbank offered rate) to make it easier for companies toborrow both the short-term as well as the long-term loans (Lee, 2015,p. 1). This makes it easier for companies to access investment fundsin Singapore.

3.2:Clearing services

Theclearing services help companies and individuals convert paymentsmade in cheque into cash. The government of Singapore has a made astep ahead of most of the developed and developing economies byintroducing an automated clearing house known as SACH. The SACHsystem allows traders and companies to clear interbank payments (MAS,2014, p. 1). In addition, the system allows its users to cleartransactions that result from stock trading. A well establishedclearing house known as SCHA make policies and arbitrate disputesthat arise among members, which makes the clearing system moreefficient and the most secure in the region.

3.3:Foreign exchange services

Currencyexchange services are necessary for companies that engage in theinternational trade, including export and import. For example, ThaiBeverage may need to import inventory and sport part of its finalproducts to the neighboring markets. In such a scenario, the companymay approach financial intermediaries to get the currency required byexporters or importers in the target markets. Singapore has one ofthe most efficient foreign exchange systems, and it is ranked thefourth in the world (Panandikar, 2015, p. 7). The success of theforeign exchange system of Singapore is attributed to the presence ofmultinationals based and the international banks that are based inthe country. In addition, this success partly results fromSingapore’s time zone and geographical location that gives it anadvantage over the rest of the international markets. The efficiencyof the currency exchange system coupled with the availability of theinstitutions that offer the services help Thai Beverage transact withinternational traders more effectively.

3.4:Money transfer

Financialintermediaries provide the safest method of transferring money fromone institution to another and from one account holder to another.This allows Thai Beverage to transfer funds from its account tosuppliers and buyers to transfer money to the company bank accountswithout the risk of losing the through theft. Singapore intermediaryinstitutions are interconnected in such a way that money can be movedfrom one bank to another to suit the needs of the company. Inaddition, a consortium of Singapore local bans established anelectronic money transfer in the year 1985 (Panandikar, 2015, p. 7).This platform allows Thai Beverage to move money or make paymentsonline. The portfolio of banks offers a range of services (includingCashBack, CashCard, Shared ATM services, and SET Payment Gateway)that gives the company the opportunity to receive money and makepayments more effectively.

3.5:SWIFT services

SWIFTservices were started in the year 1973 by a consortium of 239 bankswith the objective of offering customers with secure andtechnology-based methods of transferring money. The SWITF service wasstarted in Singapore in 1979 and it was used by close to 50 banks bythe year 1983 (Panandikar, 2015, p. 7). This service has beenexpanded to cover more than 192 countries, which means that ThaiBeverage can now transfer money or receive funds from any countrythrough the SWIFT service. Other services offered through the SWIFTprogram include the store-and-forward messaging, interfaces, filetransfer, interactive messaging, and message routing. The SWIFTprogram allows the company transact across countries safely.

3.6:Internet-only banking

Thebanking system of Singapore has been evolving with time, where newchances are introduced the objective of enhancing efficiency as wellas convenience. In 2000, the Monetary Authority of Singapore (MAS)introduced the internet-only banking system. This was accomplishedissuing new licenses that allowed intermediary institutions toestablish banking subsidiaries that operates separately from theirmainstream services (Panandikar, 2015, p. 7). Under the new licenses,intermediary institutions were allowed to use new models to offeronline financial transactions without requiring their customers topresent themselves to their premises physically. This implies thatThai Beverage can make payments to its suppliers and receive paymentsfrom its customers through the internet-based banking.

3.7:Advisory services

Intermediaryorganizations play a critical role of advising their clients,especially on matters of investment and finance management. Theseinstitutions have a comparative advantage compared to companiesoperating in other industries (such as the beverage industry) sincethey are able to employ financial experts (Mackay, 2011, p. 1). Oneof the scenarios when corporations require the advisory of theintermediary institutions is decisions on the suitable financesourcing alternatives. For an instant, intermediary financialinstitutions are able to determine when the corporation should sourcefunds through equity or loans. Thai beverage can easily takeadvantage of this free service from multinational intermediaryinstitutions that have been monitory business in differentjurisdictions and in different time periods. These types of servicesare mainly offered by investment banks that specialize in investmentprojects.

3.8:Underwriting of stock

Intermediaryinstitutions are allowed by the law to underwrite the stock issue.This involves giving guarantee to companies that wish to raisecapital through the issue of shares, where the underwritinginstitutions promises to buy the balance stock once the issue isclosed. Companies issue public offerings to raise a pre-determinedamount of capital and failing to meet that target can thwart theirinvestment strategies. Therefore, Thai Beverages can take advantageof this service to ensure that any plan to raise additional capitalis underwritten.

4.0.Thai Beverage business

ThaiBeverage (ThaiBev) is a multinational corporation that operateswithin the beverage industry. Thai Beverage operates in severalcountries (such as Ireland, Scotland, Thailand, and France), but itis listed in Singapore Stock Exchange (Thai Beverage, 2015, p. 1).Thai Beverage has a market capitalization of approximately U.S. $11.2 billion. The company distills and distributes several mainbrands that include Mekhong, Change beer, and Sang Som rum. Othernon-common brands distributed by Thai Beverage include Scotchwhiskey, gin, vodka, liquers, and gin. In addition, Thai Beverageproduces spirits (such as rum), which is produced using sugar, canejuice, or molasses. Thai Beverage has total revenue of 162,040million baht, a total profit of 21,433 million baht, and total assetsof about 171,987 baht (Thai Beverage, 2015, p. 1).

5.0:Cash flow analysis

Table 1: Cash flow for financial years 2012, 2013, and 2014

Period ending

Dec 31, 2014 (000 SGD)

Dec 31, 2013 (000 SGD)

Dec 31 2012 (000 SGD)

Net income

21,694,000

19,130,000

28,493,000

Operating activities, cash flows provided by or used in

Depreciation

3,963,000&nbsp&nbsp

3,905,000

3,901,000

Adjustments to net income

Changes in accounts receivable

208,000

(320,000)

24,000

Changes in liability

Changes in inventories

(384,000)

(1,520,000)

(2,302,000)

Changes in other operating activities

1,705,000

(672,000)

1,812,000

Total cash flow from activities

24,407,000

18,087,000

19,726,000

Investing activities, cash flows provided by or used in

Capital expenditures

(4,763,000)

(4,824,000)

(4,821,000)

Investments

Other cash flows from investing activities

Total cash flows from investing activities

2,607,000

32,798,000

(94,897,000)

Financing activities, cash flows provided by or used in

Dividends paid

Sales purchase of stock

Net borrowings

Other cash flows from financing activities

7,166,000

34,853,000

(90,273,000)

Total cash flows from financing activities

(29,820,000)

(51148,000)

75,417,000

Effect of exchange rate changes

(65,000)

820,000

857,000

Change in cash and cash equivalents

(2,871,000)

557,000

1,103,000

Source:Yahoo Finance (2015, p. 1)

5.1:Cash flows from operating activities

Muchof the cash flow associated with the operating activities resultedfrom depreciation. There was a slight decline in total cash flowsfrom operations in 2013 as compared to the financial period 2012,which could be attributed to a significant increase in cash outflowsfor the purchase of inventory and cash outflows (UGD 672,000,000)associated with changes in “other operating activities” in thefinancial period 2013. The cash outflows associated with inventoryindicate that Thai Beverage increased its stock, which could in turnbe attributed to an anticipated increase in operations or perceivedrisk of scarcity of raw materials.

5.2:Investment activities

Therewas no cash inflow associated with investment activities. However,there was a significant cash outflow associated with capitalexpenditures in the three years considered in this paper. The highoutflow associated with capital expenditure indicates that ThaiBeverages has been upgrading its physical assets, includingindustrial buildings, equipment, or property. However, capitalexpenditure increase by 0.68 % in 2013 and reduced by 1.26 % in 2014,which indicates that upgrading of major assets, took place in 2013.

5.3:Financing activities

Therewas no cash inflow or outflow recorded in three major items(including sale or purchase of stock, dividends paid and netborrowings), the only cash flows available was recorded under thecategory “Other cash flows”. The company recorded a cash outflowin the year 2012, and a cash inflow in 2013 and 2014, but this cashinflow reduced by 79.4 % in the financial year 2014.

6.0:Conclusion

Thefinancial system of Singapore is ranked among the best systemsglobally, and its success can be attributed to a high level ofefficiency. In addition, the system is diverse because it has allcomponents (including financial markets, institutions, financialservices, money, and financial instruments) required in an effectivefinancial system. However, the banks, both local and foreign dominatethe national banking system. The intermediary financial institutionscan be of great help to corporations (such as Thai Beverages) thathave operations in Singapore. Some of the critical services that theycan get from these intermediary institutions include credit,depository, foreign exchange, clearing, SWIFT services, moneytransfer, underwriting, and advisory services.

Listof references

Bernstorff,J., 2008. Reformingthe World Bank’s safeguards: A comparative legal analysis.Washington, DC: World Bank.

Huat,C., Lim, J. and Chen, W., 2004. Competinginternational financial centers: A comparative study between HongKong and Singapore.Saw: Saw Center for Financial Studies.

InternationalMonetary Fund, 2014. Singapore:Financial system stability assessment.Washington, DC: IMF.

Lee,J., 2015. Short-term borrowing rates including Sibor seen getting aboost. Bankingand Finance.[Online]. Available at: &lthttp://www.businesstimes.com.sg/banking-finance/short-term-borrowing-rates-including-sibor-seen-getting-a-boost-amended&gt[Accessed 3 January 2016].

Mackay,D., 2011. Banks’ advisory role growing fast. FinancialTimes.[Online]. Available at:http://www.ft.com/intl/cms/s/0/36427b70-888b-11e0-afe1-00144feabdc0.html#axzz3wCrP4Coy[Accessed 3 January 2016].

MonetaryAuthority of Singapore, 2014. SingaporeAuthority Clearing House.Shenton: MAS.

MonetaryAuthority of Singapore, 2015. Singapore’sfinancial system assessed to be well-regulated.New York, NY: MAS.

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Singapore-GermanChamber, 2015. Singapore:Finance and insurance industry.Deursh: Singapore-German Chamber.

ThaiBeverage, 2015. Recording and awards. ThaiBeverage.[Online]. Available at: &lt http://www.thaibev.com/en08/home.aspx&gt[Accessed 3 January 2016].

TradeChakra, 2008. Trade finance instruments in Singapore. TradeChakra.[Online]. Available at: &lthttp://www.tradechakra.com/events/contact-us.php&gt[Accessed 3 January 2016].

UniversalTeacher, 2015. Components of financial system. UniversalTeacher.[Online]. Available at: &lthttp://universalteacher.com/1/components-of-financial-system/&gt[Accessed 3 December 2016].

YahooFinance, 2015. Thai Beverage public Company Limited. YahooFinance.[Online]. Available at: &lthttps://finance.yahoo.com/q/cf?s=Y92.SI+Cash+Flow&ampannual&gt[Accessed 3 January 2016].

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