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Geopolitical tensions increase Singapore’s treasury appeal

Geopolitical events such as the escalating US-China trade dispute, Brexit uncertainty and the recent Hong Kong protests have highlighted the importance of political stability and a transparent legal system and regulatory framework.

Writing in The Business Times, Ernst & Young partners Tan Bin Eng and Seah Li Yun note these events have dented business confidence and impacted on the economy, as evidenced by reports of businesses moving funds or transferring their operations and companies to alternative locations.

The escalation of trade disputes, principally between the US and China, has prompted companies to review their supply chains or production base, while in the UK, the EY Financial Services Brexit Tracker showed that 63% of global banks, investment banks and brokerages were considering or had confirmed relocating operations or staff to Europe.

News reports of the recent Hong Kong protests offered anecdotal evidence of an increasing number of companies relocating their regional headquarters from HK to other parts of Asia and “most particularly to Singapore”.

Asia’s leading financial centres

The authors note that the decision to expand business operations or companies to alternative locations is hard and can have far-reaching implications. From a corporate perspective, the choice of location for the regional headquarters influences how organisations structure their operations and where they locate their corporate treasury centres.

Over the past decades, multinational corporates (MNCs) have centralised their treasury functions across various legal entities and geographical jurisdictions to maximise the internal sources of liquidity to fund business growth. Traditionally, global and regional treasury centres are in locations that offer a sophisticated financial ecosystem and mature regulatory system, such as New York and London.

With the rise of the ‘Asian Century’ and as MNC become more focused in expanding their treasury footprint in Asia, Hong Kong and Singapore have become the region’s preferred treasury locations. Hong Kong tends to be preferred by companies with a heavy focus on China, while Singapore is attractive for those seeking to serve the wider Asia-Pacific region.

A recent EY study, Singapore: a strategic regional treasury location, reviewed key factors that influenced treasuries to set up in Singapore and found that proximity to the regional headquarters and a well-developed financial ecosystem are two key drivers.

Proximity to the regional HQ offers better engagement with regional management, as corporate treasurers plan the funding and investment requirements over a long-term horizon while balancing intercompany borrowings and managing the central and in-country banking relationships efficiently. It also enables a faster response time for crucial funding decisions.

Singapore’s strengths

As 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 developed, well-regulated and open financial ecosystem is essential.

At the same time, the wider finance ecosystem - including financial and professional services organisations - that advise treasuries, 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,” the authors note. “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.”

Singapore is ranked as Asia-Pacific’s largest foreign-exchange centre, the third-largest market for over-the-counter FX transactions globally, and the region’s second-largest over-the-counter (OTC) interest-rate derivatives centre by trading volume.

In the EY study, respondents perceived Singapore favourably when considering the secondary criteria in selecting treasury locations. These include a simple, effective tax system and availability of incentives, good liveability 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 also favourably noted.

Important secondary criteria also extend to 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,” the authors conclude.

“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.”

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