An expansion of finance and risk products to suit Singapore’s more globalised reach is prompting renewed interest from international financiers. Martin Evan-Jones reports.


Singapore is emerging as a world power in international trade finance on the back of energy and commodities demand in Asia’s rapidly-developing economies; a turnaround from nearly three years of lean pickings in the city-state’s financial sector.

However, the Lion City will have to beware of increasing regional competition from Malaysia and Indonesia when seeking to attract finance and insurance services as large institutions seek to develop business closer to their clients’ interests in those resource-rich countries.

That threat appears distant for now, and nothing typifies Singapore’s recent resurrection more as a location for trade finance speciality than the start of operations of the country’s first liquefied natural gas (LNG) terminal on Jurong Island in May.

The US$1.4bn plant can accommodate tankers carrying LNG cooled to minus 160 degrees Celsius. The first three storage tanks will raise the capacity of the plant to 6 million cubic metres (m3) of LNG by year-end from 3.5 million at the outset, with the possible prospect of a fourth tank to be built at a cost of US$403mn early next year and three others to follow, to a peak capacity of 20 million m3.

Singapore authorities expect this will leverage highly-competitively priced LNG globally. Cargoes can be broken down to satisfy domestic and regional electricity demand, but more significantly to service growing raw material demand from China and India, and upcoming markets such as Vietnam.

The initial Jurong commercial cargo was handled by the plant’s aggregator, London-based resources and exploration giant BG Group, sourcing from Equatorial Guinea; it was the first in a line of contracts that could transform the region’s gas market and impact on trade finance, with increasingly sophisticated instruments.

As a precursor to physical trading and regional distribution for major players such as Royal Dutch Shell and Gazprom, banking and finance firms will be required to step in to support LNG flows.

Singapore is already an important trading centre for energy products and this will grow with the development of the LNG market, says Axel Boye-Moller, head of global transactional services in Asia for Westpac.

“Singapore is one of Asia’s leading commodities hubs with good connections to established hubs in Europe and North America. As such, Singapore is well-positioned as a regional and global hub for gas trading, insurance and banking,” Boye-Moller adds.

As a taste of how LNG-powered energy could play a part in regional corporate deals, the Philippines’ largest power distributor Meralco in March announced its acquisition of a 70% stake in an 800-MW power station adjoining the Jurong plant in a joint venture with Hong Kong-based conglomerate, First Pacific Group. The remaining 30% is held by Malaysian energy giant, Petronas. The plant is to begin operations late this year, the first in the region to be fully supported by LNG, with power provided by BG on a long-term contract. The power is expected for use domestically in Singapore, but also for supply to the Philippines, Vietnam and Thai markets.

An LNG market may be new for Singapore but the country’s Energy Market Authority is determined to stay ahead of the game. Barely a month after its first deal, it announced plans to award its next LNG import licence through a competitive process at a date yet to be announced.

So, BG Group will have to closely guard its margins in sales to high-value markets, which include six, large-scale power companies, observers advise, while the Singapore authority is signalling its desire for LNG trading to be “a real market”, say GTR sources.

The Energy Market Authority confirmed plans in its consultation paper to adopt a flexible framework for appointing importers so won’t “restrict the number of importers to one, or appoint them concurrently before the gas markets mature”.

That’s considered an understatement in business circles, given the potential of the global LNG market, primarily in Asia. Despite a dip last year, global demand for what some – not all – claim to be a “clean fuel” is expected to grow 26% per year between now and 2025, according to BG, requiring a global investment in the region of US$40bn.

Some finance industry practitioners expect the development of the Jurong plant’s supply chain to spur the speedy evolution of the energy contract market, which has for decades relied on long-term agreements. The prediction is that quicker deliveries and greater demand for LNG in fast-developing countries will spawn short-term spot trading similar to the emergence of the spot crude market in the 1970s.

It’s a putative market that Singapore can comfortably fit with its more established commodities trades in oils, agricultural resources and metals. Demand for LNG has also grown significantly from Japan, given the country’s move to rely less on nuclear-sourced energy after the Fukushima plant disaster in March 2011; that’s regarded as an attractive proposition for Japanese brokerage firms aiming to build trading bridgeheads in Southeast Asian commodities from Singapore.

New finance instruments

With Singapore’s geographical advantage and sophisticated business infrastructure, the number of trade-related clients arriving in Singapore has been growing quickly over recent months says Ashutosh Kumar, Standard Chartered’s global head of corporate cash and trade.

These are not only international companies taking advantage of foreign tax credits, says Kumar. Many arrive because they are increasingly aware of Singapore’s connection to regional infrastructure, including air and sea ports. They include many companies from China and India.

He says that while global exports averaged annual growth of about 6% between 1988 and 2008, the bank expects major corridors involving Asia to grow at a much faster pace of roughly 15% between now and 2030. Kumar sees open account financing as generally less popular in Asia than in other regions.

“That’s why we are bullish about trade innovations like bank payment obligations (BPOs), which deliver operational efficiency of open accounts while providing the certainty of the letter of credit,” he comments, adding that Singapore has the advantage of very readily available and advanced financing models for credit insurance, BPOs, sales invoicing and re-invoicing, among other products.

For Anthony Palmer, chief executive of specialist emerging market risk insurance broker BPL Global’s Singapore subsidiary, the credit and political risk insurance market has grown rapidly in Singapore over the past five years, “with the number of insurers present increasing from two or three to nearly 20”.

BPL Global opened its regional head office in Singapore last year headed by co-founder Palmer, who predicts the trend for new trade insurance products to continue: “Insurers have rightly decided that they need to be close to the regional head offices of the policyholders, be they banks or corporates such as commodity traders, and, equally importantly, in the same region as the risks they are underwriting.”

The two types of insurance product emerging in Singapore are comprehensive policies and those covering political risk only, the latter valuable to cross-border lenders to accommodate jurisdictions where they are not comfortable with sub-investment-grade countries. Comprehensive policies cover the trader – or the financing bank – against foreign counterparty default, currency inconvertibility and non-delivery under prepayment deals for commodities such as palm oil and coal.

Palmer says a rule of thumb is that comprehensive insurance typically costs 70% of the bank’s net margin, but that can vary with supply and demand. Underwriting volumes experienced a sharp upturn in Singapore in the first quarter of 2013, registering S$10,891bn (or US$8,643bn at S$1.26 to the US dollar) for the finance and insurance industry, according to figures from Singapore’s Department of Statistics, a turnaround from the negative growth in the previous three quarters
Another notable name, Lloyd’s of London (Asia), a subsidiary of the London underwriting market, describes in its promotional material how its Singapore operation has grown exponentially from three underwriting businesses to over 18 service companies in five years, operating through 21 syndicates.

Business expectations for financial and insurance firms also rose while the measure of labour productivity in the same sector jumped 6.5% after six quarters of decline, while the overall trade picture in Singapore followed a more volatile trend from the first quarter through to May.

Dan Marjanovic, a partner with law firm Simmons & Simmons Asia says Singapore is emerging as a regional centre for structured trade finance and supply chain finance models partly for geographical reasons: “Singapore’s proximity to Indonesia, one of the world’s major commodity producing countries has played a part in that, particularly on the trade and commodity finance side.” That has spurred international traders to expand Singapore operations.

Commodities giant Trafigura, for example, is said to be booking increasing trade and structured finance through Singapore, although the company’s public relations consultant points out that it has significant teams also situated in its Geneva headquarters and in other regional hubs.

Rmb entry

Boosting the range of financing services offered in Singapore are clearing services for the Chinese renminbi (Rmb), launched by the local branch of Industrial and Commercial Bank of China in May. It singles out Singapore as the first for Rmb clearing arrangements on offshore trades outside the Chinese territories of Hong Kong and Taiwan. While yet in its infancy, and dwarfed by Hong Kong’s dominance with an aggregate market worth some Rmb1.1tn according to figures from the Hong Kong Monetary Authority, compared to Singapore’s Rmb1.6bn last May, the latter is still shaping its offerings.

Currently there is what one trader refers to as an “interesting but still tame” Rmb spot market. However, major institutions have raced to capitalise on opportunities brought by an offshore bond market, after the Singapore Exchange launched depository services for the currency. Hong Kong-based investment specialists believe the move will be a big step for Singapore to shape regulation on how the Rmb can be used to service trade finance outside China, particularly by Singapore-based commodity firms.

Standard Chartered was the first, with HSBC, to issue “dim sum” bonds on the Singapore market, offering Rmb1mn three-year bonds with a yield reported at some 2.75%.

Frankie Au, head of Rmb products for Asia, says dim sum bond issuance in Singapore provides the market with an additional choice of investment for a good return. If this continues to grow, “more corporates in Singapore and the region will have the incentive to hold and accept Rmb to support the re-denomination trend of cross-border trade with China in Rmb”. The bank’s head of product management for Asia, Michael Vrontamitis, says Singapore is currently using the book transfer model where participating banks open their nostro accounts (those held in a foreign country and currency by a domestic bank) through the Rmb clearing system.

Singapore plans to establish its Rmb real time gross settlement (RTGS) system, although Vrontamitis believes clearing in Singapore, like Taiwan, is likely to be more domestically focused than in Hong Kong, whose clearing platform has over 1,500 international participants – including Singapore and Taiwan banks.

“Banks that are already in Hong Kong’s clearing system will open additional nostro clearing accounts in Singapore, which has its own advantages to attract private banking, commodity traders and regional treasury centres,” explains Vrontamitis.

Regional appeal

Singapore’s challenge ahead as a trade facilitation and finance centre may well be the extent to which neighbouring Malaysia and Indonesia will attract banks and other institutions, as they open up energy and commodities markets.

Malaysia’s US$30bn programme for oil and natural gas exploration is expected to garner greater natural gas production offshore Sarawak and Sabah, which could push gas output – representing 60% of the country’s aggregate output – to record highs by 2020, say industry analysts.

Although Indonesia, Southeast Asia’s largest producer of oil and gas, saw production drop to 830,000 barrels per day and gas down 12% last year with ongoing global uncertainties, it is still seen as a market to be tapped as demand increases again.
That could impact Singapore’s outward financing and insurance prospects unless the market continues to benefit from its reputation for top-quality services and proven legal framework, say some executives.

Despite being bullish on Singapore and Hong Kong, “increasingly, our banking clients are looking for ‘on-shore solutions’ such as in Indonesia and Malaysia”, says Palmer of BPL Global. “Those insurers who have operations in these countries should therefore try to get approval from the relevant national regulators so that they can issue policies to customers on-shore.”