Singapore's strict banking secrecy laws, sound fiscal management and reputation as a robust legal jurisdiction all combined to transform Singapore into an international private banking hub within the last few decades. Like Singapore, Cyprus too relied upon private banking to act as a vehicle for growth for its residents.
Cyprus is located in Europe and, despite being a politically divided island, qualified for European Union (EU) membership in 2004. Like the country's 'Big Brother' Greece, Cyprus underwent an attitudinal change following EU membership.
Suddenly, a small island with a population of just over one million people had its future guaranteed by behemoth states like Germany, France and Britain. Cypriot banks became less risky. Russian wealth searching for a 'legitimate' home within the regulated borders of the EU looked no farther than Cyprus.
The Cypriot banking system became awash with cash. Partly as a result of these inflows into its banking system, the Cypriot economy racked up almost USD 107 billion of external debt; a princely amount for an economy with a total Gross Domestic Product (GDP) of USD 22.5 billion. By 2012, the services sector, primarily finance and tourism, accounted for almost 81 percent of the Cypriot economy. The finance sector could make or break the small island's economy.
Almost a decade after joining the EU, Cyprus is negotiating a tough economic bailout package with the International Monetary Fund and the EU. As part of the package, depositors in Cypriot banks are expected to pay a levy on bank deposits. In other words, savers will likely be penalized for squirreling money away for a rainy day. Why? Cynics argue the tax is necessary simply because, somewhere along the line, economic managers and bankers got too greedy and precipitated the recent Global Financial Crisis.
Surely, Cypriots should address their economic problems without interference from a Singaporean blogger. The 'if, when and how' of any bank deposit levy is a Cypriot debate.
Nonetheless, there are some lessons for Singapore from recent events in Cyprus, particularly given the importance of financial services and private banking to Singapore.
1. Singapore must continue to manage its public finances prudently. Economic managers must resist the temptation to 'socialize' the economy and liberally hand out more 'free' services to the population at large. In reality, 'free' services are paid for by taxpayers. Only by avoiding financial crises can the Little Red Dot maintain the confidence of global investors, especially as the government administered Central Provident Fund begins to see net outflows of cash as Singapore's ageing population draws from the mandatory savings scheme.
2. Financial services rely heavily on an aura of confidence around the Singapore brand. Major unexpected negative events could result in large and rapid outflows of moneys from Singapore's banking system – a catastrophic event for the country's economy. To avoid such an eventuality, policy makers must avoid drastic and unexpected shifts. Additionally, the central bank must continue to work with banks to make certain bank capitalizations are (and remain) more generous than international Basel requirements, even if that means lower bank profits. Singapore is not a member of the EU and the country's lender of last resort should remain the MAS and not an IMF bailout program.
3. Economic policy makers ought to be conscious of Singapore's dependence on financial services. The ongoing efforts to diversify the economy across several value added service sectors of the economy will be helpful.
Singapore is no Cyprus in the making. Singapore's economy is not drowning in external debt. Typically, the government runs an annual budget surplus. However, like Cyprus, Singapore has a large (oversized?) banking sector reliant upon a high volume of offshore cash deposits. If not properly managed, Singapore's economy contains many of the ingredients required to cook up a domestic financial crisis at short notice.