Singapore: A Difficult Relationship


Dr Garry Rodan

The historical legacy of the failed political merger between Singapore and Malaysia is complex and deep, periodically manifesting itself in residual suspicion and conflicting perceptions across the causeway. But diplomatic friction has not prevented close economic ties. As the second-largest source of foreign investment, over 1,000 Singapore companies have in excess of S$10 billion currently invested in Malaysia. A further S$21 billion is provided in loans from Singapore banks. The regional economic crisis is, however, placing new strain on Singapore-Malaysia relations. After months of acrimonious public exchanges on a range of issues, divergent policy responses to the crisis are also emerging. Contentious issues over recent months include: protracted renegotiations over water supplies from Johor to Singapore; protests over regulations conditioning access by Malaysians to superannuation funds accrued in Singapore; charges of Singapore attempts to undermine Malaysian tourism, to dampen investor confidence in Malaysia, and to discredit Kuala Lumpur's new airport; a dispute over the redevelopment of the site of Tanjong Pagar train station in Singapore, which involves a 999-year Malaysian land lease; Malaysian proposals to rescind Singapore's control of specific air space and sea movements within Malaysian territory; Malaysian criticism of a Singapore historical exhibition portraying bilateral relations; Malaysian proposals to direct exporting companies to use domestic ports; accusations that a senior Singapore Minister, George Yeo, breached ASEAN non-interference with observations about Prime Minister Mahathir; and Malaysian reactions to Lee Kuan Yew's published memoirs. In this climate, Malaysia's central bank, Bank Negara, has announced currency and stock trading restrictions with significant implications for Singapore. Intended to protect the ringgit from speculation and limit the impact of short-term capital flows on the domestic economy, these require Bank Negara permission to convert ringgit into foreign currencies and to transfer funds between external accounts, as well as for ringgit proceeds from Malaysian stock sales to be retained for at least twelve months. Not only is Singapore the location for investment banks and hedge funds speculating in regional currencies, but also the Singapore government itself holds billions of Singapore dollars worth of ringgit. The new regulations put a stop to extensive ringgit-related transactions in Singapore and undermine a thriving over-the-counter trade in Malaysian stocks. Around 25% of the Singapore Stock Exchange business has involved trading of Malaysian shares. Meanwhile, Singapore authorities are extending integration with international markets. Foreign companies, for example, will be able to list Singapore dollar-denominated shares on the local stock exchange. There is, however, no likelihood in the short to medium term that the Singapore dollar itself will be internationalised.

WATCHPOINT: Can the Singapore government alleviate some of the diplomatic tension with its neighbours through undertaking or encouraging investment initiatives in the region?


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