Will Abu Dhabi's finance hub eat Singapore's lunch?

Oil-rich emirate taps Singaporean talent as it opens ambitious global market centre
By Goh Eng Yeow, Senior Correspondent, The Straits Times, 11 Nov 2015

As the International Monetary Fund (IMF) noted in a working paper last year, Hong Kong and Singapore have developed a big enough banking franchise to make them the mainstay financial centres in Asia.

But other countries have their eye on the prize of being go-to international finance hubs - the latest of which is the fabulously rich Abu Dhabi, capital of the United Arab Emirates.

Arab money has worked a miracle in enabling the Gulf states to capture a big chunk of international air traffic and giving Singapore Airlines a run for its money.

Will it do the same in challenging the Republic's status as an international financial hub?

It may only be at an early stage of developing its financial hub, and naysayers say it has its work cut out growing to be the likes of Singapore.

After all, the Republic has over 1,200 financial institutions licensed by the Monetary Authority of Singapore which are involved in a wide array of activities. Besides the usual big names, there are a big number of smaller firms.

Still, there is no room for complacency. Abu Dhabi has made no bones about looking east, and in particular to Singapore, rather than west, for its inspiration to build its financial centre, the Abu Dhabi Global Market (ADGM). It even wooed a Singaporean, Mr Richard Teng, former chief regulator of the Singapore Exchange, to head its all-important regulatory unit, in its attempt to replicate the Republic's success.

LOFTY AMBITIONS

Over the past decade, Dubai has attracted some of the biggest names in global finance, leveraging on its position as a stopover on trade routes between Europe and Asia to become the Middle East's financial hub.

Now, its sister emirate down the road, Abu Dhabi, whose sovereign wealth fund alone is an estimated US$1 trillion (S$1.4 trillion), aims to do the same - or even better.

Last month, the ADGM, the world's newest finance centre, went "live" after lengthy consultations with some of the world's top banks on the necessary framework. It announced it was ready to receive licence applications from banks and other financial institutions, effectively declaring itself open for business.

It aims to build a regional financial hub, with an initial emphasis on private banking and asset management, capitalising on Abu Dhabi's geographical advantage at the crossroads of Asia and Europe.

The IMF has identified developing a deep pool of expertise, a robust market infrastructure and a solid legal framework, together with consistent government support, as necessary to achieving these goals.

So, given its fledgling state, the ADGM clearly has some way to go.

Indeed, a London-based strategist with consultancy firm Ecstrat, Mr Emad Mostaque, was quoted in The Financial Times as expressing doubt about whether the ADGM would ever grow to the size of Dubai, let alone London or Singapore, in the foreseeable future.

Still, the Singaporean whose talents Abu Dhabi has tapped, Mr Teng, has no doubts about ADGM's eventual success. In a phone interview from Abu Dhabi, he said: "In the next few decades, the Middle East, Africa and South Asia will be a key engine of growth for the global economy. Abu Dhabi is a natural hub. It is not ideal to service this fast-growing region from elsewhere as you need to be close to the ground."

Abu Dhabi also shares some of the attributes that made Singapore a success - political stability in a region known for its volatility, and a first world infrastructure with a top-notch education and health system which makes comfortable living for the rapidly growing expatriate community.

In January, the Economist Intelligence Unit ranked Abu Dhabi as the world's 25th safest city.

Mr Teng said: "The quality of life here is very good. Top international schools such as Paris-Sorbonne and NYU are also here, while well-known hospitals like the Cleveland Hospital have set up shop, too. On the arts scene, we are expecting offshoots of the Louvre and Guggenheim museums to be opened here soon."

Abu Dhabi also enjoys other advantages, sitting atop 9 per cent of the world's oil reserves and 5 per cent of the world's gas reserves. It is the largest of the seven states which make up the United Arab Emirates (UAE), and accounts for two-thirds of the UAE's US$400 billion economy.

Apart from building a private banking and asset management business to service the rich, the ADGM also aims to serve the fast-growing domestic economy. This has expanded at an average rate of 7.5 per cent a year for the past eight years - a frenetic pace which many counties would envy.

Mr Teng said: "In a fast-growing economy, there are a lot of business activities which need all kinds of services. The financial sector accounts for only 5 per cent of Abu Dhabi's GDP. The objective is to build it to the level of other financial centres. In Singapore, the financial centre makes up 12 per cent of the economy, while in Europe, it is about 9 to 10 per cent."

NEW THREAT?

The IMF working paper observed that the power of incumbency is not to be underestimated. Singapore and Hong Kong enjoy a clear "early mover advantage", which confers some "natural" advantages.

While young financial centres such as Abu Dhabi may have the means to create a conducive environment for banks to operate, it will take time - at least five to 10 years - to build a critical mass of domestic and foreign financial institutions which provide a wide range of financial services that are the hallmark of an international financial hub.

And even with the Gulf states' enormous oil wealth, using money to build a financial centre can only go so far. Qatar, whose financial hub was established in 2005, has yet to achieve critical mass, despite offering selective incentives to woo asset management firms to set up shop there.

The timing must be opportune, too. Recent history shows that some pre-eminent financial centres got to where they are now - almost by accident - as they were able to leverage on the opportunities that suddenly became available.

In the 1960s, London's status as a financial centre was in gentle decline, reflecting Britain's waning importance in the global economy. Then, due to US regulations which drove companies to keep their greenbacks offshore, London became the centre of the so-called Euromarket, attracting more international banks than New York. That status was further enhanced 20 years later, as Britain liberalised its financial services sector in the "Big Bang", luring Wall Street banks to move a good chunk of their operations there.

It resulted in London becoming the dominant financial centre in Europe, eclipsing Frankfurt and Paris, which faded in importance as international financial hubs.

Likewise, Singapore was able to take consistent advantage of global upheavals to move ahead in the rankings of the world's leading financial centres.

In 1971, following the United States' decision to delink the dollar from gold, Singapore created a regional centre for foreign exchange which attracted a large number of banks to set up shop here as it linked the Asian time zone with New York and London.

This large concentration of banks, in turn, enabled the city-state to morph into the world's third largest forex trading centre after London and New York. It also provided the seeds for other businesses such as commodities and derivatives, as banks relocated other operations here.

Similarly, there were few noteworthy asset management firms to speak of in Singapore prior to Hong Kong's 1997 handover to China. But as the handover approached, numerous clients took steps to "book" assets in Singapore and to retain these assets, enabling the Republic to build a business that was once the preserve of jurisdictions such as Bermuda and the English Channel island of Jersey.

NO ROOM FOR COMPLACENCY

The IMF has noted that one key ingredient in the success of the financial centre here is the active role played by the Government, which considers a robust financial centre to be central to the country's economic future.

"The Government fostered and maintained Singapore's position in global financial market through internationally competitive tax structures and by promoting a well-regulated financial system," it said.

Take the steps by the Government to liberalise the financial sector in the aftermath of the 1997-1998 Asian financial crisis, after identifying the sector as one of the economy's growth engines.

Broadly speaking, while continuing to keep a tight leash on domestic finance, Singapore did what it could to induce international firms to come here. It cut bureaucratic red tape, enabling financial licences, as well as work visas for key employees, to be obtained efficiently and quickly. There were tax breaks for firms that were considered important.

But any misstep - even a small one - can catch out a big, well-established financial centre.

Switzerland, famed for its anonymous numbered accounts, traditionally led the world in private banking. But ADGM chairman Al Sayegh earlier this year declared the Swiss banking model dead. This was in the wake of scandals surrounding British lender HSBC and Brazilian oil giant Petrobras which purportedly originated in secrecy-shrouded Switzerland.

Instead, financial centres such as Singapore have won kudos from the IMF as safe havens in times of crises because of their robust regulatory systems, tough supervisory standards and high degree of transparency.

Still, there is no room for complacency. So far, Singapore has played its cards right, but more cities are likely to follow in Abu Dhabi's footsteps to challenge the Republic as a renowned international financial centre.

It is one issue which the recently announced Singapore's Future Economy Committee should ponder - how to fend off the challenges posed by these wannabes and propel the Republic's financial centre to even greater heights.