ANNUAL REPORT 2002 / 2003


2003 is proving to be a much more challenging year than 2002. Fortunately, the war in Iraq was short and its economic impact limited. But the outbreak of Severe Acute Respiratory Syndrome (SARS) is an unexpected blow to Asian economies, including ours.

The SARS outbreak is a new and major uncertainty for the region. How lasting and deep the effects of SARS will be difficult to predict. Its impact is felt most acutely in the tourism, hospitality and transport industries, but extends beyond these sectors. We have lowered our Gross Domestic Product (GDP) forecast for 2003 to a range of 0.5-2.5% from the initial 2.0-5.0%. This assumes that the outbreak remains under control and does not become a worldwide problem.

Against the backdrop of a more uncertain outlook, slower growth and a benign inflationary environment, monetary policy will continue to be supportive of recovery in the domestic economy.

At such times, our small, open economy is particularly vulnerable to external shocks. Volatile markets and poor economic conditions have heightened the risks to financial institutions. Competition has put pressure on margins, sometimes inducing financial institutions to take on more risk. With liberalisation, our financial sector is less sheltered from these risks than before, but also more prepared to meet them.

Putting up walls will not keep out these risks. We have to strengthen our ability to manage them. The fundamentals are in place. MAS will continue to sharpen its risk-based supervisory capabilities. We will collect better information and use it more effectively to produce more accurate risk profiles of the financial institutions we supervise. Instead of preventing institutions from taking risks, we are encouraging them to better identify, monitor, and control the risks they take. Continued vigilance will help institutions to monitor their own status, and pre-empt deterioration before damage is done, both to the institution itself and to the financial system as a whole.

More broadly, as global financial conglomerates become more dominant, and as financial institutions transfer risks more actively across the industry, regulators need a more holistic understanding of the entire financial system, to identify what and where its potential vulnerabilities are, and how exogenous shocks might weaken it. MAS is therefore enhancing its capabilities in integrated supervision and financial surveillance. We must always plan a few steps in advance. That is why we emphasised the importance of sound Business Continuity Plans (BCP) for our financial system. Dramatic events in recent years gave MAS and the financial sector opportunities to test their preparedness against operational disruptions. To further strengthen the financial system, MAS formulated guidelines in January 2003 on sound BCP practices, which have proved helpful to financial institutions responding to the SARS crisis.

To stay ahead in uncertain times, we must continuously innovate and adapt to changing conditions. MAS will monitor market developments closely, consult actively with industry, and refine and update our regulatory and supervisory framework to maintain and enhance Singaporeís position as a resilient, competitive, and dynamic international financial centre.

I wish to take this opportunity to express my sincere appreciation to Mr. Khaw Boon Wan for his significant contributions to MAS and the financial sector. Mr. Khaw stepped down from the MAS Board in July 2002, having served as a member since 1998.


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