MAS: Annual report 2006 / 2007
CONTENTS
HOME
 
ENTERPRISE: Our Role
BUILDING ON A ROBUST MACROECONOMIC ENVIRONMENT
DEVELOPMENTS IN THE SINGAPORE SECURITIES MARKET
FOSTERING A SOUND & REPUTABLE FINANCIAL CENTRE
RISK MANAGEMENT & INFRASTRUCTURE
GROWING SINGAPORE AS AN INTERNATIONALLY COMPETITIVE FINANCIAL CENTRE
CURRENCY
ORGANISATIONAL INITIATIVES
ENTERPRISE: Our Role
BUILDING ON A ROBUSTMACROECONOMIC ENVIRONMENT 14
The World Economy: A Fourth Consecutive Year Of Robust Global Growth 14
Box 1 -Economic and Financial Integration in East Asia 15
International Financial Markets: A Cautionary Note Against Abundant Liquidity 17
Strong Capital Inflows Make Asia Vulnerable To Shifting Risk Appetites 19
The Singapore Economy: Sustained and Broad-based Strength 20
Growth was Broad-based Across Key Sectors of the Economy 21
Labour Market Conditions Continued to Strengthen 21
Inflationary Pressures Remain Largely Contained,  
  In Part Reflecting the Effects of Globalisation 21
Monetary Policy - An Anchor for Price Stability in A Strong Economy 23
Strengthening the Monetary Policy Formulation Process 23
Pushing the Frontier of Monetary Policy Research and Analysis 23
Box 2 - Enhancing Liquidity Management: The MAS Standing Facility 24
 
International Financial Markets: A Cautionary Note Against Abundant Liquidity
International financial markets were characterised by abundant liquidity and resulting low risk premiums in 2006 and the early part of 2007. Global equity markets experienced sharp run-ups in valuations during the period, in tandem with sustained and non-inflationary economic growth in the global economy. Aside from two brief, albeit sharp corrections in May 2006 and February 2007, global equity markets posted healthy returns on the back of strong corporate profitability and merger & acquisition activities. The US subprime mortgage market was in the spotlight during the period, as concerns over the cooling housing market and downgrades in subprime mortgage ratings spooked investors about the sustainability of US economic growth.

Equity markets in Asia and the US experienced widespread sell-offs in both May 2006 and February 2007 (Chart 4). The May 2006 episode was triggered by concerns over the possibility of higher-than-expected inflationary pressures in the US. In comparison, the sell-off in February 2007 was prompted by concerns of overvaluation – following a prolonged period of low risk premiums which might have encouraged excessive risk-taking by market participants – rather than any significant shift in real economic fundamentals. Sovereign spreads in most East Asian countries, for example, have remained tight reflecting improved fiscal positions, although the global search for yield also played a part (Chart 5). These recent market developments have underscored both the swift changes in financial market conditions and the growing interconnectedness of financial markets across countries.
 
Chart 4: Equity Market Indices and MSCI World Index
 
Chart 5: Sovereign Spreads
 
Long-term government bond yields in developed markets remained at historically low levels in 2006 (Chart 6). While US government bond yields rose to above the 5% mark in June last year, reflecting the ongoing normalisation of short-term rates as well as a heightened sensitivity to upside inflation risks, yields fell back due to concerns over economic weakness. These relatively low levels of long-term interest rates could be attributed to both cyclical and structural factors, including expectations of low inflation, an abundance of liquidity as well as continued demand for long-dated securities from pension and other institutional funds.

While the inversion of the US yield curve in 2006 had raised some concerns about a possible recession, the global economy continued to register strong growth last year. This momentum may have moderated somewhat in the first quarter of 2007, although economic growth remains firmly entrenched.

In the foreign exchange market, the USD weakened against the Euro and the SGD, on heightened concerns over the sustainability of the US current account deficit.  Against the Japanese yen, however, the USD was periodically supported by large yen carry trades. The unwinding of some of these carry trades during the sell-off in February this year resulted in a resumption of USD weakness. Nonetheless, the correction in the USD thus far has been orderly and markets have remained resilient (Chart 7).
 
Chart 6: G3 Long-Term Bond Yields
 
Chart 7: USD against Euro, Japanese Yen & Singapore Dollar