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Chairman's Message

The world economy took a downward turn towards the end of 2007, following several years of robust growth. The US subprime mortgage crisis precipitated a credit squeeze and widespread financial turmoil, and the slower growth in industrialised countries will have spillover effects on other regions. At the same time, the world is facing rising inflation caused primarily by high oil, food and other commodity prices. Navigating these challenging conditions has been a priority for central banks everywhere, including the MAS.

Being an open economy, Singapore is buffeted by these external headwinds. Despite them, the Singapore economy grew by 7.7 percent in 2007, its fourth consecutive year of strong expansion. At the start of 2008, growth continued to be firm, underpinned by the wholesale and retail trade, transport and storage, and financial services sectors. However, Consumer Price Index (CPI) inflation has risen, reaching 6.6 percent in the first quarter of 2008. CPI inflation was 2.1 percent last year and 1 percent in 2006.

Singapore's economic growth is likely to ease in the next few quarters in view of slowing demand from developed economies. However, the economic prospects for Asia continue to be relatively sanguine in the near term and Singapore will benefit from the region's growth, especially China's and India's. Overall, this year, Singapore's GDP growth should come in at its medium term potential of around 4 to 6 percent. The bugbear is CPI inflation. It has picked up this year, mainly because of higher global food and oil prices. Against a backdrop of heightened global growth and inflation risks, MAS has to strike the right balance in setting monetary policy. Taking into account both growth and inflation prospects, MAS shifted to a policy of a slightly steeper rate of appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) at the October 2007 policy review. This was followed by the decision to re-centre the exchange rate at the prevailing level of the S$NEER at the subsequent policy meeting in April 2008. In our assessment this monetary policy stance is appropriate to moderate inflation while providing support for sustainable growth over the medium-term.

As the US subprime mortgage market problems snowballed into a wider global financial crisis, MAS intensified financial system surveillance and supervision of financial institutions in Singapore. We worked closely with financial institutions to review their internal stress test results and parameters. We also exchanged information regularly with other regulators and worked with the Singapore Exchange (SGX) to monitor brokers' exposure, capital adequacy and their ability to meet their payment obligations. MAS continues to emphasise the need for financial institutions to maintain prudent risk management and to provide feedback on potential stresses.

Basel II took effect in Singapore on 1 January 2008, marking a milestone in MAS' efforts to implement a more risk-sensitive capital framework for banks incorporated in Singapore. To ensure that banks are better able to manage liquidity stress situations in a timely manner, we have streamlined the process for drawing down of regulatory reserves.

In the insurance sector, MAS introduced mandatory requirements to strengthen life insurers' internal governance practices on the management of their participating funds and worked very closely with the industry to enhance disclosure standards to participating policyholders. MAS also revised rules for Investment-Linked Insurance Products (ILPs) to facilitate the availability, in Singapore, of cost effective ILPs that would meet both policyholders' needs for broader investment choice as well as adequate post-sale disclosures.

In the area of corporate governance, MAS and SGX took over the oversight of corporate governance of listed companies in September 2007. We have embarked on practical initiatives to enhance standards to ensure that they are in line with global best practices.

We continue to engage key stakeholders and industry players to tap their expertise and views on a range of issues. For example, the industry-led Audit Committee Guidance Committee (ACGC) was established by MAS, Accounting and Corporate Regulatory Authority (ACRA) and SGX in early 2008 to develop practical guidance for audit committees of listed companies to enhance their effectiveness. We also received useful feedback from our International Advisory Panel which held its seventh meeting in Singapore in May 2008.

Singapore's financial services sector recorded strong growth in 2007, driven in part by robust expansion in both the domestic and offshore banking segments. The Asian Dollar Market also strengthened, as lending to East Asia and the Americas gathered pace. The asset management industry continued its strong growth, reaching S$1.2 trillion at the end of 2007, a 32% increase from 2006. We also witnessed record high trading in the equities and derivatives markets. The real estate equity financing market continues its strong growth and saw four new REITs and our first real estate business trust listed on SGX.

These are good achievements. However, the ongoing volatility in global financial markets and the threat of higher inflation mean that we have to remain vigilant. MAS will continue to facilitate the development of Singapore as an international financial centre with high standards of regulation and supervision. We will continue to strengthen our staff's skills. To this end, we have launched the MAS Academy to hone leadership skills and professional competencies in MAS.

Mr Chao Hick Tin stepped down from the MAS Board on 11 April 2008, following his reappointment as a Judge of Appeal of the Supreme Court. He had served on the Board since 22 May 2006. I thank him for his contributions to MAS. Mr Chao is replaced by Professor Walter Woon, the new Attorney-General. I welcome him to the MAS Board.