Encouraging Signs for Sustained Economic Recovery and Development as a Financial Centre

Wednesday, 7 July 1999... There are encouraging signs for the nascent economic recovery to be sustained into next year, and for Singapore's development as a premier financial centre. That was the message from Monetary Authority of Singapore (MAS) Managing Director, Mr Koh Yong Guan, at a press conference today on MAS' 1998/99 annual report (PDF, 1.71MB). Mr Koh said that Singapore was also preparing to play its part in ongoing international discussions to improve the global financial system.

PROSPECTS FOR THE ECONOMY ENCOURAGING
BUT GROWTH NOT BROAD-BASED AND DOWNSIDE RISKS REMAIN

1   "Prospects for a sustained economic recovery into the second half of 1999 and beyond are good. The external environment is expected to be favourable and the policy measures taken in 1998 in response to the economic slowdown are beginning to take effect", said Mr Koh.

2   MAS said that the US economy was likely to continue growing, albeit more slowly than in 1998. Japan was showing signs of recovery. Across the region, currencies have stabilised and interest rates have declined to pre-crisis levels. More importantly, industrial production and exports have begun to increase in many of the crisis-affected economies.

3   "The measures introduced by the government in November 1998 to cut business costs by S$10.5 billion have helped to boost Singapore's competitiveness. This has been supported by an easier exchange rate policy stance by MAS", said Mr Koh. At the outset of the Asian currency crisis, the substantial depreciation of regional currencies had led to an appreciation of the Singapore Dollar on a trade-weighted basis. MAS widened its exchange rate policy band to allow it to manage the exchange rate more flexibly in the more volatile foreign exchange market. Last year, given the absence of inflationary pressures, MAS eased exchange rate policy to cushion the economy from the adverse effects of the crisis and facilitate its recovery. Since early this year, the trade-weighted value of the Singapore Dollar has been back to pre-crisis levels.

4   The economy is picking up faster than expected at the beginning of the year. But despite the favourable outlook, MAS cautioned that Singapore was not completely out of the woods yet. First, the recovery is not yet across the board. Although the manufacturing sector expanded by 6.5% in the first quarter, construction, commerce, and most financial services remained weak. Second, the positive outlook hinged on continued strength in the industrial countries and a recovery in the region. Both factors faced possible downside risks. These include a sharp correction in the US stock market, a renewed weakening of the Japanese economy and the Yen, political and social instability in the crisis-affected economies of Asia, and delays with banking and corporate reforms in these countries.

5   "We must therefore remain watchful of our business costs even as the economy picks up. The Govern-ment has stated that it will reassess the economy at the end of the 1999, to decide whether to begin restoring the employer's CPF contribution rate in 2000 instead of 2001, in order to manage wage pressures should the recovery gather pace. The MAS, on its part, will ensure that exchange rate policy remains conducive to a sustained non-inflationary recovery. We set exchange rate policy on a medium-term basis, in anticipation of trends in inflation and growth. Notwithstanding the recent increase in asset prices, the economy is still operating below potential and the inflation outlook is benign. We are therefore maintaining our current neutral exchange rate policy stance. As currency markets have become less volatile, we have also decided to narrow the exchange rate policy band to its pre-crisis width", said Mr Koh.

FRAMEWORK IN PLACE FOR
BUILDING A WORLD-CLASS FINANCIAL CENTRE

6   "Together with the financial community, MAS has laid the building blocks to develop Singapore as a world-class financial centre. We have kept up a steady pace of financial sector reforms over the past 18 months despite the regional economic crisis", said Mr Koh.

7   The key strategic thrusts of MAS' policy reforms are to:

• promote a vibrant asset management industry

• develop deep and broad capital markets in debt, equity and derivatives

• build a strong and competitive banking industry.

MAS cautioned that it would take time to build up a critical mass of activities and develop deep and broad markets. Moreover, because of the crisis, business volumes in the financial industry declined last year, both in Singapore and in the region.

8   However, MAS was optimistic that the reform efforts will bear fruit over the next few years. "Three factors augur well for our vision to become a world-class financial centre: (a) Singapore's policy response to the regional financial crisis; (b) the resilience of our financial sector in the face of slowdown; and (c) the favourable response of industry to the reforms, with new players entering the market and new activities being introduced", said Mr Koh.

9   MAS said that Singapore's credible and consistent economic policies have enhanced investors' confidence in Singapore as a conducive place to do business and use as a regional financial hub. The stability and resilience of the financial sector in the face of slower economic growth, shrinking business volumes, and rising non-performing loans has also enhanced investor confidence in Singapore as a financial centre. "Our strong and consistent regulatory and supervisory framework has ensured that systemic risks were well contained. Our banks remain well-capitalised and fundamentally strong", said Mr Koh. He added that the financial sector's rigorous preparations for Year 2000 had also enhanced investor confidence in Singapore.

10   Elaborating on the response of the industry to the reforms and initiatives, Mr Koh said there were some 130 new projects in the financial sector over the last year. "Several asset management companies and insurance companies have committed to setting up operational headquarters in Singapore. Ten more multi-national companies will base their regional treasury centres here. Total assets under management in Singapore are now higher than before the crisis, and fund managers have increased their fixed income capabilities in Singapore during this past year", said Mr Koh.

11 MAS cited preliminary indicators confirming that the initiatives taken during the last 18 months were having some effect. [See attached Fact Sheet 1 for details.]

12   "Looking forward, our key challenge is to follow through on the initiatives introduced in the last 18 months and build on the momentum created thus far. MAS will continue to strengthen its supervisory framework and build up its risk-based supervision capabilities. We will also work in partnership with the financial community to explore new ways to further develop the financial centre", said Mr Koh.

PLAYING OUR PART IN THE INTERNATIONAL FINANCIAL ARENA

13   MAS is preparing to play a more significant role in international discussions to improve the global financial system. It noted that information technology and globalisation of capital markets have made the international financial system more susceptible to shocks. As a leading financial centre that has a large stake in a sound and stable international financial system, Singapore has a natural interest in contributing to these important discussions.

14   MAS said that Singapore was well-placed to contribute to efforts to improve the international financial architecture. "We have experienced close-up the effects of the financial crisis in Asia. We understand how vulnerable emerging market economies are to destabilising capital flows. Nevertheless, we have always supported an open global trading and financial system and a liberal approach to markets. We thus hope to participate in developing a consensus on how to preserve the benefits of free capital flows and unfettered markets, while strengthening international surveillance of vulnerabilities, and promoting prudent behaviour by financial institutions through international best practices", said Mr Koh.

15   Singapore has been invited to join the Financial Stability Forum (FSF), set up by the G7 Ministers of Finance and Central Bank Governors to help foster a more stable international financial system. The FSF has been tasked with (a) assessing vulnerabilities affecting the global financial system; (b) identifying and overseeing action needed to address these vulnerabilities; and (c) improving co-ordination and information exchange among the various authorities responsible for financial stability. Singapore will be represented by Mr Koh.

16   Last year, MAS participated in numerous international and regional fora and hosted several key international events pertaining to the Asian financial crisis and macro-prudential issues. [See attached Fact Sheet 2 for details.] "We look forward to contributing more to international efforts to foster a more stable and robust global financial system," said Mr Koh.