Annual Report 2001/2002


Chairman's Statement

Chairman

2001 was a difficult year for Singapore. Hit by the sharp global IT downturn and the slowdown in the global economy, Singapore slipped into its worst recession since the mid-1980s. September 11 further dampened the already bleak outlook. As a result, the economy contracted by 2% in 2001.

Faced with a rapidly weakening economy, in July 2001 MAS shifted its monetary policy stance from a gradual and modest appreciation of the Singapore dollar to a neutral exchange rate policy. In October, as prospects worsened, MAS widened the policy band to allow for greater flexibility in managing the exchange rate.

After the initial shock, financial markets stabilised. At the beginning of the year, MAS narrowed the policy band while maintaining a neutral policy stance. The global economy, led by the US, is now showing clear signs of recovery. Reflecting the improved external environment, the Singapore economy has rebounded in the last two quarters. We now expect GDP growth of 2% to 4% in 2002.

Despite the economic uncertainties, MAS pressed on to further liberalise the financial sector. One significant development is the consolidation among the local banks. Well-executed integrations will produce a core of larger and stronger local banks, enjoying greater scale. Strong local banks, competing with quality international banks in a liberalised environment, will foster a more dynamic market and offer better services to consumers.

In June 2001, MAS announced a major package to further liberalise the domestic banking sector. MAS freed up the wholesale banking market and committed to upgrade progressively all Offshore Banks to Wholesale Bank status. Fifteen banks were awarded wholesale banking privileges in December 2001. Another five Wholesale Bank licences will be made available in 2002. We also enhanced the Qualifying Full Bank (QFB) privileges, and awarded QFB status to two more foreign banks, in addition to the four that received QFB status in 1999.

MAS further liberalised the Singapore dollar non-internationalisation policy to ease access to Singapore dollar credit by non-residents wishing to invest in or tap our capital markets.

MAS has now exempted all individuals and non-financial entities from our borrowing restrictions. Non-resident financial entities are still governed by
the non-internationalisation policy, but we have lifted restrictions on foreign exchange options, asset swaps, cross-currency swaps and cross-currency repos. Financial institutions may lend any amount of Singapore dollar-denominated securities in exchange for Singapore dollar- or foreign currency-denominated collateral.

The calibrated pace and cumulative effect of the liberalisation measures over the last three years underscore our intention to broaden and deepen our foreign exchange, equity and debt capital markets, without compromising our ability to manage the Singapore dollar within its trade-weighted policy band. Hence, we have maintained the core stance of our Singapore dollar non-internationalisation policy, and still disallow non-resident borrowing of the Singapore dollar purely for currency speculation.

The changes to the Singapore dollar rules have increased participation by international investors and financial institutions in our capital markets. The debt market continues to grow strongly, with a record $72 billion worth of corporate debt issued in 2001. More foreign companies have been listed on the Singapore Exchange (SGX).

MAS continued to strengthen its regulatory and supervisory framework in step with consolidation and liberalisation of the financial industry. The Securities and Futures Act and the Financial Advisers Act came into force in stages over the first nine months of 2002. The new legislation is structured flexibly to encourage innovation and consistency in regulation, and foster higher professional standards.

MAS also introduced a new risk-based capital framework for SGX member-brokers, tailored more directly to the business risks of individual firms.

Corporate governance and financial disclosure standards were further enhanced. MAS now requires banks to change auditing firms every five years, in order to enhance audit effectiveness. We announced a new liquidity supervision framework, tailoring requirements to the liquidity profile and risk management capabilities of banks, as part of the broader move towards risk-based supervision. We are now developing guidelines to encourage banks and insurance companies to better manage firm-wide risks, in particular internal controls, credit, market and liquidity risks.

Against the backdrop of September 11, MAS remains fully committed to the national and global effort against money laundering and terrorist financing.

In terms of organisation, the Board of Commissioners of Currency, Singapore, will merge with MAS by 31 March 2003. We expect to formalise the merger by October 2002. This will give MAS the full range of central banking functions.

The financial landscape is continuing to change. MAS will continue to monitor developments in the global economy and participate in international financial initiatives. We will adopt flexible and adaptable supervisory regimes and actively consult with industry so as to enhance the dynamism and competitive-ness of our financial centre.

I wish to express my sincere thanks to Mr Chan Sek Keong and Mr Tharman Shanmugaratnam, for their many significant contributions to MAS and the financial sector. Mr Chan stepped down from the MAS Board in January 2002, having served as a member since 1992. Mr Shanmugaratnam relinquish-ed the post of Managing Director in October 2001, and remains a board member. I would also like to welcome Mr Chan Seng Onn to the Board.

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