The past year was extremely challenging for central banks around the world. From an environment of strong inflationary pressures in the first half of 2008, the global economy plunged into its worst recession in the post-war period late last year, as key segments of the financial system seized up and trade collapsed.
Singapore, being open and highly dependent on trade, was badly affected by these external developments. After several years of rapid growth, the economy experienced its deepest recession in late 2008 and early 2009. By the first quarter of this year, output had fallen by around 10% from its peak. Notwithstanding this, the domestic financial system remained resilient. Confidence in the Singapore dollar stayed strong.
Recently, global macroeconomic conditions have begun to improve. The unprecedented fiscal and monetary measures adopted around the world have helped to ease the credit crunch and stem the freefall in economic activity. Domestic economic conditions have also started to improve. Nonetheless, the sustainability of the recovery is still uncertain. Much will depend on the strength of the rebound in final demand in the developed economies.
Taking into account the weak growth prospects and moderating inflationary pressures, MAS eased its monetary policy in October 2008 and April 2009. These policy responses were appropriate for maintaining price stability over the medium-term.
Amidst this global financial and economic crisis, Singapore's financial system has remained healthy. Our banks have very low non-performing loans (NPLs), minimal exposure to toxic assets, and are well-capitalised and sound. We escaped the worst partly because our financial institutions and our supervision of them have been relatively more conservative. They did not venture too far into complex instruments.
Thus, Singapore did not have to take extraordinary measures to maintain stability in the financial system. Nevertheless, following announcements by other jurisdictions of blanket government guarantee on deposits, Singapore followed suit to ensure a level playing field for banks in Singapore. The Singapore Government announced on 16 October 2008 its guarantee on deposits of individuals and non-bank customers of banks licensed in Singapore, which will remain in place until 31 December 2010.
On 30 October 2008, MAS established a swap facility with the Federal Reserve Bank as a precautionary measure to reassure financial institutions in Singapore that they would have access to US dollar liquidity in the midst of global US dollar funding shortage at that time. Market confidence was boosted by the assurance of access to US dollar liquidity in the Singapore dollar money market. In addition, MAS kept a higher level of liquidity in the banking system through its market operations and enhanced its monitoring of market functionality through closer contact with financial institutions.
The ongoing crisis has brought into sharper focus the need for MAS to leverage on our structure as an integrated financial supervisor to ensure the safety and soundness of financial institutions. MAS maintained heightened vigilance on international financial developments and the channels through which these developments could affect us. We further strengthened prudential oversight of financial institutions' risk exposures and risk management while still keeping the onus of risk management responsibility primarily within the financial institutions. Besides regular discussions with the management, board and auditors of financial institutions, we also continued to emphasise the importance of stress testing as a tool to assess potential risks to financial institutions' soundness.
The global financial crisis led to the default or early redemption of several credit-linked structured products in Singapore. Many investors were adversely affected. MAS promptly took measures to require the affected financial institutions to review complaints in a serious and impartial manner. At the same time, we investigated into allegations of breaches of the law, inadequate internal controls by distributors of the products and poor sales practices by their representatives. MAS has undertaken a review of the regulatory regime for the sale of investment products to further safeguard consumers' interests, and issued fair dealing guidelines to financial institutions.
Talent development remains a key focus of MAS in the current downturn. We encourage such efforts through the enhancement of the Financial Sector Development Fund's existing training schemes. MAS also launched a new scheme to catalyse the creation of job and attachment opportunities for fresh graduates. Singapore has also made good progress in the area of Islamic finance, with MAS successfully hosting the landmark 6th Islamic Financial Services Board (IFSB) Summit in May 2009 - the first time the event was held in East Asia.
The global financial landscape will likely be very different when we emerge from the crisis. We can expect significant and far-reaching changes in the global financial system. Financial institutions and regulators need to be alert to these changes. MAS will continue to remain vigilant and adhere to high standards of regulation and supervision. We will also continue to foster a vibrant and reputable financial centre in Singapore, one that serves the growing needs of Asia and is trusted for its integrity and efficiency.