DPM Lee's Reply to Parliamentary Question on Global Financial Crisis
Issues Raised in Parliament
ANSWER TO PARLIAMENTARY QUESTION ON: DPM Lee's Reply to Parliamentary Question on Global Financial Crisis
For Parliament Sitting on 12 Oct 98
Question: To ask the Deputy Prime Minister (a) whether the financial crises spreading over Russia and Latin America together with the near-collapse of the US hedge fund Long-term Capital Management signal a possible global financial crisis; and (b) what monetary policies and measures Singapore intends to put in place to stave off any adverse repercussions.
To ask the Deputy Prime Minister whether Government will consider taking steps to see that the investors' interest in the Central Limit Order Book System is protected.
Answer(a): 1 The Asian financial crisis has indeed become globalised. Through the inter-linkages of the financial markets, the crisis has affected even countries with strong policy regimes such as US and Europe. President Clinton himself has acknowledged that this is the "biggest financial challenge facing the world in half a century" 1. Among the G-7 countries, there is a greater sense of urgency and the recognition of the need for action with respect to the crisis.
2 However, there is no reason to be unduly pessimistic. The US economy remains robust and Europe continues to grow strongly.
3 In their latest meeting (3 Oct), the G7 nations have also expressed their commitment to promote financial stability and global economic recovery. The US, Canada and UK have pledged to maintain conditions for sustainable growth. The continental European nations have committed to implementing urgent structural reforms and reducing unemployment. Such measures will form the basis for a continuation of solid economic growth in the industrialised countries and thus support recovery in the rest of the world.
Answer(b): 1 Despite Singapore's strong fundamentals, we will not be insulated from developments in the world economy. This reflects the high degree of openness of the Singapore economy. In fact, external sources of demand account for almost two-thirds of the total demand for our goods and services.
2 Should the financial crisis worsen and lead to a widespread downturn in global economic activity, the expected recovery in Singapore and the rest of the Asian region will be postponed. Given our small size and heavy dependence on demand conditions in global export markets, we are restrained in our ability to pursue specific unilateral policy initiatives. We need to be realistic and recognise that ultimately the external environment must improve before an enduring economic recovery in Singapore can take place.
3 Nevertheless, the government will take the necessary steps to help alleviate some of the short-term pain as the economy adjusts to the shock of the financial crisis.
4 On exchange rate policy, the Monetary Authority of Singapore has been managing the Singapore Dollar exchange rate with greater flexibility. The objective is to maintain price stability with a view to ensuring the conditions for sustainable economic growth.
5 On fiscal policy, the government is pursuing somewhat more expansionary policies, for example, in increased spending on economic infrastructure. However, because our economy is so dependent on external demand, we cannot hope to pull ourselves out of the downturn by just stimulating domestic spending.
6 Thus, the main focus of the government's response is on reducing business costs in Singapore, with a view to sustaining our competitiveness. The Committee on Singapore's Competitiveness is undertaking a comprehensive review of measures to reduce business costs decisively and its recommendations will be ready by the end of the year.
1 Clinton's Speech to the Council on Foreign Relations, 14 Sep 98