Published Date: 30 September 1998

Speech by DPM Lee Hsien Loong, at Nomura Securities "Singapore Seminar", Tokyo, Hotel New Otani

Date: 30 Sep 1998

1   I am happy to see a strong attendance at today's Singapore seminar. This is a time of great turbulence in the world economy. What started as a localised problem in Thailand last year first grew into a regional crisis, then affected other emerging markets, and now poses risks to financial institutions in the US and Europe. New developments occur almost daily.

2   Japan is a key player in the world economy. It has a major stake in the health of the global system, and can make an important contribution to its stability and recovery. Japanese institutions are global players. You need to track closely what is happening abroad, and where the opportunities are.

3   I therefore propose to explain how we in Singapore see the situation in the region, and what we are doing to secure our position and keep Singapore's own economy sound and competitive.


4   Although many Asian economies are facing difficulties, their situations are not identical. They have different problems, and are adopting different approaches towards recovery.

5   Thailand and South Korea are following IMF prescriptions most closely. They have made some progress cleaning up their banks and rescheduling foreign loans. They are now tackling structural reforms, but the task will not be easy.

6   Indonesia faces a more complex and urgent situation. The IMF and World Bank now play only a supporting role. Indonesia's priorities are to feed the population, restore law and order, follow through the political transition to establish a strong and effective government, and stabilise their economy. These are fundamental issues which the Indonesians have to decide and solve for themselves.

7   Malaysia's economic situation is much better than Indonesia's, despite problems in the corporate sector and with non-performing loans of banks. Malaysia has rejected the orthodox IMF approach. It has imposed stringent exchange controls, lowered interest rates, and instructed banks to increase lending and reduce interest margins. The Malaysian government hopes to save important companies which it believes are fundamentally sound, but have been undermined by what it feels is an unjustified fall in share prices and the exchange rate.

8   Hong Kong does not have excessive foreign borrowing or unsound banks, unlike the other countries. However the Hong Kong dollar peg has made its economy less competitive compared to its neighbours, whose currencies have all depreciated against the US dollar. The Hong Kong government is determined to defend the peg, which has been an anchor of stability for the economy for the past fifteen years. Although the cost has been high, I believe the alternative would be even more painful at this time.


9   Singapore has also been hurt by the downturn in region, but less badly than our neighbours. Like Hong Kong, we do not have excessive foreign borrowing or unsound banks. But whereas Hong Kong's problem is caused by its high exchange rate, Singapore's is caused by our close inter-dependence with the other economies of SE Asia which are in difficulty. Because our economy is so small and open, the drastic changes in external economic conditions have immediately affected Singapore.

Basic Approach: Rely on Market Forces

10   We must adjust quickly to this new environment. We cannot afford to put off needed changes, or do nothing and hope that the problem will go away. Our fundamental approach towards economic development has not changed: to rely on market forces, allow free capital flows, encourage foreign investments, and plug ourselves into the global economy. The Government cannot decide which companies deserve special help, conduct "price keeping operations" to prop up the share market, or artificially sustain industries whose products are no longer in demand.

11   However, the Government is not helpless or inert. It can and will ensure supportive fiscal and monetary policies; take steps to reduce businesses costs, in order to help all firms tide over this difficult period; and get Singaporeans to understand what is happening, and to work together to overcome this challenge.

Short Term: Cost Cutting

12   Because our economy is so dependent on external demand, we cannot pull ourselves out of the downturn by stimulating domestic spending. Instead we have to make ourselves more competitive internationally, especially against countries which are our major competitors in third markets.

13   The Singapore dollar has depreciated less than other Asian currencies against the US dollar. This will affect our competitiveness relative to theirs, although investors have to consider many other factors besides the exchange rate when deciding where to invest. However, it would not be wise for us to attempt to strengthen our competitiveness by pushing down the exchange rate. This would undermine confidence in the Singapore dollar, with grave consequences.

14   Instead we must carry out direct cost reduction measures. The National Wages Council, a tripartite committee that brings together unions, employers and the government, had recommended wage restraint, in its guidelines for this year. However, since June, when this recommendation was made, the situation has worsened. The Government has therefore reconvened the Council to revise its guidelines. It should report within a month.

15   At the same time, the Committee on Singapore's Competitiveness, chaired by the Minister for Trade and Industry, is now studying comprehensive measures to reduce business costs decisively. These should include government taxes and charges; land and utilities costs; and wage costs, including CPF contributions. The Committee should report before the end of the year.

16   Over the last few months, the government has explained to Singaporeans the importance of staying competitive, and the need to tighten belts. Singaporeans know that it is better to accept smaller bonuses, lower wage increases, and even wage standstills or reductions, than to risk more retrenchments and higher unemployment.

17   Our last recession was in 1985. On that occasion, we found great difficulty in reducing wage costs. High wage increases during the boom years of the early 1980s had been built into fixed wages. Workers expected these to be permanent and had planned on that basis. The increases could not be cut back when conditions changed and companies could no longer afford to pay as generously. As a result we suffered a sharper recession than we needed to.

18   Following this experience, we decided that we had to make our wage system more flexible, so that employers could pay more in good years but trim back in bad years. This way, companies could weather economic ups and downs more resiliently, and thus help workers to keep their jobs. We call it the flexi-wage scheme. Therefore since then we have built up variable payments like bonuses and profit sharing formulas, with the full cooperation of employers and unions. These variable payments now form 16% of total wages.

19   The present situation is precisely what the flexi-wage was designed for. After many years when flexi-wage has meant being flexible upwards, we now need to use flexi-wage to reduce wage costs. The indications are that wage costs will decline on average by 5-8% this year, because of the scheme. This is a valuable contribution to cutting business costs and making companies more viable. This is only possible because we had put the scheme in place in good times.

Long Term: Economic Restructuring

20   Although cost cutting is essential, it cannot be our only solution for the long term. We aim to enable Singaporeans to become more productive and skilled. This way, they can earn better wages, and not compete on wage costs against unskilled workers in other countries who earn one tenth or less of Singapore wages.

21   Therefore in the midst of the crisis, we are carrying out economic restructuring and making strategic shifts to prepare for the future. The global driving forces of rapid technological change and fierce borderless competition have not abated, despite the current economic problems. We must stay abreast of these developments, and not be overwhelmed with immediate fire fighting. Our relatively better economic situation, compared to other countries, gives us the opportunity to do so.

22   We are working to enhance our attractiveness as a regional and international business hub. Manufacturing and services sectors remain the twin engines of growth. We intend to keep the manufacturing sector competitive, and not allow our industries to be hollowed out as Singaporean incomes rise and foreign competitors upgrade themselves. While we continue to push for higher technology and higher value-added activities, we will also help older industries to upgrade and stay viable.

23   We are investing heavily in education, and in training and retraining workers. We are providing students of all abilities a first class education, under what we call the "Thinking Schools, Learning Nation" programme. The aim is to produce citizens who can be productively employed, and imbue them with the ability and the mindset to continue learning and upgrading themselves all their working lives.

24   We are also helping to reskill older, less well-educated workers. They are at greatest risk of losing their jobs and being unable to find new ones. In this, we have the whole-hearted support of the unions. Many developed countries have tried to do this. Their experience suggests that the task will not be at all easy. But unless we mount a strong effort, we will face a difficult problem of structural unemployment.

The Financial Sector

25   We are also thoroughly revising our strategies to develop the financial sector, to make Singapore a leading financial centre in our time zone. We intend to foster a more competitive, dynamic and innovative environment for the financial industry. As the Asian crisis has amply demonstrated, we must maintain the high standards of integrity and sound financial management that have become associated with Singapore. But we can do this while allowing the private sector to play a larger role.

26   We have shifted our emphasis from regulation to supervision. We are relying less on setting strict "one-size-fits-all" rules, but focusing more on supervision to ensure sound internal controls and risk management systems. We are overseeing the financial sector with a lighter touch, accepting more calculated risks, and giving the industry more room to innovate and stretch the envelope. We are making our rules and regulations more transparent. At the same time, we are raising standards of disclosure, so that companies and financial institutions are subject to closer scrutiny, and market discipline can work properly to help protect investors.

27   We have worked out development plans for key financial activities. The Asian crisis has shown that economies need well-diversified funding mechanisms. We plan to develop our debt market, further liberalise and expand the offerings in the equity market, and strengthen the venture capital industry. These will provide funds with different maturity, catering to different types of companies and individuals with different risk profiles and needs.

28   We are also developing the asset management industry and supporting services. We have made the regulatory environment more conducive to fund managers, for example by relaxing the requirements for fund managers to qualify for the Investment Advisor licence1. We have enhanced the tax incentives to locate in Singapore, for instance by giving full tax exemption on fee income to fund managers who manage more than S$5 billion in Singapore. We have liberalised access to CPF funds through the CPF Unit Trust Scheme, by broadening the list of approved fund managers and relaxing the investment guidelines for CPF unit trusts.

29   We are placing out more government funds to be managed by the private sector. The Government of Singapore Investment Corporation has committed to place out S$25 billion to private fund managers in the next three years. Statutory Boards and Government-linked companies are being encouraged to place out their surplus funds. We are also open to new ideas, such as Real Estate Investment Trusts, loan restructuring, credit derivatives and other non-traditional products. We will develop the necessary infrastructure to support such new products and services where there is market demand.

30   To develop the debt market, we will encourage more issuance, bring in more investors, and attract more financial intermediaries to operate out of Singapore. We will issue more Singapore Government Securities and encourage the issuance of bonds by government agencies, especially agencies carrying out long term infrastructure development, such as the Land Transport Authority, Jurong Town Corporation and the Housing Development Board. In July, we issued S$1.5 billion worth of 10-year Singapore Government Securities to establish the benchmark yield curve for the bond market. We have also introduced new tax incentives to encourage the origination, structuring and trading of debt securities in Singapore.


31   Despite the gloomy outlook and bearish sentiment, Asia will eventually recover, although this will take some years. Singapore will continue to be affected by the region's problems, but our sound economy, plus the measures we are taking to reduce costs, sharpen competitiveness and build long term strengths, will enable us to pull through sooner than others.

32   This is not the first time we are in such a situation. In the 1960s, when we first became independent, we established economic ties with the developed countries, attracted investments, and expanded our markets in the US, Europe and Japan. We leapfrogged the region, and thrived. Now with the benefit of 30 years of economic development and nation building, we have the resources and the will to do it again.

33   Singapore is a good location from which to monitor investment opportunities in the region. I know that right now the Japanese economy and Japanese financial institutions face difficult and protracted problems. But I am confident that Japanese institutions have the resilience and staying power to weather this period, take a long view, and position themselves for the recovery, in Japan and the region. We in Singapore will work with you, rationally and pragmatically, to build a business environment that meets your needs.

1 Specifically, the minimum shareholders' funds have been reduced from S$500 million to S$100 million. The minimum global funds managed by the parent company has also been reduced from S$5 billion to S$1 billion.