Published Date: 04 May 1998

Address by Finance Minster, Dr Richard Hu, at the Inauguration of the IMF- Singapore Regional Training Institute, 4 May 1998 Restoring Credibility in Economic Management: The Strengthening of Institutional Capabilities


Mr Camdessus,
Your Excellencies,
Honoured Guests,
Ladies and Gentlemen,

I am pleased to be here on this occasion of the Inauguration of the IMF-Singapore Regional Training Institute or STI. I feel a personal attachment to this project, having first discussed it with Mr Camdessus in December 1996, over dinner at the MAS, and subsequently in February 1997, at the ASEAN Finance Ministers' Meeting in Phuket. We signed a Memorandum of Understanding on the STI in Hongkong in September 1997 and here we are today launching the STI.

2   I would like to congratulate both the IMF and the Singapore officials involved for the ease and speed with which the idea has been implemented. This is especially important against the background of developments in this region since mid-1997 which has highlighted the need for institutional building and training.

3   The East Asian financial crisis, when it erupted last July, caught many by surprise. East Asian economies did not fit the profile of some countries in Latin America which got into financial difficulties in the 1980s, in which the governments ran persistent budget deficits and then financed them by large scale offshore borrowings, or by writing cheques on the central bank. Instead, East Asian countries scored well on conventional macroeconomic indicators. They had high growth, low inflation and balanced budgets or budget surpluses. Unlike Latin America, the current crisis had erupted largely in the private, not the public sector.

4   My topic today, "Restoring Credibility in Economic Management: The Strengthening of Institutional Capabilities", points to the heart of the "puzzle" behind the East Asian crisis. If public institutions in East Asia - whether central banks or finance ministries - were found wanting, it is not because they pursued inappropriate macroeconomic demand management policies, but because they failed to safeguard financial system stability. Countries had rushed to liberalise their financial systems and capital accounts before adequate safeguards were in place.

5   All was well as long as capital continued to flow in. With strong inflows of capital and rising asset values, banks were flush with liquidity. They lent excessively to increasingly unproductive and speculative sectors of the property and stock markets. When capital flows reversed and asset prices plunged, collateral values collapsed and the banks were caught with substantial non-performing loans. Private companies had also borrowed excessively and short-term from overseas, without proper hedging and matching of maturities. In many cases, risk management and control mechanisms in the banks and companies were inadequate.

6   Even where risk management mechanisms were adequate, banks and companies were lulled into complacency by the macroeconomic policy environment. The authorities were sending wrong signals to the market in the form of an "implicit guarantee" of stable exchange rates. Attracted by lower interest rates in offshore markets, domestic banks and companies borrowed heavily overseas, and often at short-term maturity.

7   Institutional weaknesses not only contributed to the crisis, they also seriously impede the adjustment process. Opaque and outdated insolvency laws hinder quick resolution of non-performing loans, and cause banks to shrink from providing new loans to even good customers. Bankruptcy laws and court arbitration, which should facilitate the closure of insolvent firms and allow capital and labour to flow into more efficient uses, proved woefully inadequate.

8   East Asia urgently needs to build and strengthen its institutions so that they are robust to changing macroeconomic conditions, and can work well in both good times and bad. In particular, the principles of transparency and accountability are fundamental to the successful reform of institutions, both public and private.

9   East Asia has learnt, the hard way, that it does not pay to keep the markets guessing. Investors assume the worst when governments and companies are perceived to be withholding information. Late disclosure or failure to disclose data on banks' non-performing loans or companies' short-term debt, have all aggravated the crisis of confidence. The regulators must share some of the responsibility for this. Weak company and securities laws do not compel companies to make adequate disclosure. To ensure transparency, there must be adequate rules on disclosure, which helps to enforce market discipline.

10   East Asian countries have taken the lesson to heart. Bank Negara Malaysia now requires its banks to disclose non-performing loans and exposure on a quarterly basis, and subjects them to a monthly stress test. Here in Singapore, we have encouraged local banks to disclose their exposure to the regional economies, and we have set up a Committee on Banking Disclosure Standards, comprising mainly of private sector banks, to recommend ways to improve banking disclosure.

11   To be fair, East Asian institutions are not wilfully withholding information; rather, the infrastructure to gather information may not be in place. Indonesia, for example, did not have a system in place to gather comprehensive data on corporate external debt. But steps have been taken to remedy this. The Indonesian Government issued a decree on April 8 requiring companies to report on their external debts. Contraventions would be penalised.

12   The IMF is actively working with member countries to improve their information-gathering capability, and timely disclosure of macroeconomic data through the Special Data Dissemination Standard (SDDS).

13   It is important that East Asia does not see the drive towards transparency as an external imposition. Indeed, investors, both domestic and foreign, would welcome more disclosure of financial data by companies as it serves to reassure them of the soundness of their investments.

14  . Public institutions in East Asia can also draw on the experiences of other countries in the areas of transparency and accountability. The IMF is in the process of drafting a Code of Good Practices on Fiscal Transparency. Its key objectives are: roles and responsibilities in government should be clear; information on government activities should be provided to the public; budget preparation, execution, and reporting should be undertaken in an open manner; and fiscal information should be subjected to independent assurances of integrity.

15   East Asian countries can draw on and adapt these models and experiences to their own situation. Strengthening its institutional capabilities, both in the private and public sector, will take years, and will require the commitment of both politicians and bureaucrats. But it is an essential part of structural reform in East Asia. The reward of institutional reform will be for East Asia's public and private institutions to regain credibility in world financial markets; credibility which has been so badly battered in recent months.

16   I believe the STI will make an important contribution to helping East Asia face the challenge of institution building in this difficult time. The need for institution building applies to all Asian economies regardless of how little or how badly they are affected by the crisis. The STI will help countries in this region develop the capability to deal with the challenges of the 21st century, in a world of increasing financial globalisation and integration. Singapore is glad to be able to have the STI as a vehicle for our contribution of technical assistance to the region in this very important area.

I wish the STI success.