Published Date: 30 July 1998

Speech by DPM Lee Hsien Loong to IMD Alumni:"The Asian Financial Crisis: Challenges to Business Management"at Shangrila Hotel

Date: 30 Jul 1998


1   May I welcome the IMD Alumni to Singapore. You visit at an eventful time. The economic turmoil in Asia provides a thought provoking backdrop for your discussions. The Asian crisis is a vivid case study of how things can go rapidly wrong. Many analyses have been published on the causes of the crisis. But whatever the causes, as executives you have to take the situation as it now is, and move forward. Your primary concern will be how to tackle the challenges presented by the crisis, and guide your organisations safely through it.

2   I wish to share with you my view of prospects for the Asian economies, and offer some suggestions, drawn from Singapore's own experience, on how companies might tackle the business challenges.


3   The prospects for Asia depend on the performance of the largest economies, Japan and China, as well as developments in the individual countries which are in difficulties.


4   Japan is the economic superpower in the region. It is a major source of investments and technology, and a major market for the other countries. Its prolonged economic slump and despondency is a drag on the region. If the Japanese government succeeds in boosting economic growth and restoring business confidence, economic prospects across the region will improve. If not, the yen will remain weak and threaten the stability of financial markets in the region.

5   Successive Japanese governments have announced a series of fiscal measures to stimulate the economy, and plans to clean up and reform the banking sector. But financial markets remain sceptical about the government's commitment to reform and the pace of implementation. Lack of credibility is the big stumbling block to restoring consumer confidence and hence domestic demand. The new Prime Minister Obuchi has expressed his determination to put right the Japanese economy. He has persuaded former Prime Minister Miyazawa, an elder statesman, to come out of retirement and serve as his Finance Minister. All of Asia hopes that he will succeed.


6   China's economy is not quite as interlinked to the regional economies as Japan's. Nevertheless, the sustained high growth in China, triggered by the economic reforms, has been a major factor in the mood of optimism that pervaded the region until this crisis. Thus far the China has managed its economy with impressive competence. Although exports have slowed down, China's external position remains strong. China has large current account surpluses, strict controls on the capital account, and foreign reserves holdings of US$140 bn. However, the economy is clearly slowing, with GDP growth in the first half of 1998 at 7%, below the government's target of 8% for the year. Urban unemployment has risen to almost 6 million (3.1% of the urban labour force). The restructuring of the state-owned enterprises and the reforms to the financial sector have caused another 12 million workers to be laid off (xiagang). The strong external position gives the government some scope to stimulate domestic demand, although there is a limit to its capacity to do this.

7   China's ability to maintain the value of the renminbi is critical. Senior Chinese leaders have repeatedly reaffirmed their commitment not to devalue the renminbi. This has been a stabilising influence on the region. However, the slowing Chinese economy and the weakening Japanese yen has increased the pressure on China. An official newspaper in China has reported that China had warned the US that it would be forced to devalue the renminbi if the Japanese yen continued to weaken. Separately, Taiwan's United Daily News reported on 23 July that Premier Zhu Rongji intended to issue three important directives on the renminbi issue at the annual central working committee meeting in Beidaihe. The first directive was to do everything possible to stabilise the exchange rate, to insist that it will not be devalued, although this did not mean that it will never be devalued. According to the newspaper, once the financial crisis eases, 'when the major currencies of Asia (such as the yen) turn round fully', the renminbi may be allowed to be devalued appropriately.

8   In Shanghai, the black market rate for the renminbi has fallen by 5% because the market fears a possible devaluation. If this happens, the region is in for another round of currency instability, this time transmitted through the Hong Kong dollar.


9   In South Korea, Thailand, Indonesia and Malaysia, the economies are contracting. They have difficult paths to recovery. In economic issues, they need to recapitalise banking systems and corpo-rations, rollover foreign debt, strengthen financial supervisory capabilities, and improving the quality and transparency of corporate governance. But the issues are not only economic, but also social and political. Political stability and confidence are prerequisites for restarting stalled economies and interrupted trade and investment flows. Several of the countries have seen changes of government, while Indonesia is still in the midst of political transition.

10   Singapore, located in the middle of the region, has been seriously affected by the instability and downturn, even though our own economy is basically sound. We hope that the countries will successfully overcome their problems, daunting as they appear. Favourably external conditions and assistance will help, but the problems cannot be solved from outside. Essentially the countries have to put their own houses in order. Progress will vary depending on the manner in which they implement reforms, but I am confident that recover they eventually will.


11   The Asian financial crisis has generated greater uncertainty and challenges that companies will need to manage.

12   First, the business environment has sharply deteriorated. Consumer confidence has been hit by the regional economic slowdown, rising unemployment, and the drastic fall in asset values. Companies have been burdened by high interest rates, exchange losses, and a credit crunch.

13   Second, demand has slumped in Asian markets. This has badly hurt companies which primarily serve regional markets.

14   Third, the infrastructure for business has broken down in some of the worst-hit countries, making it impossible to conduct business as usual. Unsound banks are unable to extend credit. Trade financing for imports and exports is no longer forthcoming. The mutual trust and confidence that underpins business has been broken.

15 Fourth, the risk of political and social unrest has grown.


16   There are lessons from the crisis that apply both to corporates and to governments.


17   Severe as this crisis is, it will in time blow over. When it does, there will be new openings for corporations to participate in the recovery and renewed expansion of the Asian economies. MNCs should take a long view of Asia's potential and prepare themselves for the next wave of economic growth. Companies which are resourceful and go for the fundamentals can still find rewarding opportunities.

18   Doing business in Asia requires ground knowledge and trust. Companies that pull out of the market and return later may lose whatever they did in the past to establish a presence. Financial institutions who become known as fair-weather friends will soon lose customers. Companies which stay through thick and thin will establish long term goodwill which will eventually pay off handsomely. For example, companies which invested in China soon after the June 4 Tiananmen incident in 1989, like Motorola, not only secured favourable terms, but gained lasting goodwill from the Chinese.


19   The economic crisis has also brought home the timely lesson that corporations and countries have to get their fundamentals right. In the euphoria of the Asian boom, many corporates suspended normal approaches to risk assessment. They poured money into property development, excited by the sharp rise in asset values and believing that these could only go in one direction, thus contributing to the current property bubble. Some companies relied on strong political connections as a guarantee against business losses. Peregrine, Asia's largest homegrown investment bank, collapsed because it gave a loan worth most of its firm's net worth to a single Indonesian client, a taxi company, that it believed was incapable of going bust. Companies took on so much debt that when interest rates rose and equity values fell, it was enough to cause the companies to go under.

20   The last year has shown that business in Asia are not exempt from "normal" rules. Corporates are subject to the same financial and economic constraints and risks as in America or the EU. Production must take into account cost efficiency of operations; balance sheets must be sensibly structured; project viability assessments must be robust. This will be no surprise to IMD alumni, but unfortunately most Asian businessmen did not have the benefit of the training you have.


21   Economists and analysts are still arguing over whether the Asian crisis could have been predicted. Certainly, anyone who forecasted 18 months ago that 6 significant Asian economies would experience negative growth this year would have been laughed off the stage. Many hedge funds did not, and were long in the Asian currencies when the market crashed.

22   But the crisis did happen. Tectonic shifts in the environment are possible, and can change the business proposition overnight. Not all developments can be anticipated, however sophisticated the models and careful the planning and projections.

23   Companies need the right mindset to anticipate and deal with discontinuities. Traditional strategic planning methods assume a business-as-usual environment and extrapolation of existing trends. They seldom predict a discontinuity, or work in a turbulent environment. Some of the canniest companies like Royal Dutch Shell use tools like scenario planning to help them better prepare for major shifts in their business environment. Shell scenario planners anticipated the OPEC oil shock and the collapse of the Soviet Union.

24   Once the environment has changed, whether or not predicted, companies need the courage and realism to respond vigorously to the new situation. It is understandable that when difficulties first strike, everyone is shocked and uncomprehending. It is human nature to be in denial, refuse to believe that this is happening to you, and to hope that the problems will go away.

25   Bankers with experience of the Latin American debt crises tell me that it takes 18 months to two years after a crash before companies and individuals and can psychologically accept that things have changed, and that the old values of assets and investments have been wiped out forever. This explains the delay in banks disposing of bad loans, companies bringing in new capital, and countries shifting gear to pick up the pieces and press on.

26   It is unlikely that Asia can be completely exempt from these human frailties. But the sooner we accept the new realities, and work on the basis of the world as it is, rather than the world as we wish it were, the faster we will fix the problems and recover.


27   I would like to illustrate with a few examples how we have tried to follow these principles in Singapore. We have not invariably been successful, much less do we have answers to all our problems. But nevertheless these principles have helped us to make fewer mistakes than otherwise.


28   For Singapore, taking the long view has meant putting in place the foundations that assure our longterm growth. We need to continue to do this even during the current turmoil, because the global trends of restructuring and leveraging IT will not wait for Asian economies to get over our difficulties.

29   Hence, we are investing in economic infrastructure and the training and education of our people. We are promoting new investments, which will bring new technologies, markets and jobs in the next few years. We are pressing ahead with our strategy to revamp and reposition Singa-pore's financial sector to sustain its competitive position as a leading financial centre in the Asian time zone. We have shifted our approach to regulation and supervision, and embarked on initiatives to deepen and broaden the capital markets in specific asset classes and develop capabilities in different types of financial activities.


30   In terms of fundamentals, we have striven hard to maintain macroeconomic and financial discipline, even in good times. Our prudent fiscal stance gave us a strong budgetary position. High savings rates and current account surpluses helped build strong reserves which acted as ballast and gave confidence when the market turned volatile. High standards of prudential regulation and supervision helped build a sound and robust financial system which investors trust.

31   We have also sought microeconomic efficiency, pursuing policies that promoted private enterprise and fostered a conducive business environment. We encouraged the use of the market mechanism as the basis of allocating resources, be it industrial land, labour, or precious road space in a congested city.

32   From time to time we make mistakes too, although we try to learn from them. For instance, when the region soared, Singapore too experienced a property boom, which threatened to develop into a dangerous bubble. For a time companies and individuals alike were carried away with the belief that property development and sales yielded higher returns than investments in other productive businesses. Fortunately we pricked the bubble in 1996, a year before the crisis struck, but in hindsight not soon enough. We now have a property overhang, far less serious than in other countries, but that is small consolation to our developers.


33   We have tried to get our population to anticipate change, to prepare them for an uncertain and unpredictable world. We have set up committees and project teams, involving the private sector and the community, to think about our problems and anticipate what the world will be like, beyond the immediate the future. We use scenario planning tools to help us think through major challenges ahead. We discuss major issues as candidly and widely as we can, often with the entire population. For example, every year the Prime Minister addresses the nation at national day, explaining live on television the problems that preoccupy the leaders and possible ways forward. When every citizen understands the issues at stake, it is easier to change course when necessary, while maintaining cohesion and the support of the population.


34   The lessons from the current economic turmoil are painful but precious. The countries and companies that learn and apply them will ultimately become leaner, stronger and more competitive. The region still offers opportunities in the midst of the crisis. Now is the time to explore the region, albeit carefully and in a considered way, and not to leave the region.

35   I wish you a happy visit to Singapore and fruitful discussions at the seminar.

36   Third, to support the development of a mortgage-backed securitisation market in Singapore, we will allow banks to transact Singapore Dollar currency swaps and interest rate swaps with Singapore-incorporated Special Purpose Vehicles, as long as the proceeds are for the express purpose of securitising mortgages of financial institutions in Singapore.

37   MAS will issue today the new Notice MAS 757, setting out the revised implementation of MAS' policy on the internationalisation of the Singapore Dollar.

38   We do not plan to change our policy on the non-internationalisation of the Singapore Dollar in the foreseeable future. As a small and open economy, we cannot afford to have our currency subject to manipulation or speculation. Even if the attacks ultimately fail because of our sound fundamentals, they may still do us considerable harm.

39   But so long as the stability of the exchange rate is not compromised, the actual implementation of the non-internationalisation policy will continue to evolve as we gain experience with the new rules, and as our financial sector and capital markets grow and develop. The provisions in the new MAS 757 are therefore not final or permanent. MAS will review them after one year, in the light of practical experience.

40   In contrast to these changes to the soft infrastructure of the financial sector, we can afford to be bolder in upgrading the hardware of our financial sector. Up to date technology and systems will enhance Singapore's competitiveness as an international financial centre. MEPS will make our payments infrastructure more efficient and robust, and facilitate our integration into the global financial system. It is my pleasure, therefore, to officially launch the MAS Electronics Payment System.