Good morning. Let me start with a review of the overall macroeconomic conditions in 2006 and in the first half of 2007.

Continued Strong Performance of the Global and Singapore Economy 

2   The global economy posted its fourth consecutive year of strong growth in 2006.  This provided the backdrop for the robust performance of the Singapore economy, which grew by almost 8% last year. The healthy expansion has continued into the first half of 2007. 

3   While the US economy is weighed down by the ongoing correction in the housing sector, growth has been firm in the other industrialised economies and Asia.  The Eurozone economy is holding up well alongside strong labour market conditions, while Japan’s continued expansion is underpinned by favourable business sentiment and good export performance.  The robust growth in China and India will drive intra-regional trade, creating positive spillovers across the rest of the region.  In ASEAN, economic activity has remained resilient, as growth in consumer spending and exports strengthen across most economies. 

4   Against these supportive external conditions, the Singapore economy grew by a strong 7.3% in H1 2007 (based on the Advance Estimates).  With the exception of the IT-related industries, the rest of the economy, including the financial services sector, performed well.  For the year as a whole, GDP growth will be underpinned by the ongoing expansion in the transport engineering and biomed manufacturing clusters, as well as the services sectors.  The domestic labour market remains healthy, with the unemployment rate at 2.9% (seasonally-adjusted) in Q1 2007.  Some 49,000 jobs were created during the quarter, after the record 176,000 jobs in 2006. 

5   Meanwhile, increases in consumer prices have generally been mild, with CPI inflation averaging 0.8% over the first half of this year.  However, business costs have risen alongside the strong growth in the economy, with some components including wages and rentals, experiencing more rapid gains recently.  With the 2% GST hike in July and some increases in the prices of food, transport and oil-related items, CPI inflation will pick up into the second half of 2007.  For the year as a whole, headline CPI inflation is expected to come within our forecast of 0.5-1.5%, albeit at the upper half of that range.  MAS will closely monitor the cost and price developments in the economy.

6   The economy has generally evolved in line with the assessment of growth and inflation prospects made at the time of the April Monetary Policy Statement.  The monetary policy stance of a modest and gradual appreciation of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) policy band announced in April, remains in place. 

Singapore’s financial sector

7   Financial services performed well. Growth in banking and insurance rode on the strong economic performance in the region, and increasing trade and investment within Asia and with countries in Europe and the US.  The Asian Dollar Market, in particular, benefited from the regional economic strength, spurred by robust trade financing and syndicated loan business.  Domestic credit activity also saw steady growth, supported by improved business loans to the building and construction industry and business services.  For insurance, total premium volume underwritten grew by 5.2% to reach S$13.5 billion for both the life and non-life business in 2006. The asset management industry grew strongly with another double-digit growth of 24% in assets-under-management to S$900 billion for the year 2006. The main drivers for this growth include continued investor interest in Asian markets as well as heightened demand for investment management services.

8   Domestic capital markets continued to deepen and broaden with a greater diversity of market players and products. As at April 2007, total market capitalization of stocks listed on SGX was over $720 billion, up 69% from end 2005. In the bond market, MAS issued the inaugural 20-year  Singapore Government Securities (SGS) in March 2007 to serve as a pricing benchmark for other long duration Singapore dollar interest rate products and to broaden the investor base.  As the first market in Asia to introduce a real estate investment trust (REIT) framework, Singapore is now the largest REIT market in Asia ex-Japan with 16 listed REITs and a total market capitalization of over S$27 billion. Based on our business trust regime introduced earlier, we saw the listing of the world’s first shipping trust, with another two following soon after.  The first infrastructure trust in Asia, also based on the Business Trust regime, was listed in February 2007. 

9   On the prudential supervision front, we continued to work towards strengthening the stability and resilience of our financial markets by enhancing our risk-based approach to supervision, and updating our regulatory framework in response to market developments. We also conducted in-house exercises to test our responses and preparedness in dealing with both potential operational disruptions and financial events. 

10   To provide greater transparency of our risk-based approach to the supervision of financial institutions, we published a monograph in April this year on the processes and methodology under our CRAFT (Common Risk Assessment Framework and Technique).  CRAFT sets out the framework used to assess the risk and impact of financial institutions we supervise across the banking, insurance and securities sector.  The publication follows refinements to our risk-based approach over the last two years, and reiterates the importance of the roles played by the board and senior management to ensure prudential soundness and professional market conduct of their institutions. 

11   We introduced new risk-based elements in the Banking (Amendment) Act early this year which enabled MAS to vary prudential requirements including liquidity and asset maintenance requirements according to the risk profile of an institution.  Following the introduction of deposit insurance last year, we have made further moves to strengthen our ability to deal with distressed financial institutions expeditiously.  The powers introduced by the Banking (Amendment) Act accorded MAS a wider role in a court-led liquidation process and a broader range of resolution options including the transfer of the business of a distressed bank.  MAS also conducted a major review of the capital adequacy requirements of locally incorporated banks. With effect from 1 March 07, we lowered the Tier 1 capital requirement from 7% to 6% and allowed a wider range of Tier 2 instruments.  The move allowed the banks to manage their capital more efficiently whilst continuing to meet our prudential standards.  We continue to work closely with the banks on the implementation of Basel II in Singapore.  The Basel II standard-setting process is in its final stages.  We have conducted a series of consultations on the draft standards over the past year.  These standards will come into force on 1 January 2008.   

12   We have finalised the policy positions to implement a Nomination of Beneficiaries framework for insurance policies, incorporating feedback received from a public consultation conducted in December 2005. The framework aims to give policy owners greater choice and flexibility in the disbursement of their policy proceeds, and make the process of nominating beneficiaries clearer.  A consultation on the draft bill to give effect to the new framework will be released shortly.  In addition, we are reviewing the scope and coverage of the Policy Owners’ Protection Fund as well as the operational details of the fund to ensure that it continues to provide adequate protection to insurance policy owners.

13   Efforts to clarify and streamline regulatory responsibilities continued during the year. On 1 September 2007, oversight of corporate governance of listed companies will be transferred from the Council on Corporate Disclosure and Governance to MAS and the Singapore Exchange. The approach is consistent with that taken in other sectors, where the sectoral regulator takes responsibility for the oversight of governance.

14   MAS continued to work with the industry on achieving good market conduct practices.  We conducted our first mystery shopping survey in 2006 to determine the quality of practices of our financial advisory industry and released findings from our review of financial advisors’ controls to monitor improper switching of investment products. We are following up with the industry on our recommendations.  Over the year the financial industry associations and professional bodies have undertaken a number of initiatives to improve standards of professionalism and market conduct in the industry.  They have also actively supported the MoneySense national financial literacy programme.  MAS welcomes these industry efforts.  Financial institutions, individually and collectively, should continue their efforts to address emerging market conduct and consumer issues at an early stage before they develop into broader issues of public concern.  MAS will continue to partner the industry on financial education initiatives under MoneySENSE to help consumers make well-informed financial decisions.

15   On currency, $5 polymer notes were introduced into circulation in May this year. This follows the release of $2 polymer notes in 2006 after favourable public response to a limited number of $10 polymer notes introduced earlier in a pilot.  More $10 polymer notes would be issued from 2008 when the stock of paper notes is depleted. Singapore and Brunei also celebrated the 40th Anniversary of the Currency Interchangeability Agreement (CIA) between the two countries.  The CIA ensures full interchangeability of each country’s currency notes at par.  Prime Minister Lee Hsien Loong and the Sultan of Brunei reaffirmed the Agreement by jointly launching $20 commemorative notes in June.

Annual Accounts

16   On our financial statements, MAS recorded a net profit of S$3.85 billion for the financial year, comprising mainly interest income and gains from asset markets, partially offset by the foreign exchange impact from the strengthening of the Singapore dollar. Total assets, including the Currency Fund, grew by S$12.29 billion during the year to S$218.21 billion at end-March 2007.

Remaining Vigilant

17   Barring any unforeseen circumstances, 2007 should continue to be a good year for the Singapore economy and for the financial sector.  The outlook for growth is positive, while inflation is expected to remain contained.

18   Nonetheless, we continue to remain vigilant in the face of a number of risks in the global economic and financial environment. These include upside surprises to inflation from higher commodity prices, weaker–than-expected growth in the US following from a more severe unraveling of its sub-prime market and potential heightening of geopolitical tensions around the world. The problem in the sub-prime market has led to an increase in risk aversion in the credit market, particularly in structured products. If the risk aversion were to spread, there could be a sharp spike in volatility across various asset classes and markets.

19   These risks concern central bankers and regulators.  If they materialise, the Singapore economy and domestic financial markets will not be immune from the spillover effects of such developments.  This is why MAS puts a lot of emphasis on robust risk management in the financial sector and has devoted more resources to build our knowledge and capability in this area. We will continue to work closely with the industry to identify vulnerabilities and threats to financial stability through macro surveillance and stress testing.  MAS’ focus in the coming year will continue to be driven by our mission of supporting non-inflationary economic growth, and fostering a sound and reputable financial centre.

***