Keynote Address by Mr Ong Chong TeeDeputy Managing Director, Monetary Authority of Singapore, at the Bank of America - Merrill Lynch Asian Stars Conference 2009
Good morning, ladies and gentlemen.
2 Allow me to first thank the organizers and Bank of America/Merrill Lynch for inviting me to speak in this Asian Stars Conference, which is the third one in consecutive years. One only needs to look back at the last 3 years – since this conference series started – to see the structural transformations in financial markets and in the investment environment.
3 Much has been spoken and written about the recent financial crisis, so I will not delve into the cause-and-effect of the financial ‘perfect storm’. Suffice to say, that the epicenter of a US sub-prime crisis that triggered the global financial tsunami still has its ripple effects and aftershocks felt today. While escalating commodity prices and inflationary pressures were the predominant concerns in the first half of 2008, fears of a global financial meltdown and the prospects of a worldwide recession gripped financial markets in the second half of last year. Indeed, following the collapse of Lehman Brothers, global liquidity virtually dried up as risk aversion reached extreme levels. Along with the erosion of asset values, the dislocation in credit markets caused the G3 economies to experience one of the sharpest contractions in the post-War period. Emerging economies including here in Asia were not spared either.
4 Global equity market capitalization lost over US$30 trillion at the lows of 2008 compared to their values 18 months earlier. To put this in another way, from the market peaks in 2007 to the recent lows, MSCI World declined 56%, MSCI Emerging Markets fell 59%, and MSCI Asia fell 61%. The Shanghai Composite alone plunged 72%. Yet from these recent troughs, stock markets worldwide appear to have rebounded strongly, by between 30 to 50% for the different indices; MSCI Emerging Markets and MSCI Asia rallied some 50% from the bottom last October. So there is now some cautious optimism about financial markets and economic prospects going forward. But there is some risk of overstating this market pullback because of the lower denominator effects. It is useful to place this market recovery in the context of the 2007 peaks. For MSCI-Emerging Markets and MSCI-Asia, we have now restored almost 20% of the loss in value from the 2007 peak. For MSCI-World, we have clawed back 13% of the steep decline, and for the Shanghai Composite, about 15% recovery.
5 So is the worst behind us? Are the ‘green shoots’ of recovery now firmly rooted and sprouting ‘green leaves’? I know we have a number of expert speakers in this conference that will be able to share their views and analyses on this subject. But allow me to share some general thoughts on the Asian macroeconomic outlook and particularly, mentioning the case for Singapore.
Asian Macroeconomic Outlook
6 For export-oriented Asia, a sustained and broad-based recovery depends on growth improving in the more developed economies. While there are tentative signs that the rate of contraction has moderated, the prospects for the region in the near term remain uncertain: the reduction in demand due to the sharp fall in exports will not be fully offset by government measures to support the domestic economy. Nonetheless, Asia’s fundamentals remain sound, helped by financial institutions’ limited exposure to troubled assets and households’ higher level of savings. By and large, the region’s banking and financial systems have strengthened significantly since the Asian Financial Crisis and they have weathered the current global financial crisis fairly well. This past weekend, the Asean+3 Finance Ministers announced a US$120 billion regional lending facility under the Chiang Mai Initiative to be launched by the end of this year, to further boost the region’s resilience.
7 In my view, Asia is still fundamentally a growth story over the medium to long-term. The Asia Development Bank’s forecast for Asia in 2009 remains positive at 3.4%, with 2010 expected to see growth of 6.0% if the global economy experiences a mild recovery next year .
8 This global downturn has presented Singapore with its most challenging external environment in recent history. Moreover, the recent outbreak of swine influenza has added a new dimension to the risks for GDP prospects in the immediate months ahead.
9 Singapore’s openness and trade-dependency makes our economy more susceptible to global headwinds. As a proportion of total demand, Singapore’s external demand has increased markedly over the last decade, from 70% in 1998 to 76% in 2008. How much has the external environment deteriorated? As an indication, countries accounting for 57% of Singapore’s exports are projected to be in full-year recession in 2009, compared to 50% in the 1998 recession and 5% in the 2001 period.
10 However, the same openness of the Singapore economy should also enable us to pick up more strongly than other countries when the global recovery eventually gets underway. An in-depth econometric study by MAS’ Economic Policy Department suggests that while Singapore is most susceptible to the initial impact of a common external shock among the Asian economies, it will also benefit the most from a recovery in external demand.
11 Singapore’s overall macroeconomic policy stance has adjusted to the cyclical conditions facing the economy. The Singapore government’s fiscal response has been decisive to help alleviate the burden of adjustment in the economy, even as the monetary policy stance emphasizes stability amidst the prevailing uncertainty in the external markets. On the fiscal front, an unprecedented Resilience Package amounting to 8.2% of GDP was announced in the latest Budget. This timely, large and targeted package included direct measures to save jobs, and enhance the cash flow and competitiveness of firms in the short-term.
12 In monetary policy, MAS re-calibrated the position of our neutral exchange rate policy band last month in our most recent Monetary Policy Statement. This is a sequenced and measured response to the external demand shocks confronting the economy, while maintaining price stability over the medium term that will continue to underpin confidence in the Singapore Dollar.
13 Some of you may have also read that MAS entered into an FX swap arrangement with the Federal Reserve with a swap line of US$30 billion created. The Fed also set up other swap lines, with 13 other central banks including Bank of England, European Central Bank, Bank of Japan, and Reserve Bank of Australia. With Singapore being a major funding centre, this arrangement will be helpful to global financial institutions operating here, to be able to continue to have access to US dollar liquidity. The Federal Reserve on its part also recognized the importance of an enhanced ability to provide US dollar liquidity round the globe through central banks in sound and systemically important financial centres. Since our swap arrangement, global US$ squeeze pressures have since alleviated and we have not had to use the swap line, nor see any impending need to do so. But this coordinated and precautionary measure has been helpful.
14 One area that MAS is focused on is in working closely with financial institutions and industry associations to build the pipeline of talent, to upgrade financial training and strengthen competencies. The MAS recently launched a programme to spur structured internship programmes for local fresh graduates in the finance sector over the next one year. In addition, training programmes under the Financial Training Scheme (FTS) will receive increased funding support and the Masters programme under the Finance Scholarship programme (FSP) has also been broadened to include more areas of studies.
15 These are all but some examples of what Government and MAS can do to help financial institutions and companies weather this financial storm and for the Singapore economy and our financial sector to emerge stronger. Singapore’s strong fundamentals built up over the past decades – strong balance-of-payment and fiscal positions, low levels of domestic and external indebtedness, will ensure that our underlying macroeconomic and financial stability remain intact. Most recently, a couple of weeks ago, Fitch Ratings has affirmed Singapore’s sovereign rating at “AAA” and maintains the ‘Stable’ outlook.
Equity as an Asset Class
16 Allow me now to briefly share some brief comments on equities as an asset class for long-term investors.
17 At a recent fund management conference here in Singapore, I shared an article that appeared in Financial Times a few months ago, that seemed to challenge the traditional view of the equity risk premium. This article quoted Peter Bernstein, the economics consultant and author, that equities, while generally seen as riskier than bonds, have actually not yielded higher returns, thus raising questions about the fundamental tenet of investing for the long run. Bernstein noted that equities – contrary to popular expectations - have in fact underperformed bonds in the last 5, 10 and 25 years. He also observed that the volatility of equity prices tend to increase, not decrease, as the time period lengthens – when studying prices over the last few decades.
18 So should long-term investors now shun equity investments? My own view of the conventional wisdom, that by passively investing in equities and sitting tight over many years, one will achieve superior returns, may not be true all the time. I think what Bernstein showed in his think piece, is that the other adage - “timing is everything” – is key. In other words, the point of investment entry matters. Since few of us can be independent of the broad market cycle, a crucial differentiator then is one related to that question of investment timing, that is, entry and exit. This relies on the investor’s knowledge, stock-picking acumen and the ability, as the title of the final segment of this conference states, to pick “the Right Stars”. Not just which ‘star’ to buy, but when to buy. Wealth managers that survive this financial market meltdown will be those that have displayed that strong investment ability and risk management processes that allow for “all weather” positive alpha rather than merely hugging the general market index performance. I am sure the speakers for the sessions in this conference will have much views and insights to offer.
Importance of Corporate Governance
19 There is another important set of lessons to be learnt from the market turmoil. In identifying star companies with the growth and revenue prospects to do well, a key factor that cannot be over-emphasized, is the quality of corporate governance.
20 This financial crisis has brought to light issues of fraud risks, bad business incentive practices, inadequate regulatory checks and insufficient transparency. Investors’ trust and confidence can disappear quickly but will take a much longer time to restore. It is not just about companies, such as India’s Satyam Computer Services that was implicated in accounting irregularities; but also supposed fund managers that actually ran Ponzi schemes. Using the downfall of fraudulent fund managers like Madoff as an example, the system of governance can easily fail when a manager can be his own fund administrator and broker. Some have also asked whether investors themselves, be it a fund-of-fund manager or a high-net worth individual, should also bear some responsibility for not carrying out more thorough due diligence when making an investment decision. This will be part of an ongoing debate but the direction is clear - all over the world, financial firms, publicly listed companies and fund managers will be subject to greater investor and regulatory scrutiny.
21 Singapore has a fundamentally sound corporate governance regime, which underscores our standing as an international financial centre. However, we are not immune to corporate governance weaknesses either, as seen by some news affecting a few listed firms on the Singapore Exchange. The need to further strengthen good corporate governance culture and practices will be an ongoing effort by all parties. For instance, the Singapore Exchange has stepped up its due diligence work on its listed companies as well as prospective companies seeking listing. The Exchange is also working with company auditors, independent directors and audit committees to place greater emphasis in identifying and reviewing high risk areas. In a similar vein, the Accounting and Corporate Regulatory Authority has issued an audit practice bulletin, reinforcing the importance of audit professionals to pay attention to heightened risk areas when conducting client audits. A recent strategic review of the Singapore Institute of Directors revealed that while Singapore companies in general show high corporate governance standards, there is scope for further enhancements to be made to the current set of governance practices of Singapore-listed companies. Some of its recommendations relate to a more holistic director-training curriculum. One of the findings from the review includes broader delivery methods for company directors such as specific discussion groups focused on topics of governance. This would help directors to learn from each other’s experiences. The roles and effectiveness of independent directors are worth reiterating.
22 On our part, MAS too will be reviewing areas where there may be a need to enhance regulations. We take a long-term view to these actions. Our regulatory stance must be, first and foremost, to uphold high standards and proper conduct of those that operate in our marketplace, as well as to protect the overall interests of depositors, investors and other users of financial services. But we recognize too, that there should be a calibrated balance between the appropriate level and intensity of regulations and regulatory actions, versus any excessive cost burden that may otherwise stifle useful financial innovations and the vibrancy and competitiveness of our financial centre.
23 For the Asian ‘rising stars’ – those companies that will emerge as winners in the years ahead – they must be peer leaders in setting high corporate standards, sound practices and sustainable long-term growth policies. It is said that stars shine the brightest when the sky is darkest. So amidst the financial storm and ‘dark skies’ of shattered confidence and erosion of trust, those companies that stand out will be firms that do what is right, what is fair and what is good.
24 Let me conclude once again by thanking the Bank of America/ Merrill Lynch and the conference organizing team for inviting me here this morning. For the visitors in Singapore, I hope you will be able to find the time to experience some of the charms of our city state. And to all participants, may I wish you a most fruitful conference ahead. Thank you.