Heng Swee Keat: A review of Singapore's economy and financial system
Opening remarks by Mr Heng Swee Keat, Managing Director of the Monetary Authority of
Singapore, at MAS' Annual Report 2008/09 Press Conference, Singapore, 16 July 2009.
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Backdrop on global financial and economic crisis
The world economy has witnessed one of the most tumultuous and challenging times. Global
GDP is expected to contract in 2009, the first time in the post-War period.1 The tremors that
shook the financial markets surpassed the most extreme stress scenarios. Bank losses have
now exceeded US$1.5 trillion and further writedowns are expected. In the six months
following the collapse of Lehman Brothers, from September 2008 to March 2009, stock
markets worldwide fell by almost 40%, wiping off about US$16 trillion in capitalisation.
Singapore's Straits Times Index (STI) also fell by close to 35%. In the fixed income markets,
the rally in government bonds was offset by the sell-off in the non-sovereign sectors such
that global bond markets in aggregate also declined over this period. Many institutional and
individual investors were affected negatively.
These shocks to the international financial system severely disrupted credit flows and led to
dislocations in economic activity globally. The US - which was the epicenter of the crisis - as
well as the EU and Japan, fell into a deep recession. The collapse in G3 demand, in turn,
had a cascading effect on the emerging economies. As trade collapsed towards the end of
2008 and into the first few months of this year, Asia's export-reliant economies were hard-hit.
Against this external backdrop, the Singapore economy contracted sharply, as our
manufacturing, transport, logistics and wholesale trade industries were closely tied to global
and regional trade flows. By the first quarter this year, the economy had posted an output
loss of around 10% from its peak a year ago, the steepest decline in its history.
The unprecedented global financial crisis has weighed heavily on financial markets
worldwide, leading to severe declines in valuation across many asset classes amidst
heightened market volatility. MAS' investments were negatively affected by the crisis. As at
the close of the financial year on 31 March 2009, MAS recorded a net loss of S$9.2 billion,
about 3.5% of MAS' average total assets. This compares with profits of S$7.44 billion in the
previous year and S$3.85 billion in FY06. This severe crisis has therefore pared back about
80% of the gains in the preceding two years. The extent of loss has been mitigated as we
raised the liquidity profile of our portfolio in the early part of 2008, in the face of greater
uncertainties. With the broad based upturn in financial markets after the close of the financial
year, the valuation of MAS' foreign assets has improved and more than half of the losses
have been recovered.
Despite the severe global conditions, Singapore's financial system has, by and large,
weathered the crisis well. In managing this crisis, MAS has focused on maintaining the
strength of Singapore's financial system, based on three key pillars: first, maintaining sound
financial institutions; second, ensuring well functioning markets; and third, maintaining
confidence of investors. Let me touch on these in greater details.
Strengthening resilience - what MAS has done
Given the openness of our financial system and the severe downturn in our economy,
Singapore's financial system cannot be insulated. MAS focused on maintaining the
soundness of financial institutions in Singapore. We intensified supervision of financial
institutions through close monitoring of their financial soundness, holding regular discussions
with the board, management, and auditors of financial institutions, and for foreign financial
institutions, having constant dialogues with their home regulators and head-office auditors.
Stress testing major financial institutions is one of our supervisory tools that is used regularly
even before the crisis. In this crisis, we have given stress tests an added emphasis, and the
latest stress tests of banks and life insurers were conducted in Q1 2009. As the banks and
insurers here were well-capitalised and financially sound, the objective of the stress test was
not to ascertain what recapitalization amount was needed, because the need did not arise.
Instead, the stress tests were to allow MAS to determine how resilient the banks and insurers
were to highly adverse scenarios. In this regard, the stress tests revealed that while financial
institutions' financial resources would be affected by lower asset values, rising credit costs
and moderating earnings, they are generally resilient even under stress conditions. A second
objective is to focus the financial institutions' attention on managing their risks and
safeguarding the robustness of their liquidity, earnings and capital so that they remain
financially sound through the economic downturn.
Second, we took steps to ensure well-functioning markets. Singapore's interbank money
markets did not experience the seizure that griped the LIBOR markets. However, the
openness of our markets meant we could not be immune from the global dislocations. MAS
reassured financial institutions that they would have access to S$ and US$ liquidity in three
ways.
We kept a higher level of liquidity in the banking system. We also expanded eligibility to the
Standing Facility to all banks that participate in the MAS Electronic Payment System,
MEPS+, allowing them to repurchase SGS for S$ funds with the MAS. Finally, we entered
into a US$30 billion swap arrangement with the US Federal Reserve. This arrangement has
been extended to 1 February 2010.
Third, measures were put in place to maintain confidence of investors in Singapore as an
international financial centre. In response to announcements by jurisdictions in the region of
blanket government guarantee on deposits, the Singapore Government announced on 16
October 2008 a guarantee on deposits of individuals and non-bank customers of banks
licensed in Singapore. This was aimed at ensuring a level international playing field for banks
in Singapore and demonstrated the Government's confidence in the soundness of the
financial system. It has also had the effect of maintaining the confidence of investors and
depositors in our banking system.
State of the financial System
The measures taken around the three pillars of maintaining sound financial institutions,
ensuring well functioning markets and maintaining confidence of investors, as well as
the way in which institutions and market players responded to the crisis, have helped our
financial sector weather the crisis. A healthy and functioning financial system has continued
to support credit and capital intermediation to the economy. Compared to the Asian Financial
Crisis, the moderation in bank lending has been milder. While credit conditions have
tightened, there has not been disruption of credit flows to corporates. A total of S$9.6 billion2
was raised by SGX listed companies in the first half of 2009, which accounted for 65% of
total rights offerings in Asia in this period. More than 7,300 Government-backed loans
amounting to S$4 billion have since been approved in the first half of 2009.
In the first quarter of this year, the financial sector grew by 7.7% quarter-on-quarter on a
seasonally-adjusted annualized basis. Financial services employment has also held up
reasonably well. Employment stock continued to increase in Q4 2008 and fell by 1,900 or
1.1% in Q1 2009. A recent poll3 showed that the banking and financial services sector
reported the biggest jump in hiring intentions, 32% this quarter, up from 19% in Q2.
Strengthening resilience - new measures
Going forward, we will remain vigilant and continue to focus on the three key pillars of
resilience of our financial system. The main focus would be on shaping and adopting new
international regulatory standards, strengthening the corporate governance of financial
institutions, enhancing the Standing Facility and strengthening the Singapore Government
Securities auction system, and bolstering investors' confidence in our financial system.
Reforming the regulatory framework has become a major issue internationally, and the
emerging consensus is towards more stringent regulation. Under the first pillar of
sound
financial institutions, MAS is contributing to and helping to shape new regulatory standards
being discussed at the Financial Stability Board, the Basel Committee on Banking
Supervision and other international standard-setting bodies. For example, discussions on
liquidity risk management standards and the capital framework for banks are at an advanced
stage. Over the course of the next one to two years, we will be implementing changes to our
regulatory framework to adopt these new standards. As MAS' regulatory framework has
generally been regarded as conservative, we are in a good position to adopt these
standards. We are mindful of maintaining a balanced approach and not over-swinging the
regulatory pendulum. We will work closely with and consult the industry and the public.
In the area of regulatory standards, we will review the Corporate Governance Regulations
and Guidelines for locally incorporated banks and significant life insurance companies,
introduced in 2005 and which were implemented in 2007. MAS' review will focus on the
effectiveness of risk management at the Board level, including the role played by Boards in
safeguarding the safety and soundness of their institutions and in addressing market conduct
risks. This would include a review of the Board's role in setting remuneration policies to
manage risks effectively.
Giving further impetus to risk management, the locally incorporated banks are conducting
more detailed stress tests internally as part of their Basel II implementation process and the
results will be used in their capital planning. For foreign banks, MAS is continuing our close
cooperation with home supervisors through regular discussions as well as participation in
supervisory colleges.
In the second area of ensuring well-functioning markets, several new measures, to
enhance the MAS Standing Facility and strengthen the SGS primary auction system,
will be implemented.
The MAS Standing Facility has been a key channel of providing liquidity to financial
institutions. To further enhance this facility, with immediate effect:
a) We will accept AAA-rated S$ debt securities issued by sovereigns, supranationals
and sovereign-backed corporates as collateral in the Standing Facility in addition to
SGS. Given this change, we will also permit banks to treat these securities as Tier 2
liquid assets, with the same zero risk weighting as SGS. This will help banks to better
manage their risks and liquidity profiles.
b) We will also enter into cross-border collateral arrangements with other central banks
to accept well-rated foreign currencies and government debt securities as collateral in
the Standing Facility. Last month, I signed an MOU with the Governor of De
Nederlandsche Bank N.V., the Dutch Central Bank. Discussions are ongoing with
several other central banks.
Globally, government bond issuance is rising while banks' balance sheets which are typically
used to underwrite these issuances are shrinking. We have seen in some jurisdictions
several instances of poor or even failed auctions of government bonds due to unexpectedly
weak sentiment or concerns about ballooning government debt and fiscal deficits. Singapore
is different. The Government does not issue bonds to finance its budget deficit. Investors
understand that the Government issues SGS for the sole purpose of building a risk-free yield
curve for the corporate sector to price its debt. But the SGS market can be affected by
contagion of weak sentiment spilling over from other markets. We have therefore worked
with the Government on two measures to enhance the resilience of the SGS market.
MAS will be empowered to either adjust the issuance size or vary its subscription amount to
stabilise an auction. This will mitigate the risk of disorderly trading in specific securities or
further volatility in the secondary market. In the event of extreme market conditions or
disruption, MAS will be empowered to cancel an auction.
In ensuring stability and resilience of the financial sector, a key anchor is a central bank
backed by a strong balance sheet. We have increased our total capital and reserves to
S$28.74 billion, representing close to 11% of MAS' total assets of S$264.75 billion. This will
position us well to navigate through a potentially volatile financial market environment, and
allow us to implement a broader range of measures to stabilize the Singapore financial
system should the need ever arise.
While local institutions withstood the crisis and remained sound, a large number of local
investors were adversely affected when the credit-linked structured notes they bought
defaulted or were redeemed early. Although the defaults were triggered by an
unprecedented financial crisis, it has been a painful experience for affected investors. MAS
has responded by taking prompt measures to require affected financial institutions to review
complaints rigorously. MAS' approach was for financial institutions to review complaints on a
case-by-case basis. Settlement offers are made by the financial institutions taking into
account the particular facts and circumstances of each transaction. We also completed our
investigations into the sale and marketing of structured notes linked to Lehman Brothers by
these financial institutions. Our investigation found that the nature and extent of failings
identified and their potential impact on the sales process and customers differed for each
institution.
It is clear from our investigation findings that an across-the-board general settlement for all
investors would not have been justifiable. We understand that not everyone agrees with the
case-by-case approach. However, we believe it is the correct approach that is fair to all
parties concerned.
There are lessons from this episode for financial institutions, investors and MAS. Thus, in the
third area of enhancing confidence in our financial system, we have to review the roles
undertaken by all parties. MAS has reviewed the sale and marketing of structured products,
and in March 2009 put out for consultation a set of proposals to further safeguard
consumers' interests and promote higher industry standards for the sale and marketing of
unlisted investment products. For financial institutions, the Board and senior management
must take immediate steps to win back the trust and confidence of their customers. MAS'
Fair Dealing guidelines reiterate that the Board and senior management of financial
institutions are responsible for achieving fair dealing outcomes by their institutions. They will
need to go beyond just addressing the failings identified in MAS' investigations. One
immediate area for attention is staff training.
To this end, MAS has proposed a new Capital Markets and Financial Advisory Services
(CMFAS) examination module on product knowledge for representatives who want to sell
"complex investment products". MAS has been working with representatives from various
industry associations and The Institute of Banking and Finance to develop this CMFAS
examination module. But in addition, financial institutions must ensure that their
representatives keep up to date with market developments.
MAS will review and intensify our supervision of financial institutions in the sale of investment
products, and commit more resources to this. We will continue to use thematic and ad-hoc
inspections to review compliance policies, procedures and controls of financial institutions.
MAS' supervision cannot replace the primary role of the Board and senior management to
ensure that controls and processes are implemented robustly by all their staff in all dealings
with customers, at all locations. We will therefore scrutinise the steps being taken by Board
and senior management to ensure fair dealing by the financial institution with its customers.
This will include areas such as product approval due diligence, as well as the pay and
incentive structures for sales and advisory staff, and their training and supervision.
Downstream, we will increase the use mystery shopping to complement inspections and
other supervisory tools to help us identify specific areas where financial institutions are falling
short.
While this means that MAS will be more probing in our supervision and dealings with
financial institutions than in the past, we will need to be careful that this does not create an
overly legalistic and combative relationship with the regulated entities. We share a common
objective in having a regime that encourages growth based on sound and ethical business
practices, and adherence to the spirit and letter of MAS' standards, so that consumers can
be well served.
Consumers too have to play their part. The recent crisis reinforces the importance of
investing only in products that they understand and taking steps to better safeguard their
interests when making investment decisions. Although these points have been highlighted in
various MoneySENSE guides and seminars, in times of rising asset markets, outreach efforts
had not been easy, but we must persist.
To help investors understand common financial products, we launched the MyMoney
programme, in partnership with ABS, the Securities Investors Association (SIAS) and the
Singapore Management University's Sim Kee Boon Institute for Financial Economics.
Speakers shared facts on the risks in investment products such as structured deposits, unit
trusts, bonds and investment linked policies, highlighting risk-return trade-offs, and key
issues consumers should consider before deciding whether to purchase a product.
Going forward, we need to focus on new products when they are launched. We would like to
see financial institutions organise educational initiatives in partnership with independent
experts, when they launch products with features or structures that are new to the market.
A major piece of work for us in this area in the coming year will be to develop a financial
literacy core competency framework. Building on the three tiers of financial literacy in the
MoneySENSE programme, the framework will set out the basic knowledge and life skills
individuals would need to make informed financial decisions at key life stages, starting at an
early age, continuing through working life and into retirement. These decisions include
managing budgets, setting aside adequate funds for emergencies, managing CPF savings
prudently for retirement, assessing affordability when buying a property, and understanding
and evaluating risks when investing in particular products.
The Financial Sector Development Fund has set aside $10 million to fund financial
educational programmes for the next three years. Going forward, we will invite the public to
contribute new and imaginative ideas on how financial education can be delivered more
effectively. Consumer education requires sustained efforts by each and everyone in the
community. We will fund proposals that can best support the delivery of the knowledge and
skills in the financial literacy competency framework.
Our next measure to maintain confidence is a review of the deposit insurance (DI) scheme
in Singapore. As part of MAS' continual efforts to enhance the regulatory framework in
Singapore, we are reviewing the DI scheme to ensure it remains relevant, provides adequate
protection to depositors and is in line with international practice. When the DI Scheme was
started in April 2006, it targeted to fully insure the deposits of 80-90% of individual
depositors. In line with this, a limit of $20,000 per individual depositor per institution was set,
allowing 87% of individual depositors to be fully insured.
This coverage ratio has now come down to 83%, the lower end of our targeted range. MAS is
considering raising the DI coverage limit above $20,000 to achieve a better coverage ratio
and provide a better level of protection to depositors. We are mindful that this should not
substantially increase the cost to the industry and indirectly to customers. We are targeting to
conduct our review and consult the industry and public on the proposed changes over the
next six to nine months, and will seek to implement the revisions to the deposit insurance
scheme in 2010.
Strengthening research capabilities
Even as we deal with the immediate effects of the global crisis, we also continue to have our
eye on building up capabilities in the longer term. The Economic Policy Department in MAS
has run a successful visiting scholar programme since 2002. To support and strengthen
research in finance and economics on a wider scale, MAS announced today that it will
sponsor a professorship in economics and finance at the National University of Singapore
(NUS) for the next five years. This Professorship also signifies MAS' desire to strengthen
collaboration between academia, industry and the public sector. Together with NUS, we will
engage internationally renowned academics to lead and conduct research in Singapore in
the areas of finance, international economics, monetary economics or public finance.
Economic outlook
Finally, on the economic outlook. More recent data, including the advanced estimates
released by MTI, showed that the Singapore economy had rebounded strongly in the second
quarter. This recovery has to be seen in the context of the sharp retraction in economic
activity which took place during Q4 2008 and Q1 2009. As such, businesses have started to
rebuild inventories to levels that are more sustainable and consistent with underlying
demand, which has stabilized somewhat amidst easing financial conditions. In the domestic
financial sector, several areas of activities posted gains in the second quarter. Improved
sentiment has buoyed stock market turnover, while the latest figures for May showed that
domestic non-bank loans remained firm.
Nevertheless, much still depends on the strength of final demand in the G3. Given that there
remain stresses in the global financial system and job markets in the major economies
continue to weaken, the domestic economy is likely to witness slow and uneven growth,
rather than sharp and decisive recovery. For the economy as a whole, MTI has revised the
official growth forecast for 2009 to between -6% and -4%.
In tandem with the weak demand and easing domestic costs, consumer price increases are
expected to be muted. For the whole of 2009, CPI inflation is now expected to come in
between -0.5% and 0.5%. This revision takes into account the recent developments in global
commodity prices.
Monetary policy
In October last year, in light of the weak economic environment and easing inflationary
pressures, MAS shifted to a 0% appreciation of the S$NEER policy band. This was followed
by a re-centring of the policy band to the prevailing level of the S$NEER in April 2009, while
keeping the 0% appreciation path. At this juncture, notwithstanding the sharp rebound in the
economy in Q2 2009, growth remains below trend and inflationary pressures continue to be
muted. We assess that the current policy stance remains appropriate to support the
economic recovery and ensure medium-term price stability, which in turn underpins
confidence in the Singapore dollar. Our next monetary policy review will take place as
scheduled in October.
Conclusion
Going forward, it will be important for central banks and regulators around the world to
remain vigilant and to continue addressing financial system risks as the markets remain
fragile and uncertainty remains. Singapore is not insulated from pressures in other parts of
the world. We need to understand the changes and anticipate how they would affect us in
order to take the right actions. MAS will continue to build on our key pillars of having sound
financial institutions, ensuring well functioning markets and maintaining confidence of
investors. Building on such strong fundamentals and adapting to new challenges, we can
ensure we emerge stronger.
Thank you.