Heng Swee Keat: A more challenging global and domestic economic
environment
Opening remarks by Mr Heng Swee Keat, Managing Director of the Monetary Authority of
Singapore, at the Monetary Authority of Singapore's Annual Report 2007/2008 Press
Conference, Singapore, 24 July 2008.
* * *
1. There is heightened uncertainty in the global economy and financial markets. The US
subprime mortgage crisis has led to financial turbulence that hit many American and European
financial institutions, forcing them to recapitalize and tighten lending standards. These
stresses in financial markets have been a drag on economic activity in the industrialized
countries through various channels, including the adjustment in the housing market and
wider credit spreads.
2. The pace of US economic growth is slowing, constrained by the ongoing credit crisis, the
unprecedented fall in the housing markets across the country, and rising commodity prices.
In Europe and Japan, business expectations and consumer confidence continue to weaken.
In Asia, growth has held up relatively well, helped in part by the robust expansion in China
and India so far. Nonetheless, rising inflation will impact the real earnings of households and
corporates in the region, with a concomitant pullback in spending. Overall, global growth is
expected to fall to 2.9% this year from 3.8% in 2007. At the same time, inflation has emerged
as a significant risk factor. Slower growth, together with rising inflationary pressures,
presents challenges for the global economy.
3. In Singapore, economic activity is moderating. After 17 consecutive quarters of sequential
expansion, the growth momentum has eased since the fourth quarter of 2007 as anticipated,
to around the economy's medium term potential. On average, GDP grew slightly over 4% in
the first half of this year, registering 6.9% in the first quarter and 1.9% in the second quarter
of 2008. The weaker performance in Q2 was due in part to a sharp decline in the output of
the pharmaceutical sector, which can fluctuate significantly from quarter to quarter because
of company-specific production cycles.
4. In the coming months, activities which rely directly on G3 demand, such as electronics
manufacturing, or are sentiment-driven like stockbroking, will be more adversely affected by
the global headwinds. However, other industries including construction, marine and offshore
engineering as well as financial intermediation services are expected to continue to provide
support to GDP growth over the rest of 2008. Our assessment for full-year GDP growth
remains at 4-6%. Given the uncertainty in the external environment, we will be carefully
monitoring the incoming data.
5. CPI inflation came in at 7.5% in June, bringing the average for the first six months of this
year to 7.1%. Global oil prices had surged towards the end of May, reaching a high of
US$147 per barrel (WTI) in mid-July. Though they have pulled back slightly, prices are
currently around US$125, up from US$98 in Q1 this year. Our major trading partners are
also facing a rise in inflationary pressures, as fuel subsidies were partially lifted in some of
these countries. Apart from oil, food prices are expected to remain elevated, even as the rate
of increase moderates.
6. These external developments - higher oil prices, continued high prices of food, and
inflationary pressures in our trading partners - have affected Singapore because of our
openness and heavy dependence on imports. We are thus revising our CPI inflation forecast
for this year to 6-7%, compared to the earlier estimate of 5-6%. Given the outcome in the first
half of the year, the new forecast range implies that headline CPI inflation is expected to
come down over the rest of the year. There are several reasons for this:
First, the one-off impact of the GST hike will cease to affect headline inflation in July.
•
• Second, although global commodity prices are likely to remain high, any further
price increases are expected to be milder, compared to the first half of the year.
• Third, there are early signs of an easing of domestic cost pressures as the economy
slows and asset markets consolidate. The rate of increase in commercial rentals, for
example, appears to have peaked. Recent employment surveys have also shown
that employers have become more cautious about hiring, suggesting that the
pressures on the labour market could ease.
• Fourth, MAS had pursued a policy of targeting an appreciation of the Singapore
dollar nominal effective exchange rate (S$NEER) since 2004. In a pre-emptive
move, MAS further undertook a tightening of monetary policy in October 2007 and
April 2008, even as there were heightened concerns over developments in the US
economy.
7. Between April 2004 and June 2008, the S$NEER appreciated by 12.2%. Against the US$,
the S$ appreciated by 23.4%. The policy moves have had a clear restraining effect on CPI
inflation. For example, while WTI oil prices in US$ have increased by more than 70% from a
year ago, domestic electricity tariffs and petrol prices rose by around 30% each. Similarly,
while the IMF global food and beverage index has soared by 43% from a year ago, domestic
food prices picked up by a more moderate 9%. The effects of our policy tightening will
continue to restrain cost and price pressures going forward.
8. However, we cannot totally insulate ourselves from the increases in global food and oil
prices. Hence, we must ensure that inflation expectations remain firmly anchored and that
external price changes do not trigger second round effects. For monetary policy, our
objective continues to be price stability over the medium-term. At the same time, other policy
responses, as well as changes in household and business behaviour have been
complementary toward this end.
9. MAS' current monetary policy stance announced on 10 April 2008 remains appropriate
given our assessment of current external economic developments. The next monetary policy
statement will be released in October as scheduled.
Financial stability
10. The international financial system and the global economy are still facing significant
challenges and downside risks. So far, prompt action by financial authorities in the US and
Europe has helped avert a wider crisis. But financial markets remain uncertain and volatile.
11. Singapore banks have limited exposure to US mortgage related securities, and they
remain well capitalised. Over the past year, MAS has intensified our monitoring of financial
markets and our supervision of financial institutions. We have also conducted stress tests of
Singapore banks and the domestic operations of the large foreign banks here, and the
results reported by the banks showed them to be resilient. Nevertheless, there is no room for
complacency. The current crisis provides important lessons on the areas we have to work on
to enhance the resilience of the Singapore financial system. MAS is also participating in
several international working groups that are reviewing ways to strengthen supervisory
practices and standards.
Strengthening resilience: Basel II, liquidity management and standing facilities
12. As new international regulatory standards and practices are finalised, MAS will consider
strengthening our standards and market infrastructure where appropriate while taking care to
avoid a disproportionate response. Let me highlight three areas, where we had started
reviewing our regulatory framework before the crisis and have proceeded to implement these
new measures to further strengthen the resilience of our financial system.
13. First, an area found to be wanting elsewhere in the credit crisis was the inadequate
capital requirements that Basel I placed on banks in respect of their securitisation activities.
On 1 January 2008, all Singapore-incorporated banks have adopted Basel II, a more
risksensitive capital framework. The greater focus on enhancing internal risk management
required under this new framework is especially timely given the volatile and uncertain
environment.
14. Second, MAS has been working on improving liquidity risk management of banks before
the current crisis. Events in recent months reinforced the critical importance of liquidity
management. To enable banks to better manage their liquidity risk, MAS has put in place a
revised Minimum Liquid Assets framework. Banks can apply to adopt a more risk-sensitive
methodology for determining their regulatory liquidity reserves, which takes into account their
risk management capability.
15. Third, at the macro-level, to enhance liquidity management in the system, we will be
making some changes to the MAS Standing Facility that has been in place since June 2006.
16. The Standing Facility allows banks to place excess funds with or borrow from MAS
against Singapore Government Securities collateral. This has helped to moderate intra-day
volatility in interest rates as banks can avoid any undue scramble to square large, and
potentially destabilising, positions in the market. The Standing Facility is currently open to the
11 Primary Dealer banks which are the most active banks in the Singapore dollar money
market. Non-Primary Dealer banks could access the Facility through the Primary Dealer
banks.
17. While the existing arrangement has worked well, experience in other developed markets
has also demonstrated that such a facility is particularly useful in times of unusual market
volatility, as this enhances confidence that liquidity needs in the banking system will be met.
18. Hence, to enhance the robustness of the system, MAS will widen participation in the
Standing Facility to MEPS+ participating banks, subject to necessary documentation. The
PSA/ISMA Global Master Repurchase Agreement continues to be a requirement for banks to
access the borrowing facility which will remain collateralised against Singapore Government
Securities. We will provide more details on this to the banks over the next few weeks.
Corporate governance, market conduct
19. Apart from dealing with issues relating to the safety and soundness of banks, and the
stability of financial system, MAS has also been working on improving the responsiveness of
our rules, as well as on improving corporate governance and market conduct.
20. MAS is proposing amendments to the Securities and Futures Act and the Financial
Advisers Act. The amendments aim to facilitate new business activities and products in
response to market needs, to enhance the market misconduct enforcement framework and
to fine-tune the legislation to achieve greater clarity, consistency and operational efficiency.
Policy and legislative consultation on the proposed amendments to the Acts have already
been conducted. We will table the Amendment Bills within the next few months.
21. To continue to strengthen corporate governance, MAS, together with Accounting and
Corporate Regulatory Authority (ACRA) and SGX, have established an industry-led Audit
Committee Guidance Committee (ACGC). The ACGC will develop guidance to assist audit
committees better understand and carry out their role and responsibilities. MAS, ACRA and
SGX are also working with the Singapore Institute of Directors to review the professional
development of directors in Singapore.
22. In the area of insurance, we have set out mandatory requirements to strengthen life
insurers' internal governance practices on the management of their participating funds and
enhance disclosure standards to participating stakeholders. To enable policyholders to
access a wider and more cost effective range of Investment-Linked Insurance Products
(ILPs), MAS revised ILP rules.
Singapore's financial sector
23. Let me now turn to the performance of our financial sector. Notwithstanding the onset of
the global financial turmoil towards the end of the year, the domestic financial services sector
recorded strong growth in 2007. Growth was broad-based, across all segments of the
industry. Domestic non-bank credit registered strong gains while the Asian Dollar Market also
strengthened.
24. Singapore's financial centre continues to grow in diversity. We remain the largest REITs
centre in Asia-ex-Japan, and a pipeline of business trusts in sectors such as shipping,
aviation and infrastructure is being developed. A broad suite of instruments from FX, fixed
income, derivatives to commodities are now traded here, contributing to the growth of
Singapore as a trading hub. Activities in Islamic Finance are growing with the entry of new
players, and MAS is honoured to host the 6th Islamic Financial Services Board Summit in
May next year.
25. The asset management industry in particular has shown robust growth in 2007. Our
latest Asset Management survey shows that the industry has continued its strong
doubledigit growth for the seventh year, with a 32% increase in assets under management (AUM),
reaching almost S$1.2 trillion for the year 2007. In tandem with this growth, the number of
investment professionals rose by about 22% to close to 2,200.
26. Reflecting Singapore's role as an international financial centre, the sources of assets
managed in Singapore as well as their investment destination remains diversified. The
AsiaPacific region continues to be a key driver of growth for the industry. More than 80% of the
total AUM was sourced from outside Singapore with Asia-Pacific accounting for 44% of the
total. Almost 60% of the funds managed in Singapore are invested in the Asia-Pacific region.
27. The asset management industry has also seen a greater diversity in terms of players,
strategies and products. Large traditional managers continue to expand and anchor their
investment capabilities here. Singapore has also grown in importance as a centre for
alternative investments such as hedge funds, private equity and real estate. The strong
growth of the asset management industry has in turn drawn in several ancillary service
providers such as fund administrators and prime brokers. All these developments reflect
Singapore's ideal position for asset managers to deepen and broaden their activities in the
Asian time-zone.
Annual accounts
28. On our financial statements, MAS recorded a net profit of S$7.44 billion for the financial
year. The profits comprised mainly interest income, as changes in the valuation of foreign
assets and the foreign exchange effects of a stronger Singapore dollar largely offset each
other. Total assets, including the Currency Fund, grew by S$35.58 billion during the year to
S$253.79 billion at end-March 2008.
Remaining vigilant
29. We need to remain vigilant in the face of a number of risks in the global economic and
financial environment. We will continue to work closely with the industry to identify
vulnerabilities and threats to financial stability through macro surveillance and stress testing.
MAS' work in the coming year will continue to be driven by our mission of supporting
noninflationary economic growth, and fostering a sound and reputable financial centre.
30. Thank you.