Heng Swee Keat: New strategies for new economic realities
Remarks by Mr Heng Swee Keat, Managing Director of the Monetary Authority of Singapore,
at the 16th Annual World Islamic Banking Conference, Bahrain, 7 December 2009.
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H.E. Governor Rasheed M. Al Maraj, Central Bank of Bahrain,
H.E. Aset O. Issekeshev, Minister of Industry and Trade, Republic of Kazakhstan,
Your Excellencies
Distinguished guests
Ladies and gentlemen
1. Good morning. I am honoured to speak at this plenary session of the 16th World
Islamic Banking Conference.
Global crisis and recovery
2. The theme of "New Strategies for New Economic Realities" is timely. Last year, the
financial crisis that enveloped the world was unprecedented in scale, complexity and speed
of transmission. Major financial institutions have failed and others continue to face significant
challenges ahead.
3. The outlook seems better now than a year ago. Equity markets have rallied and
credit spreads narrowed. Many Asian and GCC economies have recovered more quickly and
strongly than expected with China and India leading the way. ASEAN-5 and GCC countries
are expected to post small positive growth in 2009. Going into 2010, growth in ASEAN-5 and
GCC is estimated to rebound sharply to 4% and 5.2% respectively.
4. However, sentiments remain volatile and investors react sharply to bad news, as
recent events have shown. The global de-leveraging of financial institutions is still on-going.
The IMF has highlighted that global banks and financial institutions have yet to recognize
more than half of their total estimated write-downs of US$3.4 trillion. So far, growth has been
supported by the massive monetary and fiscal stimulus. Indeed, studies of past crises
suggest that economic recoveries in the aftermath of financial crises tended to be protracted.
Many analysts therefore expect global growth to be slower in the coming years.
5. Against this backdrop, what should be the growth strategies of emerging economies,
and what is the role of financial institutions, especially Islamic financial institutions?
6. Even with slower global growth, emerging Asian and Middle Eastern economies are
expected to grow at higher rates than advanced economies. There are many positives
working in their favour - abundant natural resources and monetary reserves; young and
dynamic populations, growing consumer demand, large infrastructural programmes
underway in some areas like water, energy, transport, education and healthcare. Generally,
balance sheets of corporates and households are in better shape than it was in earlier years.
7. With the growing importance of emerging economies, we will see changes in the
patterns of trade and development. There will be stronger "south-south" trade. The old
pattern of "flying geese" development in Asian newly-industrialised economies, where
developed economies bring in investment and technologies, will give way to a more
variegated pattern, where companies in the emerging markets will invest in other markets.
We already see many corporates from emerging markets developing disruptive technologies
and business models that address market needs in very competitive ways. It will be a more
diverse and vibrant landscape in the future.
8. However, growth is not to be taken for granted. Many challenges remain. Let me
suggest three areas where policy makers and financial practitioners in the Middle East and
Asia can work together to contribute to growth and development.
9. First, at the recently-concluded APEC meetings in Singapore, it was recognised that
sustainable global growth will require structural reforms and a new growth paradigm. We can
no longer rely on export-led growth in developing countries and high consumption in the
developed world driven by excessive leverage and asset appreciation. Big economies like
China and India have greater scope to restructure their economies and raise domestic
demand. Smaller economies such as Singapore and Bahrain have to re-orientate themselves
and respond nimbly to new opportunities in global markets.
10. In both the GCC and Asian regions, the funding needs to support growth and
development are large. For instance, the Asian Development Bank has projected that Asia
requires US$8 trillion of new infrastructure over the next decade. Such investments are
important for economic growth, as well as for raising the quality of life by providing better
access to education, health care and sanitation. Hence, as part of the structural reforms,
governments need to put in place investment frameworks that promote and mitigate the risk
of such long term investments.
11. Second, proper financing structure for such investment is crucial. Today, there is
strong risk appetite for emerging market assets. National authorities are concerned with the
risks of asset inflation and volatility of capital flows. But properly structured, these provide
unique opportunities to channel the much-needed capital for growth and development. In this
regard, Islamic finance which has its central emphasis on supporting real economic activities
in trade, investment and the growth of productive capacities is especially relevant.
12. However, effective intermediation of capital requires focused attention on the
management of risks. As I mentioned in my speech at the previous WIBC, many risks -
including credit, market, liquidity, operational and reputational risks are common to both
conventional and Islamic finance. Overly-optimistic projections of growth, or
overconcentration in particular sectors, or mismatches in assets and liabilities can give rise to
risks that can damage financial institutions. The crisis serves as a valuable pause from the
frenzy of financial activities. This allows us to re-evaluate risk management practices in
individual financial institutions, as well as the systemic linkages across institutions,
instruments and markets.
13. Central banks and regulators need to cooperate closely so that risk assessments
can be shared and common action taken where necessary. The Central Bank of Bahrain
(CBB) and MAS have enjoyed very good relations, and have worked to promote Islamic
Finance. The CBB is a highly-regarded central bank and integrated financial regulator. I am
pleased that the MAS and CBB will be signing a Memorandum of Understanding later today
to build on our existing strong relationship to enhance supervisory cooperation and
information-sharing.
14. The third area relates to close interactions among industry practitioners and the
development of ground knowledge. While there are many opportunities for trade and
investment among emerging economies, the business linkages are only beginning to grow.
Forums such as the WIBC provide a valuable platform for practitioners to build their
knowledge of each region and the business leaders. At the same time, for large-scale and
long-term investments such as in infrastructure, effective knowledge of partners and
on-theground presence are important ways of mitigating risks.
Recent developments in Singapore
15. Let me therefore take this opportunity to say a few words about developments in
Singapore. As an international financial centre in Asia, Singapore seeks to develop Islamic
finance by leveraging on our existing strengths in banking, insurance, asset management
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and capital markets. Although relatively new, we have seen steady progress. MAS launched
its Sukuk early this year. The Islamic Development Bank also issued a $200m Singapore
dollar-denominated trust certificate. In May, Olam International, a local trading firm tied up
with the Islamic Bank of Asia to launch a Commodity Murabaha based on agricultural trade
flows. Just last month, Singapore's Keppel T&T and Saudi Arabia's Al Rajhi Holding Group
announced an agreement to establish a joint venture asset management company to
manage the world's first Shariah-compliant data centre fund. Other Singapore companies
and Real Estate Investment Trusts (REITs) are also using Shariah-compliant structures for
their financing needs.
16. We were honoured to host the 5th Islamic Financial Services Board Annual Summit
in May. At this Summit, MAS issued a consolidated set of guidelines to provide greater clarity
and certainty on how our banking regulations apply to Islamic banking. Islamic finance was
also featured when the Paris EUROPLACE International Financial Forum was held in
Singapore in October. We will continue to work with fellow regulators and the private sector
to fine-tune our regulatory approach and to develop the infrastructure and talent to facilitate
the growth of Islamic Finance in Singapore.
17. As I mentioned earlier, bringing leaders in finance and business together to
understand the developments in each region provides a valuable platform for collaboration. I
am therefore pleased that MEGA Events has decided to bring the first Annual WIBC Asian
Summit (Asia WIBC 2010) to Singapore. Islamic finance will provide an increasingly
important bridge in the growing connectivity between the Middle East and Asia. Singapore is
pleased to help catalyse deeper relations between these two high-growth regions. Asia
WIBC will provide a unique platform for industry players from more established centres of
Islamic finance to share their experiences. I look forward to welcoming all of you to the
inaugural Asia WIBC in Singapore next June.
Conclusion
18. In conclusion, the global economy is recovering gradually, though there remain
many risks ahead. Emerging economies are expected to grow well, but we need to tackle the
many structural challenges. Governments need to undertake structural reforms. The financial
sector needs to facilitate the flow of funds into growth areas, and Islamic Finance will play an
important role. By working closely to deepen risk management, and to enhance the ground
knowledge in each region, we can contribute to sustainable growth. On this note, I wish you
another very successful conference in Bahrain.