Koh Yong Guan: Review of Singapore's economy and financial sector
Opening remarks by Mr Koh Yong Guan, Managing Director of the Monetary Authority of Singapore, at
the press conference releasing the MAS's Annual Report, Singapore, 15 July 2003.
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Introduction
Good morning, ladies and gentlemen. Welcome to this media briefing for the release of the Monetary
Authority of Singapore's 2002/2003 Annual Report.
MAS has had an eventful year. The economy performed weaker than expected in the first two quarters
of 2003. The financial sector faced more volatile markets, heightened competition, and continued
global industry consolidation. Amidst this more challenging environment, MAS has remained focused
on supporting non-inflationary economic growth, promoting key growth areas in the financial sector,
and enhancing the supervisory framework for a sound and resilient financial sector.
Supporting non-inflationary economic growth
Global geopolitical uncertainties and the outbreak of SARS derailed the recovery of the Singapore
economy earlier this year. We lowered our GDP forecast for 2003 to a range of 0.5-2.5 per cent. More
recently, however, signs have emerged of a pick-up in economic activity. Several indicators in the
global electronics industry have improved. The SARS-hit services sectors are turning around. We
expect the economy to resume a modest recovery in the second half of the year, although some
downside risks remain. At the same time, inflation has turned out lower than expected, and the outlook
is for inflation to remain subdued into 2004. MAS has therefore re-centred its exchange rate policy
band at the current level of the nominal effective exchange rate of the S$, while maintaining a zero
percent appreciation path and no change in the width of the policy band.
Promoting key growth areas in the financial sector
The weaker domestic and regional economic environment in the last two years has dampened growth
in Singapore's financial sector. Financial sector value-added contracted by 4.8 per cent in 2002
compared with a rise of 2.2 per cent in 2001. The banking industry was affected by weak loan
demand. The insurance industry experienced a sharp decline in activity following three years of rapid
growth. The securities industry was dragged down by falling equity market volumes and bearish
market sentiment.
But the weakness in overall financial activity masks strong performance in key growth areas such as
asset management and treasury business. Total assets managed by Singapore-based financial
institutions grew a healthy 12 per cent in 2002, bucking the global trend of a decline in assets under
management. In the debt market, 2002 saw continued healthy growth in structured debt and a record
number of issues by foreign entities. Singapore has also benefited to some extent from the
consolidation of financial sector companies worldwide. Various institutions have chosen to centralise
their regional operations in Singapore. For instance, in treasury, several global players consolidated in
Singapore their regional foreign exchange and derivatives business. The Singapore dollar has been
included as one of eight settlement currencies in the Continuous Linked Settlement (CLS) system - a
global initiative aimed at eliminating foreign exchange settlement risk arising from time zone
differences.
Going forward, the outlook for the other segments of the financial sector has improved. The stock
market has rebounded with daily transactions nearly tripling in Q2, compared to Q1. With the expected
pick-up in domestic and regional economic activity in H2 2003, we are also likely to see further
improvement in commercial banking. The financial sector is expected to post a small positive growth
this year, following the 4.8 per cent contraction in 2002.
Enhancing supervisory framework for sound financial sector
On the supervisory and regulatory front, MAS continued its efforts to move away from a prescriptive,
rule-based approach to a more flexible, risk-based approach. This entailed strengthening risk-based
and disclosure-based regulatory frameworks, enhancing corporate governance standards to foster
better risk management on the part of institutions, and empowering consumers to make better
informed investment decisions. Let me touch on key initiatives in each of these areas.
An important step towards a disclosure-based regime was the full implementation last year of the
Securities and Futures Act and Financial Advisers Act. MAS will continue to refine the regulatory
framework for capital markets, taking into account industry feedback.
In the area of risk-based supervision, we implemented last year the new Liquidity Supervision
Framework for banks. Several banks that have better risk management systems and processes have
been allowed to lower their minimum liquid asset requirements from the existing 18 per cent on the
basis of their liquidity risk profile and liquidity risk management capabilities. Similarly, in the area of
capital adequacy, we are currently developing a framework for setting individual bank-specific
requirements according to their risk profile and risk management capabilities as part of our ongoing
review of the overall capital adequacy framework. For securities and futures intermediaries, we
introduced a risk-based capital framework last year. For insurance companies, we tested such a
framework last year and are working towards implementation in 2004.
Shifting from a rule-based to a risk-based approach requires MAS to sharpen its supervisory
capabilities. It involves assessing key risks faced by individual financial institutions and their ability to
manage these risks. We are building more comprehensive risk profiles of individual institutions,
leveraging on technology and better information collection.
Primary responsibility for risk management rests with the Board and senior management of the
institutions themselves. This is why strengthening corporate governance standards in financial
institutions has been a key priority at MAS for several years. Building on earlier initiatives, we have
issued a consultation paper, proposing to set higher standards of financial transparency and corporate
governance for locally-incorporated banks and direct insurers. We have proposed making it mandatory
for the roles of the Chairman and CEO to be separated, and strengthening the independence of
boards of directors from substantial shareholders. We have received good feedback on these
proposals and will issue a final set of guidelines shortly.
A less prescriptive regulatory approach requires that consumers be empowered through enhanced
disclosure and education to make better-informed decisions themselves. This is particularly relevant in
the current context of financial innovation which has spawned a growing array of retail products and
services with enhanced distribution networks. MAS will work closely with industry associations and
other public sector agencies to develop consumer guides and educational programmes to raise the
financial literacy of consumers. We have also facilitated the development of industry-based
mechanisms to offer consumers faster and more cost-effective ways to settle disputes with banks and
insurers. The banking industry has set up a Consumer Mediation Unit and the insurance industry the
Insurance Disputes Resolution Organisation.
Enhancing organisational effectiveness
The year was also eventful for MAS as an organisation, as we continued to build on our structure,
systems, and people to better meet the challenges posed by a changing and uncertain external
environment. We restructured the organisation to better integrate our supervisory functions, align
resources with our objectives, and build technical and managerial depth. We stepped up efforts to
enhance the skills and expertise of our staff, sending more of our staff on external attachments to
financial institutions and supranational organisations, and putting in place a more systematic approach
in functional training. The integration with the previous Board of Commissioners of Currency,
Singapore (BCCS) was carried out successfully following the merger on 1 October 2002.
Annual accounts
A few quick words on MAS' financial statements. The Authority's total assets grew 18.6 per cent
during the year ended 31 March 2003 to S$153.9 billion. About 11 per cent or S$16 billion is due to
the transfer of the Currency Fund from BCCS. All other assets and liabilities of BCCS as at 30
September 2002 were similarly transferred to the MAS and have been incorporated into our financial
statements. The net assets of the Currency Fund at the end of the financial year provided 112 per cent
asset backing for the currency in circulation of S$13.8 billion. MAS' profit after provisions for the
financial year ended 31 March 2003 declined by 2.8 per cent to S$623 million as our investments
continued to be affected by the low global interest rate environment and volatile financial markets.
Conclusion
In closing, let me restate MAS's priorities going forward. Supporting economic growth while
maintaining domestic price stability will remain the key focus of monetary policy. In the financial sector,
we will continue to partner with industry players to build on our successes in key growth areas like
asset management, the debt market, and treasury business, while looking out for new niche areas and
opportunities. We will continue to refine our regulatory and supervisory framework as we progressively
shift the emphasis from a rule-based regime to a risk-based and disclosure-based approach. This is
necessarily work-in-progress, as it will take several years of learning and adaptation by MAS, financial
institutions, and market participants. But achieving this is an important part of ensuring that Singapore
remains a resilient, competitive, and dynamic financial centre.
Thank you very much. My colleagues and I will be pleased to take any questions that you may have.