Tharman Shanmugaratnam: Update on the Singaporean economy
Statement by Mr Tharman Shanmugaratnam, Managing Director of the Monetary Authority of
Singapore, delivered at the MAS Annual Report 2000/2001 media conference in Singapore on 12 July
2001.
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1 Introduction
MAS has had an eventful year, shaping monetary policy in a challenging and uncertain environment
and continuing to liberalise and enhance standards in the financial sector.
2 Monetary policy
In January this year, MAS decided to maintain the existing exchange rate policy stance of allowing a
modest appreciation of the trade-weighted Singapore dollar within an unchanged policy band. This
policy was aimed at capping medium-term inflationary pressures, while continuing to be supportive of
economic activity as growth came off its cyclical high and moderated to a slower pace.
Economic activity slowed much more in the first half of 2001 than was expected, causing market
sentiment to shift against the Singapore dollar. Strong demand for US dollars to fund merger and
acquisition activities by domestic corporates, and a strengthening of the US dollar against the major
currencies, exerted further downward pressure on the Singapore dollar. The S$NEER weakened over
the period, from the top of the policy band at the start of the year to the lower half of the band at end
June. This trend was consistent with the change in underlying economic and market conditions.
Against the backdrop of a weaker external economic environment and a more protracted global
electronics downturn, near term growth prospects for the Singapore economy have turned significantly
weaker while inflationary pressures are subsiding. The slowdown reflects a decline in demand, not an
erosion of competitiveness. There is no reason for any persistent weakening of the Singapore dollar.
MAS has therefore shifted to a neutral exchange rate policy stance, with a policy band centred on a
zero percent appreciation of the S$NEER. MAS will continue to guide the S$NEER within this
exchange rate band, and stands ready to intervene to dampen excessive volatility should this become
necessary.
3 Financial sector supervision and development
MAS' financial sector policies seek to promote a sound and resilient financial system while facilitating
innovation, dynamism and competition. Recent and ongoing initiatives by the MAS have focused on:
 harmonising regulation across the financial sector;
 liberalising access to the domestic industry;
 promoting corporate governance and market discipline;
 implementing a risk-focused supervisory framework; and
 developing talent in the financial sector.
Harmonising regulation
Convergence of financial activities and consolidation of financial institutions have made a more
harmonised and integrated approach to regulation more urgent. Consistent regulatory treatment for
similar products and activities will help level the playing field; it will also lower compliance costs by
streamlining relevant regulations and reporting requirements across activities. As an integrated
regulator, MAS has made significant progress in harmonising regulation. Recent and ongoing efforts
have focused on the areas of licensing and capital adequacy.
On licensing, there have been two major initiatives: the new Securities and Futures Act (SFA) and the
new Financial Advisers Act (FAA). Public consultation documents and draft legislation of the SFA and
FAA were released in March 2001. The Bills will be tabled in Parliament soon and are expected to be
enacted by the end of this year.
The SFA rationalises and consolidates into a single comprehensive legislation the Securities Industry
Act, Futures Trading Act, and provisions in the Companies Act related to capital raising. It introduces a
single, modular licensing regime for securities and futures intermediaries, which will enhance
competition and lower compliance costs. The new legislation will also reflect initiatives that take into
account industry developments brought on by globalisation and technological advancements.
The FAA provides a single licensing regime and a more flexible and integrated regulatory framework
for entities engaging in financial advisory activities for all investment products, and facilitates the
setting of consistent professional standards across the industry. Similarly, consistent business conduct
standards will govern the sale of unit trusts and life insurance across financial institutions licensed by
MAS.
With the proposed streamlining in licensing, financial institutions and market participants will no longer
need different licences to undertake different classes of financial activities. However, they have to
abide by common regulatory standards relevant to the financial activity they engage in, including
activities where they are exempted from holding licences.
On capital adequacy, MAS is putting in place across the financial sector a risk-based framework
based on common principles and objectives. The existing capital frameworks for insurance
companies, securities dealers, and futures brokers, are being revised, so as to move towards a
risk-based approach, not dissimilar to banking.
In insurance, industry working groups are looking into the valuation and solvency framework for both
life and general insurance business. In securities and futures, MAS has been working with the
Singapore Exchange to establish a risk-based capital adequacy framework for licensed securities
dealers and futures brokers. This framework will allow the brokers to better manage the risks they
face, in the light of market and product developments. The new framework is expected to be
introduced in the second half of 2001, and will take into account comments and findings from two
rounds of consultation with the industry.
In banking, where risk-based capital standards already exist, MAS welcomes the key thrusts of the
proposed New Basel Capital Accord. It has been working closely with the local banks to develop their
capabilities and resources, so as to implement the internal ratings based approach.
Liberalising access
Liberalisation efforts have kept pace. A more open and competitive environment will spur innovation
and enterprise in the financial centre as well as provide Singaporeans with quality financial services.
The insurance industry is completely open. The securities industry has been substantially liberalised
and will be completely open from January 2002, when remaining trading restrictions on new members
admitted to the Singapore Exchange will be removed. In banking, MAS has announced its second
liberalisation package which will free up the wholesale market and considerably enhance competition
in the retail market.
Promoting corporate governance and market discipline
Sound corporate governance and effective market discipline will complement MAS' prudential
oversight, in fostering the safety and soundness of financial institutions. MAS has taken several
initiatives to improve corporate governance and information disclosure.
The Banking Act has been amended to give legislative effect to the policy requiring separation of
financial and non-financial activities in Singapore banks and the unwinding of cross-shareholdings.
This will limit the contagion risks to the banks, enhance market discipline, increase transparency and
ensure that bank managements focus their attention on the core banking business.
Local banks, in consultation with MAS, are adopting corporate governance standards that will, in areas
such as the independence of the Board and Board committees, go beyond the recommendations of
the Corporate Governance Committee. For financial year 2000, local banks improved their disclosure
of directors' remuneration, related party transactions, and risk management practices. They will
disclose further details on these areas next year, putting them on par with their international
counterparts in terms of public disclosure.
Implementing risk-focused supervisory framework
Recent regulatory reforms by MAS have also been motivated by the shift away from a
"one-size-fitsall" regulation to a more risk-focused approach. MAS is now developing a new risk-focused liquidity
supervision framework that will set a bank's liquidity requirement in line with its liquidity risk profile and
liquidity risk management capabilities. This shift away from a "one-size-fits-all" minimum liquidity
requirement would be in line with international best practices for liquidity risk management. The new
framework will be announced in the second half of this year. Its implementation will be phased out to
minimise potential disruptions to financial markets.
As business models and technologies continue to evolve, MAS has kept close touch with market
participants and discussed with them the possible risk implications of new activities. We have avoided
pre-empting market developments with premature regulation. Regulation has to be responsive but it
cannot prejudge how the market will develop and business strategies will crystallise.
MAS has issued regulatory guidelines on the provision of financial services through new delivery
channels. Examples include the policy statement on capital treatment of internet-only banks;
guidelines on technology risk management for all institutions engaging in internet banking; and sound
practice guidelines on internet securities trading. The proposed SFA will introduce an authorisation
regime to cater to new trading systems, often referred to as Alternative Trading Systems, so as to
increase the scope of products available to investors.
Developing talent
Attracting and developing talent, both Singaporean and foreign, is critical to fostering innovation and a
vibrant financial centre. In January this year, MAS announced that a Financial Network for Excellence
in Training (f-NExT) would be established to encourage greater collaborative efforts in enhancing
workforce capabilities within the financial sector. The Institute of Banking and Finance (IBF) will take
on a new role as the central executive arm of f-NExT. f-NExT will assess the training needs of the
financial sector holistically, and identify gaps in skills requirements. f-NExT will also strive to attract
world-class training providers to set up in Singapore. Reputable training providers will be encouraged
to set up more training centres to meet the industry's demands for specialised courses. IBF will
gradually phase out training courses which overlap with programmes offered by other training
providers.
4 International profile
As a leading financial centre, Singapore has a stake in a sound and stable international financial
system. MAS is actively involved in the Financial Stability Forum (FSF), and initiatives undertaken by
the Bank for International Settlements (BIS) to strengthen national and cross border supervisory
standards and capital adequacy of banks, market surveillance, and payments and settlement systems.
MAS participates actively at the International Organisation of Securities Commissions (IOSCO),
contributing to its work in developing principles and guidelines, which serve as global best practice
standards. MAS is also an Executive Committee member of the International Association of Insurance
Supervisors (IAIS), which is the global standards-setting body for insurance supervision.
Singapore is actively involved in regional financial fora, including ASEAN, APEC, the South East Asia
Central Bank (SEACEN) Governors, and the Manila Framework Group. MAS is also engaged in
expanded technical assistance to central banks and regulators in the Asia-Pacific over the past year,
including training programmes on macroeconomic management and financial supervision.
As part of Singapore's efforts to forge bilateral free trade agreements with strategic partners, MAS has
engaged in talks on financial services liberalisation and cooperation, including with Australia, Canada,
the European Free Trade Association, Japan, Mexico and the US.
5 MAS annual accounts
Assets & liabilities
On MAS' annual accounts, total assets increased by $15.2 billion to $130 billion as at 31 March 2001.
The main components of the increase were due to a $12.1 billion increase in foreign assets and a $3.3
billion increase in our holdings of Singapore Government Securities (SGS). As in the last financial
year, the increase in SGS holdings reflected MAS' strategy of building up SGS to engage in more
repurchase agreement (repo) transactions for our money market operations.
On the liabilities side, there was an increase of $14.7 billion in Government deposits with MAS,
reflecting mainly increased issuance of SGS through the Authority.
Income & expenditure statement
For the financial year ended 31 March 2001, MAS registered profits of $2.1 billion compared to $3.6
billion in the previous year. The decrease resulted from translation effects arising from the strength of
the Singapore Dollar against major currencies other than US Dollar over the financial year as a whole.
6 The organisation
MAS has strengthened its corporate planning process. We formed several cross-specialisation teams
comprising more than 60 staff to evaluate developments and challenges both in the external
environment and within the organisation. MAS' corporate priorities for the year have been developed
on the basis of these external and internal environment scans. These include programmes to enhance
Singapore's position as a world class financial centre and to create flexible and forward-looking
organisational practices for a more cohesive and dynamic MAS.