MACROFINANCIAL LINKAGES AND THE SINGAPOREAN ECONOMY: EXPERIENCE AND LEARNING POINTS

Transcription

1 MACROFINANCIAL LINKAGES AND THE SINGAPOREAN ECONOMY: EXPERIENCE AND LEARNING POINTS Lee Yoong Yoong 1 Research Fellow Institute of Policy Studies Lee Kuan Yew School of Public Policy National University of Singapore lee.yoongyoong@nus.edu.sg Paper prepared for Pacific Economic Outlook Conference on: Macrofinancial Linkages and Financial Deepening, September 11-12, Osaka, Japan

2 MACROFINANCIAL LINKAGES AND THE SINGAPOREAN ECONOMY: EXPERIENCE AND LEARNING POINTS This paper seeks to analyse the macroeconomic impact of the recent global financial crises on the Singaporean economy, vis-a-vis its experience of previous financial downturns such as the Asian Financial Crisis in 1997/1998, and the Information Technology (IT) crisis in Introduction 1. Like many global open economies, the recent global financial crisis played a role to a marked slowdown in Singapore s Gross Domestic Product (GDP). In fact, this crisis was the worst to hit Singapore since its independence in A negative GDP growth was forecasted for 2009 at -9% to -6%. (See Chart 1) Overview of Singapore Economy (2008) Others 19% Wholesale & Retail Trade 16% Construction 2008 GDP: S$273 billion 22% Manufacturing Financial Services 13% 4% 13% 13% Business Services Transport & Communications 2008 Total Manufacturing Output Precision Engineering 9% Biomedical Manufacturing 8% Transport Engineering 10% General Manufacturing Industries 7% Chemicals 39% 2008 GDP growth: 1.8% 2009 GDP growth forecast: -9% to -6% Source: Singapore Dept of Statistics 2009 Electronics 27% (Chart 1 Overview of the Singapore Economy Source: Economic Development Board (EDB) of Singapore; Singapore Department of Statistics (DOS)) 2. Today, Singapore finds itself at a similar inflection point to the Asian Financial Crisis about 12 years ago. At that time, Asia was staging a strong recovery from THE 2

3 crisis which shook the region. Nevertheless, when comparing with the Asian Financial Crisis and to some extent, the 2001 IT Downturn, the net job losses this time round were much smaller (Chart 2), although many foreign workers were affected as they were repatriated to their home countries 2. (Chart 3) Net job losses were smaller compared to past downturns. Thousand Total Employment Changes Asian Financial Crisis 2001 IT Downturn Recent Recession H H Q Number of quarters from GDP Peak % Point Change from GDP Peak, SA Change in Unemployment Rate Asian Financial Crisis 2001 IT Downturn Recent Recession Number of quarters from GDP Peak (Chart 2 Unemployment in the past three downturns in Singapore) Source: Monetary Authority of Singapore (MAS) Local employment has been resilient, while overall wages have picked up. Local and Foreign Employment Changes Nominal Wage Growth by Industry Foreign Overall Construction 2009 Q Q1 Manufacturing Thousand Local Financial Services Community, Social & Personal Svs Business Services Wholesale & Retail Information & Comm -40 Hotels & Restaurants Transport & Storage YOY % Growth (Chart 3 Local vs Foreign Employment; Nominal Wage by Industry) Source: Monetary Authority of Singapore (MAS) 3. In fact, local employment actually expanded during the recent recession, while foreign employment fell. The relative stability of local employment partly 3

4 reflected the impact of the wage subsidy provided through the government s Jobs Credit Scheme 3. By Q1 2010, the overall wage growth has turned positive, amid strong economic expansion and a tightening labour market. The rise in wages in Q1 was led by the construction and manufacturing sectors. Emerging from the crisis 4. The worst of the global financial crisis appears to be over. Global financial conditions have improved strikingly and the prospects for the world economy have perked up. Asia, excluding Japan, is leading the recovery, with its GDP already surpassing the pre-crisis level. For the whole of 2010, Asia, led by China, India, Newly Industrialised Economies (NIEs), is expected to grow over the previous year (Chart 4). The outlook for global growth has improved. Latest Consensus Forecasts of GDP Growth (%), June TOTAL* 4.8 (3.7) 4.2 US 3.3 (2.6) 3.1 Eurozone 1.1 (1.1) 1.4 Japan 3.2 (1.5) 1.7 Hong Kong 5.6 (3.7) 4.7 Korea 5.5 (4.1) 4.3 Chinese Taipei 6.5 (4.2) 4.5 Indonesia 5.9 (5.4) 6.0 Malaysia 6.9 (4.4) 5.2 Thailand 5.1 (3.9) 4.4 Philippines 5.1 (3.6) 4.5 China 10.2 (9.5) 9.0 India 8.3 (7.5) 8.5 * Weighted by shares in Singapore s NODX (As of Oct 09) (Chart 4 Outlook of Global Outlook) Source: Monetary Authority of Singapore (MAS) 4. The Singapore economy, too, has rebounded significantly and is expected to grow by 13 15% in 2010, with manufacturing and services spearheading the recovery (Charts 5). 4

5 Construction Overview of Singapore Economy (2009) Others 18% Wholesale & Retail Trade 18% 2009 GDP: S$265 billion 5% 13% 20% 14% 12% Transport & Communications Manufacturing Financial Services Business Services 2009 GDP growth: -1.3% 2010 GDP growth forecast: 13% to 15% Source: Singapore Dept of Statistics 2010 (14 July 2010) 2009 Total Manufacturing Output General Manufacturing Industries Transport 9% Engineering 13% Precision Engineering 9% Biomedical Manufacturing 10% Chemicals 27% Electronics 32% US$1.00 = S$1.4545(2009 av.) Source: EDB RSU Census & Surveys (Chart 5: Overview of Singapore Economy 2009) Source: Economic Development Board (EDB) of Singapore; Singapore Department of Statistics (DOS)) CPI inflation fell sharply in 2009, but rose in Q Headline CPI and MAS Underlying Inflation Contribution to CPI Inflation YOY % Growth Headline CPI Inflation MAS Underlying Inflation % Point Contribution to YOY Growth Food Accommodation Fuel & Utilities Pte Road Trpt Others Inflation Rate Q1 (Chart 6 CPI Inflation in Singapore) Source: Monetary Authority of Singapore (MAS) Q2 Q3 Q Q1 5. Against the backdrop of the global recession in 2009, price pressures in the Singapore economy dissipated rapidly and the headline CPI inflation fell to -0.8% in Q This brought the overall CPI inflation rate in 2009 to 0.6%, compared with 6.6% in The MAS underlying inflation, which excludes the cost of accommodation and private road transport, was also flat for the year, after reaching 5

6 5.7% in However, CPI inflation turned positive since the start of 2010 and averaged 0.9% y-o-y in the first quarter, and reached 3.2% in April This was due to higher costs of private road transport and fuel & utilities, from higher car premiums and higher global oil prices, respectively in Singapore. It is projected that CPI inflation will come in around % this year (Charts 6 and 7). CPI inflation is expected to average between 2.5% and 3.5% this year... Headline and MAS Underlying Inflation 8 6 Headline CPI Inflation Forecast YOY % Growth MAS Underlying Inflation Q4 (Chart 7 CPI Inflation in Singapore for 2010) Source: Monetary Authority of Singapore (MAS) 6. One other reason why Singapore absorbed the shock from the global economy reasonably well despite a sharp drop in output is because the Singapore government had issued a guarantee on bank deposits as soon as economies like Hong Kong (and several others) did so, and this had also supported the stability of the Singapore economy. The Singapore government had offered a range of liquidity and credit support lines to smaller businesses and support for low income households. Thus, even though the GDP plunged, the welfare impact was actually quite minimal. 6

7 7. While the immediate outlook is encouraging, Singapore will continue to remain alert because the structural headwinds to growth in advanced economies remain. The transition from government-led stimulus to sustained private-sector driven growth may be more challenging in those economies which face rising sovereign debt levels. As global liquidity conditions normalise - following the unprecedented easing of interest rates by major central banks - financial markets could experience bouts of volatility as a range of asset classes are repriced and this could impact negatively on various interest-sensitive industries. 8. Additionally, reforms of the global financial system have to be carefully thought through, regulated and sequenced. It is important that reforms do not become politicised, with a rush to adopt simple rules that seem to solve the problems. Specific measures, each of which is sensible, may collectively create unintended outcomes and block the promising economic recovery. In this regard, Singapore hopes that the Basel Committee s 4 Quantitative Impact Studies 5 will provide an important basis to take a more holistic view of the required changes. Learning points 9. Most discussions this far have been framed around the premise of "Preventing a similar crisis from happening again". While there is a clear need to look back and learn from the crisis, it is also important to look forward. We must not only fight the last war. In the years ahead, significant restructuring of the global economy is necessary. Hence, there are grounds to believe that a more primary 7

8 question to frame the discussion is: "How do we make the global financial system more resilient and at the same time supports economic restructuring and sustainable global growth, given the economic changes and challenges ahead?" 10. It is therefore critical to get the nexus between the financial system and the real economy correct. In this regard, Asia's needs are likely to be different from those in the advanced economies. Economies in rapid transition need responsive banking and capital markets. Bankers need to appreciate the changing needs of the economy, build new capabilities and develop new products/services, to support the needs of firms, large and small, in both mature and new industries. The financial industry needs to build up capabilities to understand the requirements of new industries in the technology and services arena, and to efficiently fund long term infrastructure needs. 11. To sustain Asia's growth path, Singapore sees the need to further develop and deepen national financial systems and regional financial integration. The Monetary Authority of Singapore (MAS) 6 is studying several ideas in these areas, and Singapore looks forward to working with its regional partners and institutions, such as the Association of Southeast Asian Nations (ASEAN) 7 and the Asia-Pacific Economic Cooperation (APEC) 8, as well as with the industry to advance this. 8

9 What Singapore will be undertaking Let me now briefly touch on the measures that Singapore is taking to respond to the challenges from the international reform agenda and the evolving new financial landscape. The measures are based on three key pillars: Sound Rules 13. The first pillar is establishing sensible rules. Singapore will seek to establish sensible and high standard rules that allows well-managed risk-taking and innovation, and which emphasises the stable and sustainable development of the financial services sector. Singapore's approach to this rule-making is outcomefocused. It recognises that the design of regulation should take into account market realities so that unnecessary disruption to well-functioning markets is minimised. For example, in current proposals for a new liquidity framework for banks, having a narrow definition of acceptable liquid assets is likely to adversely affect the operations of banks in countries without an active sovereign debt issuance programme. Singapore believes that there is a good case for high quality, widely circulated non-sovereign debt to be included as acceptable liquid assets, without undermining the prudential intent of the new liquidity rules. In this regard, the results of the Basel Committee s Quantitative Impact Study will have to be studied carefully in finalising the list of eligible liquid assets. 9

10 14. Having outcome-focused rule-making also means that where appropriate, Singapore may seek to reign in potential risk-spots through more prescriptive rules, even if such rules are not commonly accepted international best practices. One example would be the macro-prudential rules in some Asian nations, including Singapore, to cap loan-to-value ratios for mortgages, something which are uncommon in the western markets. In Singapore, the MAS has disallowed innovative financing schemes for mortgages. Drawing such "bright lines" in regulation simple, clear "out-of-bound" markers has been useful in seeking out undue build-up of risks in certain situations. 15. Singapore s approach to rule-making has to strike the right balance of having a financial system that is both sound and progressive, to fulfil its function as a conduit of capital and a facilitator of trade and economic activity. The effectiveness of a regulatory framework is not determined by whether it is stringent enough to prevent shortcoming or failure of any firm. Neither is it decided by the dynamism and innovative of the financial services sector. A regulatory framework focused on stringency alone would inflict undue costs and constrain innovation without the assurance that it would be effective. Similarly, a regulatory framework focused on dynamism alone may not offer sufficient protection to investors, depositors and customers, and may experience more disorderly consequences in a crisis. 10

11 Effective Supervision 16. The second pillar is effective supervision. Globally, there has been much discussion on having better rules, but not enough on strengthening day-to-day micro prudential supervision. 17. An eminent ex-central banker once likened this financial crisis to a massive accident on the highway. To prevent future accidents, if one assesses that all drivers are irresponsible, there would be calls for the need to drastically reduce the overall speed limit. But if one assesses that we could all do a better job to take errant drivers to task early, we would have to focus on strengthening the effectiveness of enforcement. We can then afford to be more measured and targeted in our rulemaking. It is thus quite obvious that reinforcing sensible rules with good supervisory judgements achieves a better outcome than acting on just one or the other. 18. However, effective supervision is not easy. The spectrum of supervisory issues will continue to expand and evolve. The economic and financial landscapes are changing rapidly, and interactions remain complex even as one seeks to simplify the system. Globally, financial supervisors are responding to this challenge in two ways. First, many countries are now considering changes to the institutional structure of their supervisory authorities in the aftermath of the crisis. In this regard, Singapore is rather unique in combining financial sector regulation and supervision, central banking and development responsibilities under one agency 11

12 the MAS. This structure has served the city-state well, and many countries have, over the years, visited Singapore to better understand the functions of the MAS. 19. Second, many financial supervisors are stepping up their investment in building up and enhancing their supervisory resources and capabilities. The crisis has underscored the need for financial supervisory authorities to have adequate and well-trained staff, so as to cope with the demands of supervising financial institutions in a fast-moving, complex and challenging operating environment. To maintain a high degree of confidence in the quality of supervision, Singapore has recently set up the MAS Academy and devote considerable resources into training and developing its central banking and supervisory staff. Working in Partnership with Industry: Shared Outcomes and Responsibility 20. However, sensible rules and effective supervision are not enough. There is a need for a third pillar of partnership, where authorities and financial institutions each take on specific responsibilities to develop a shared ownership of supervisory outcomes. Indeed, the design of regulation and the supervisory approach taken should allow for financial institutions to take on responsibility in contributing towards desired supervisory outcomes where appropriate. Let me highlight two of these areas, namely (a) the industry's role in improving corporate governance and (b) in capability building. 12

13 Corporate Governance 21. One lesson from the recent crisis is that good corporate governance matters. The failure by Boards to exercise effective risk management oversight had damaging consequences for many institutions. Boards play a vital role in safeguarding the safety and soundness of their institutions by setting the risk appetite, remuneration policies and strategic direction, among others. For directors to discharge their responsibilities, they have to have the requisite knowledge, skills and experience. 22. Singapore will place increasing emphasis on the quality of the board of directors of financial institutions. Among the proposals to enhance our Corporate Governance Framework for locally incorporated banks and significant life insurers is the requirement for financial institutions to assess the current skills of their Boards on an ongoing basis, and to establish a continuing development programme for all their directors. Given the important role that the banking industry plays in Singapore s economy, MAS is also considering developing a mandatory training programme for bank directors. 23. Let me add that rules, and mechanical compliance with rules, can only go so far in encouraging good corporate governance in organisations. What matters most is for Board and management members to embrace not just the letter of the rules but the spirit of the rules, to take ownership of outcomes, and to internalise the essence of these rules in the ethos and practices of the organisation. Corporate governance in Singapore s financial institutions have improved over the 13

14 years. Singapore will continue this partnership between the authorities and the corporate sector to seek continual improvements in corporate governance which will underpin Singapore's reputation as a trusted financial and business hub. Capability Building 24. The other area for collaborative partnership is in building up the capabilities of financial industry professionals. Asia's financial services industry is likely to grow rapidly. If this is not underpinned by an equally rapid growth of capabilities, whether it is in the front office or the mid-back office, we risk a major disruption ahead. It is essential that a small city-state like Singapore can act pre-emptively to address this. 25. Now that financial conditions have improved and firms are hiring again, financial institutions must invest in recruiting and developing their own staff. Taking the easy option of poaching staff from competitors to meet business expansion will undermine the collective strength of the industry in the long term, with adverse consequences on growth prospects for the industry as a whole. Conclusion 26. To sum-up, the Singapore economy has recovered decisively from the 2009 downturn and activity has exceeded pre-crisis levels across a range of industries. While downside risks stemming from the Eurozone s weakness remain, Singapore s domestic output is likely to stay at high levels, driven by Asian demand and capacity 14

15 additions. Despite the cyclical upturn, the global economy continues to face risks in the near term. 27. One key risk is the sovereign debt crisis in the Eurozone. If the financial contagion spreads and the functioning of the credit markets in Europe and elsewhere is severely impaired, global growth will be marked down and this will negatively affect Asia and Singapore. 28. Asia's financial systems and institutions are facing considerably less pressure for financial restructuring and regulatory reform in the current crisis. While Asia has not emerged unscathed, significant structural changes made after the Asian Financial Crisis have enabled the region's financial systems to weather this crisis quite well. 29. Whatever it is, there is no room for complacency. Even as Singapore recognises the need to continue development of its financial markets, considerable risks and policy challenges still remain for the region. As far as Singapore is concerned, the city-state will continue with its three pillar approach of sensible rule making, effective supervision and partnership to achieve the desired outcome. 30. Asia should take advantage of the global reform agenda to strengthen its regulatory and supervisory regimes, consistent with international standards and best practices, but at the same time, doing it in a manner that is sensitive to the regional environment and needs. 15

16 31. Singapore is confident that with financial supervisors and the industry working together in partnership, the resilience of the global financial and economic systems can be better strengthened in going forward. ENDNOTES 1. Mr Lee Yoong Yoong is the Research Fellow (Economies and Business Cluster) at the Institute of Policy Studies (IPS), Lee Kuan Yew School of Public Policy, National University of Singapore. He produced this paper with references based on a compilation of governments assessments; media reports; and evaluations by experts. He alone is responsible for the errors and inadequacies of this paper. The views expressed are his own and do not in any way represent any organisation. 2. Singapore is basically a labour-importing country in its economic development. Main sources of foreign workers are from China, India, Malaysia, Bangladesh, the Philippines, Indonesia and Myanmar. 3. The Jobs Credit Scheme was introduced in the Singapore Budget 2009 to encourage businesses to preserve jobs in the downturn. Businesses will receive a cash grant based on the Central Providence Funds (CPF) contributions they have made for their existing employees. It provides a significant incentive for businesses to retain existing workers, and where their business warrants, employ new ones. Under the scheme, an employer will receive a 12% cash grant on the first $2,500 of each month s wages for each employee on the CPF payroll in 4 payments: March, June, September and December In October 2009, the Government announced that the Jobs Credit scheme will be extended for half a year with another 2 payments at stepped-down rates in March and June 2010 as follows: Jobs Credit payment Amount Payment date Qualifying period of wages Deadline for CPF contributions 1st Payment Extended 6% of wages 31 March 2010 October to December 2009, for employees on January 2010 payroll 17 February nd Payment Extended 3% of wages 30 June 2010 January to March 2010,for employees on April 2010 payroll 14 May 2010 The amount of Jobs Credit an employer can receive for each of the payment depends on two factors: (a) The number of employees (Singaporeans and Permanent Residents) on the employer s CPF payroll for the months of January, April, July, October 2009, January and April 2010; and (b) The wage cost of these employees, derived from the CPF contributions made for them in the preceding quarter (known as the Qualifying Period). 4. The Basel Committee on Banking Supervision is a committee of banking supervisory authorities, established by the central bank Governors of the Group of Ten countries in It consists of senior representatives of bank supervisory authorities and central banks from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. It normally meets at the Bank for International Settlements (BIS) in Basel, Switzerland, where its permanent Secretariat is located. 5. The comprehensive quantitative impact study under the Basel Committee is to assess the impact on participating banks of the rules set out in the documents and proposals, such as the (a) Revisions to the Basel II market risk framework; (b) Enhancements to the Basel II framework; (c) Strengthening the resilience of the banking sector; and (d) International framework for liquidity risk measurement, standards and monitoring. 6. MAS is the central bank of Singapore. Its mission is to promote sustained non-inflationary economic growth, and a sound and progressive financial centre. 7. ASEAN was established in 1967 through a Declaration by its five founding members: Indonesia, Malaysia, the Philippines, Singapore and Thailand. Today, the regional grouping embraced ten Member States with the addition of Brunei Darussalam (joined in 1984), Cambodia (1999), Lao People s Democratic Republic (Lao PDR) (1997), Myanmar (1997) and Viet Nam (1995). The total population of ASEAN is about 560 million. 8. APEC s primary goal is to support sustainable economic growth and prosperity in the Asia-Pacific region. The grouping pledges to build a dynamic and harmonious Asia-Pacific community by championing free and open trade and investment, 16

17 promoting and accelerating regional economic integration, encouraging economic and technical cooperation, enhancing human security, and facilitating a favorable and sustainable business environment. 9. Opening Keynote Address, Mr Heng Swee Keat, MAS Managing Director, The Asian Banker Summit, 19 April 2010, Singapore ( e_asian_banker_summit.html) 17