Chapter 2. Emergence of Singapore as a Full-bodied Financial and Banking
2.1 The 1997 Asian Financial Crisis: a wake up call for Singapore’s financial
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Chapter 2. Emergence of Singapore as a Full-bodied Financial and Banking Cluster, and Performance from 1997 to 2013
2.1 The 1997 Asian Financial Crisis: a wake up call for Singapore’s financial center
The 1997 Asian Financial Crisis having had a tremendous impact on the regional and Singaporean financial market, it is therefore crucial to understand its development and consequences.
2.1.1 Impact on Asia
On July 2, 1997 Thailand’s national currency, the Baht, followed a downward spiral (CNN Money, 1997). In the coming days and weeks most countries in the region were severely hit as well. The Philippines, Malaysia, Indonesia and South Korea reached their lowest points that same year too (Beeson & Rosser, 1998). On a lesser note Taiwan, Hong Kong and Singapore weathered through the hard times better.
The situation started to look bleak in Asia as early as 1996. The macroeconomic situation in Thailand had already started to worsen. The Thai Baht in parallel to the USD, to which it was pegged at the time, appreciated by 21% against the Japanese, American, and German currencies between April 1995 and December 1996 (Moreno & Federal Reserve Bank of San Francisco, 1997). Hence making the Thai Baht one of the world’s most overvalued currencies. As a consequence Thailand’s exports lost their competitiveness on the international market, shrinking by 0.2% in 1996 especially in the textile sector (Lai, 2000, p. 68), leading to a 7.9%
deficit of the country’s current account (Tan, 1999, p. 1). As a consequence, Thailand’s stocks and property markets began to tumble, further weakening local financial institutions. In spring 1997 heavy pressure started to be felt on the Bath, as locals wanted to insure themselves against the risk they had taken by borrowing in foreign currency denominated loans (Beeson & Rosser, 1998).
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To preserve the value of the Bath, the central bank spent a massive amount of its foreign reserve through USD “forward contracts”5, which proved costly and eventually deadly for governments’ foreign reserves.
The announcement of forthcoming massive losses by Finance One, one of the largest Thai banks, prompted the government to let the Bath float freely, as the Thai central bank could no longer afford to keep afloat its banking and monetary system.
This ended the long-lasting peg of the Bath to the USD (King, 2001, p. 441). So, the Thai currency lost most of its value overnight, as it had previously been kept artificially at a high level when pegged to the much stronger USD, linked to the mature American market.
In the following two weeks, Malaysia and the Philippines unpegged their currencies as well, and South Korea did similarly afterwards, thereby provoking massive flight of foreign capital from the region (King, 2001).
As much of the local private debt was foreign currency denominated, many households were unable to pay back their loans. It led many countries to face unbearable situations, with for instance the case of South-Korea whose short term foreign debt nearly reached 100 billion USD at the end of 1997 (King, 2001, p. 442).
Therefore, the region lost the momentum it had gained since the 1960’s (cf. Table 2).
Figure 2
GDP Growth (annual %)
1996 1997 1998
Indonesia 7,6 % 4,7 % -13,1 %
South-Korea 7,0 % 4,7 % -6,9 %
Malaysia 10,0 % 7,3 % -7,4 %
Philippines 5,8 % 5,2 % -0,6 %
Singapore 7,6 % 8,5 % -2,3 %
Thailand 5,9 % -1,4 % -10,5 %
Source. United Nations Statistics Division, n.d.
5 “Forward contracts” are contracts made between two parties to buy or sell an asset (referred to as the 'underlying’) at a specified price (referred to as the 'forward price’) on a future date. They do not trade on a centralized exchange and are therefore regarded as over-the-counter (OTC) instruments. There is no money exchanged until the settled date.
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The catastrophic domino effect of the crisis can be blamed on the underdevelopment of local financial systems. They were not ready to withstand the massive inward flow of foreign capital that occurred before the crisis in their local economies.
Local banks at the time heavily relied on USD denominated short-term loans, and their risk management strategies were inadequate. For instance, in the 1990’s the Thai government had settled the “Bangkok International Banking Facility” (BIBF) that was in charge of providing local banking institutions with foreign funds.
However the BIBF activities were not closely supervised, which resulted in an uncontrolled growth of foreign currency denominated short-term debt that was used to invest in long term projects, which equaled to incompatible debt maturity6 (King, 2001, p. 443).
Furthermore, due to the heavy inflow of foreign investors in local stock markets, the crisis spread fast in Asia. Fund managers and private investors who had to cover their losses in Thailand, sold their assets in other Asian markets that had not yet deflated too much, thus further inducing a domino pattern (Tan, 1999, p. 4).
All in all, at the dawn of the crisis there were three distinctly salient problems in Asia: asset bubbles in the real estate and stock market, shrinking exports, and opaque governmental and banking decision-making processes. Thus paving the way for the massive crisis that followed.
2.1.2 Impact on Singapore
Contrarily to the situation in most countries of the region at that time, Singapore’s economy was not as hardly hit by the crisis as other nations (cf. Table 1), with the exception of Taiwan. This was due to the careful building of the financial sector since the mid 1960’s. The city-state had also in the previous boom years been exempt from a massive inflow of capital from abroad, preventing too much of a lending explosion (Garrido, 2005, p. 29).
Yet, overall the country suffered, and unemployment more than doubled, to balloon to 4.4% in December 1998 (Tan, 1999, p. 5). For that reason, Singapore chose to improve the economy’s competitiveness. For instance, the wage system was
6 Maturity refers to the date when the final payment of a financial instrument is due to be paid.
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reformed in order to make it more flexible and responsive to allow companies to remain profitable in times of economic hardship (Jin, 2000).
The government at first for the 1998-1999 budget did not plan to launch a stimuli package; actually a surplus was still expected. Only small tax cuts were planned to boost competitiveness. However as the economy did not show signs of recovery, the government decided to launch a second set of policies to help domestic companies, thus mostly aiming at resorbing the surge of the unemployed.
The “cost reduction package” was probably the boldest move from the government, by reducing costs of doing business7 by 15%, it was worth more than 10 billion (SGD) in total (Tan, 1999, p. 8). These measures, though costly, did not increase Singapore’s debt as it had in its good years generated large budget surplus (Garrido, 2005, p. 33). Luckily, the expected effects of the successive plans materialized, and the banking sector was able to rebuild its attractiveness.
While helping the local economy, the Republic of Singapore also sought to help the whole region to recover as fast as possible. In August 1997 Singapore, alongside other countries, provided a rescue package worth US$17.1 billion to Thailand, and it did the same in November 1997 this time to help Indonesia with a 38 billion USD package. It also took part into the IMF sponsored “New Arrangement to Borrow” aimed at giving the IMF access to extra funding in case the international monetary system would be at risk of collapsing. It injected 340 million USD in the overall 34 billion USD program (Jin, 2002). These moves all showed the willingness of Singapore to truly engage into any international plans aimed at resorbing the effects of the 1997 Asian financial crisis.
2.1.3 Impact on the Singapore Dollar
The Singapore dollar is pegged to an undisclosed currency basket of Singapore’s “major trading partners and competitors” (Monetary Authority of Singapore, 2001d, p. 2). The official exchange rate of the SGD is calculated following the nominal effective exchange rate8 (NEER), and allowed to fluctuate within an
7 Cost of doing business (CODB) refers to the cost of operating one’s business, this generally includes taxes, salaries, bills, and rent.
8 The NEER is the quote for a currency versus a weighted value of currencies traded within an index of currencies (weighed according to the balance of trade). The NEER differs from the “real exchange
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“undisclosed policy band9” (Monetary Authority of Singapore, 2001d, p. 2). This solution allows for a more flexible monetary policy in case of crisis, in comparison to the Hong Kong Dollar that is completely pegged to the USD. As a result, while no drastic devaluation was undertaken, the SGD’s policy band was modified to allow greater volatility. Following this careful policy the NEER had as early as 1999 recovered its average NEER (Jin, 2000).
In 1997, the Singapore dollar found itself in a middle ground situation, where the national currency lost ground to the USD, the Japanese Yen, the British Pound, and Deutschemark, but appreciated against other Asian currencies, such as Malaysia’s Ringgit and the South-Korean Won (Jin, 2000).
Because of the sudden fall of other regional currencies against the Singapore dollar, the erosion of exports’ competitiveness consecutive to a comparatively more expensive currency, and the fall in regional consumption, domestic exports declined in the region. The situation would have been way worse, had the government not pushed for market expansion in all continents for its high-tech manufactured goods (Garrido, 2005, p. 35). The ASEAN-4 (Indonesia, Malaysia, Philippines, and Thailand) at that time represented almost a third of Singapore’s exports.
Singapore’s response however was nothing like that of its neighbors, it did not drastically change its monetary policy during the crisis, as speculators in the end chose to attack other currencies, which had weaker fundamentals, such as South Korea’s Won. This can be credited to the conservative lending policies of the Monetary Authority of Singapore (MAS). Before the crisis, its monetary decisions were highly trusted, and the Singapore Dollar in 1997 was still seen as a safe heaven due to the island’s sound macroeconomic environment: no external debt, large foreign exchange reserves, budget surpluses, high savings rates, current account surplus (20.9% of GDP in 1998) (Jin, 2000).
What’s more, the MAS has long opposed the internationalization of the SGD, arguing that it has to parallel the growth of the real economy, thus preventing a risk of capital flow instability. While all forms of exchange control were totally removed in 1978 (Tee, 2003, p.93), until today this policy has safeguarded the SGD from
rate” (RER), which reflects the value of a currency corrected according to local purchasing power. This also contrasts with the “nominal exchange rate” (NER), which is the official exchange rate.
9 A policy band refers to a currency system that allows a currency’s exchange rate to fluctuate between pre-established limits. It is a system in-between a fixed exchange rate and a floating exchange rate.
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suffering from any catastrophic speculative attack. Even though some complain that it hinders the growth of the Singapore Financial cluster.
2.1.4 Impact on Singaporean banks
As might be expected, Singaporean financial institutions had to overcome some difficulties during the crisis. Due to their investments in South East Asia they had to proceed to asset depreciation, and witnessed a sharp increase in non-performing loans (NPL)10 to around 10% in 1998. Luckily, the region only represented 20% of domestic banks’ assets, and “loan exposure to Malaysia, Indonesia, Thailand, South Korea and the Philippines in March 1999 was 34.7 billion SGD, or 12.5% of their total assets” (Jin, 2000, p. 9).
Banks in Singapore having an average capital adequacy ratio11 (CAR) of a bit more than 16%, they did not suffer losses to the point of going bankrupt. They were more than able to withstand the losses, and still posted benefits in 1998 (Tan, 1999).
However, financial services got affected by the recession for the year following the crisis, while the business sector continued to grow (Jin, 2000). All in all, banks while having to digest the losses from NPL, the sector was not as badly hit as in South Korea or Indonesia, thus showing resilience through effective capital management techniques (Garrido, 2005, p. 29).
2.1.5 Impact on the Stock Exchange of Singapore (SES) and the Singapore International Monetary Exchange Limited (Simex)
On a year-to-year trend, from July 2, 1997 Singapore’s stock market, which at the time comprised the Stock Exchange of Singapore (SES) and the Singapore
10 NPL (sometimes referred as “bad debt”) are loans on which the borrower stops making payments (usually for three months), and consequently leads to default. Individual countries have different regulations concerning classification into NPL. However, “loan loss provision” is usually set aside by financial institutions to cover potential losses from money lending activities. Two options exist to handle NPL, either including them in one’s balance sheet (loss account), or selling them to asset management companies (AMCs) that will reclaim whatever may be. NPL ratio reflects the overall health of banks, the smaller it is, the better the quality of outstanding loans.
11 The Capital Adequacy Ratio (CAR) refers to the amount of capital versus the credit exposure.
Regulations have been set worldwide in order to ensure that banks have a minimal CAR in order to lower systemic risk exposure, and safeguard customers.
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International Monetary Exchange Limited (Simex), lost more than 45% (Tan, 1999).
This resulted in severe losses on the side of private investors.
Singapore's brokerage firms were also severely shaken by a unilateral decision taken by the Malaysian government enforcing tight exchange control. The Kuala Lumpur Stock Exchange in mid-1998 was also concerned by protectionist measures, thus all transactions involving shares of Malaysian companies were no longer allowed to be conducted outside of Malaysia. As a consequence Central Limit Order Book International, which so far in Singapore was in charge of such transactions suffered dramatic losses (Jin, 2000).
2.2 Liberalization of Singapore’s Financial and Banking Market: Singapore’s