The Asian Financial Crisis: Singapore’s Experience and Response

Abstract

Although Singapore has a very open economy, both in the current and capital accounts, the impact of the crisis has not been as severe as in several less open regional economies; thus economic openness and globalization are not sufficient factors. Further, despite sound fundamental macroeconomic policies, Singapore did not escape the fallout from the regional crisis; thus these factors are insufficient insurance against overreactions and herd behaviour of currency traders and speculators. Finally, Singapore's policy response to the crisis is not to reject globalization and liberalization, but to undertake further reforms and restructuring to ensure international competitiveness. Introduction More than a year after the currency and financial crisis exploded in Southeast Asia, starting with floating of the Thai baht in July 1997, much has been written and debated regarding the causes and effects of the crisis and the necessary and appropriate responses at national and international levels. Singapore's experience with, and response to, the regional crisis makes for an interesting case study. First, Singapore has a very open economy, both in the current and capital accounts, yet the impact of the crisis has not been as severe as in several less open regional economies because it has strong macroeconomic fundamentals, sound macroeconomic policies, a healthy domestic financial system, and political and social stability. Second, Singapore's policy response to the crisis is not to reject globalization and liberalization and impose capital controls but to strengthen the domestic financial system and improve the economy's international competitiveness. Sound Macroeconomic Fundamentals and Policies Economic Openness and Vulnerability By any set of criteria, Singapore is one of the most open economies in the world which, together with its small size, renders it highly vulnerable to external developments beyond its control. The economy is continually subject to the discipline of the market and hence has to maintain strong macroeconomic and financial fundamentals and political and social stability to remain attractive to international capital, and pursue sound macroeconomic and financial policies. Table 1 presents some indicators of economic openness. Total trade in goods and services reached US$327 billion or 331% of GDP in 1997, with external demand accounting for two-thirds of total demand. Foreign investment penetration is extensive - the stock of inward foreign equity investment (direct and portfolio) reached US$70 billion in 1995 or 81% of GNP, while foreign controlled companies (with foreign equity ownership of over 50%) comprised 18% of the total number of companies and nearly 60% of total corporate assets in Singapore. Outward equity investments are of a lesser order, but still reached US$34.2 billion by 1995 or 33% of GNP. Foreign participation in the Singapore financial sector is probably one of the highest in the world. As a financial centre, Singapore plays host to 142 foreign banks as well as a large number of other financial institutions, while the total assets of the Asian Dollar Market (ADM) reached US$375 billion by end-1997. Ranked as the world's eighth largest offshore lending centre, the ADM plays a crucial role in mobilizing global funds for onlending to the region. With full employment since the 1970s, the foreign workforce has also been on the rise, accounting for 2>25% of the total workforce in recent years.' Sound Economic Fundamentals That Singapore has been less affected by the regional crisis is in large part due to its strong macroeconomic and financial fundamentals. With financial liberalization and capital account convertibility, these have helped maintain investor confidence and fend off speculative attacks. Real GDP growth has been high and sustained, averaging 9% in the period 199-97; as a result, per capita GNP reached US$26,475 in 1997, higher than several OECD countries. …