UNITED STATES SUB-PRIME MORTGAGE CRISIS

UNITED STATES SUB-PRIME MORTGAGE CRISIS:

(Impact on Singapore's economy): 3.

Dr Lily Neo asked the Minister for Trade and Industry (a) to what extent, if any, will the lingering United States sub-prime mortgage crisis negatively impact Singapore's economy; and (b) what are the short and long term measures in place to ensure that Singapore will not be negatively impacted.

The Minister of State for Trade and Industry (Mr S Iswaran) (for the Minister for Trade and Industry): Sir, Dr Neo has asked to what extent, if any, will the lingering United States sub-prime mortgage crisis could have a negative impact on Singapore's economy and whether there are measures to mitigate such impact, if any.

Sir, it is still too early to assess with a high degree of confidence how the sub-prime mortgage problem in the US housing market will affect the credit and other financial markets, and whether this will eventually spill over to the real economy in the US and Europe.

There are growing concerns that uncertainty in financial markets will lead to a loss of confidence and result in a more general credit squeeze. This will, if it occurs, in turn hurt investment and consumption in the US and Europe. If growth slows in these major economies, Singapore will be affected. Strong

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growth in the region and the diversity of our export markets will provide us some buffer, but we are not immune to a slowdown in the major industrial economies. At this stage, although the risks have increased, it is not clear that there has been a significant spill over into the real economy. Barring the unforeseen, MTI's growth forecast of 7%-8% for this year remains unchanged.

Taking a longer-term perspective, the current shakeout in the sub-prime market, if well managed and contained, can yield some positive outcomes. If it results in more realistic risk assessments and stronger credit standards, it will make for healthier markets and more sustained growth. The governments and central banks are working together to minimise the fallout and help bring about a smoother adjustment in credit markets.

Restoring confidence to financial markets is key. Like central banks around the world, MAS has been closely monitoring the situation and stands ready to inject additional liquidity, if necessary. To date, our markets have been functioning in an orderly fashion.

MAS is also closely monitoring our financial institutions' exposure to sub-prime and other structured credit markets, at both the domestic and global levels. Our exposure remains small and contained at this stage. At the systemic level, the potential impact on Singapore's banking system is being monitored in consultation with the industry and subject to routine stress-testing exercises. MAS is also working with SGX to monitor its members, and to ensure that its clearing funds have sufficient resources to meet outstanding obligations.

Dr Lily Neo (Jalan Besar): Sir, may I ask the MOS to what extent is the

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contingent of the sub-prime crisis a result of mismanaged fears and panics? What proportion are these concerns to the actual magnitude of the real problem? And, lastly, how does MOS respond to the market talk that the worst is yet to come?

Mr Iswaran: Mr Speaker, Sir, Dr Neo has asked what is the magnitude of the problem. I think that, in itself, is a matter of much research and speculation in the market. The point to register is really that if, in fact, the sub-prime mortgage problem is not well managed, then it can impact us in two ways. One is confidence in financial markets and that will have its own repercussions to the financial system to which we will be exposed. And the second is through its impact on the real economy, through credit squeeze and other effects. Both of these can have significant impact on us, although we are mitigated to some extent through the diversification of our economy. Quantifying the impact is quite a difficult task. I would say that no one really has hazarded a guess as to how big a problem it is because the reality is that it is quite difficult to pin down. I do not think I want to hazard a guess in this House at this point.

Dr Lily Neo: May I ask MOS whether he expects the US Central Bank to cut interest rates tomorrow? Will that indicate the unhealthy climate of US economy? Are there preventive measures on the negative impact on our economy? Is there any way of decoupling our economy from US?

Mr Iswaran: Mr Speaker, if I knew what the Federal Reserve Bank is going to do tomorrow, I will be a very rich man. Let me just say this. I think whatever the Federal Reserve Bank does, the most important thing for us in Singapore is to be very clear of the fact that we have to be vigilant and be ready to take the necessary steps in the event that some

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untoward incidents occur because we are a very open economy. But it does not really help our cause at this stage to be unduly concerned or alarmed. We are monitoring the situation. MAS is on top of it as well. I think we need to just maintain that level of vigilance and readiness to respond.