CURRENCY CRISIS (Effect on economy and investors' confidence)

Mr Ang Mong Seng asked the Minister for Finance to what extent the currency crisis has affected our economy recently and what plans the Government has to reassure our investors' confidence and to further attract new investors to invest in our economy.

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, may I take Questions 7 and 8 together as they are related?

Mr Speaker: Yes.

Dr Richard Hu Tsu Tau: Sir, so far, the regional currency crisis has had only a small impact on the Singapore economy. Recent indicators show that the Singapore economy is also on course for an export-led recovery to attain growth in the region of 6-7% in 1997. For 1998, however, growth of total export of goods and services, particularly tourism, could be weaker, reflecting slower growth and poorer business sentiment in the regional economies. Longer term, the impact will depend on how quickly the regional economies recover and resume their normal growth rates.

Unlike the Thai Baht and Indonesian Rupiah, the Singapore dollar is managed against a trade-weighted basket of our trading partners' currencies. So far this year up to 3rd October, the Singapore dollar has appreciated by 28.9% against the Thai Baht, by 39.2% against the Indonesian Rupiah, by 19.9% against the Malaysian Ringgit and by 3.7% against the Deutsche Mark, but depreciated by 9.3% against the US dollar, by 9.3% against the Hong Kong dollar, by 9.4% against the Renminbi, by 4.6% against the Japanese Yen and by 4.6% against the Sterling Pound. Overall, the Singapore dollar has firmed against the trade-weighted basket of currencies.

Singapore has emerged relatively unaffected by the regional currency crisis because of our strong political and economic fundamentals. We have high savings rates, substantial budget surpluses and large foreign reserves. We also have large current account surpluses and strong inflows of direct foreign investment. All these are the outcome of prudent fiscal and monetary policies which the Government has put in place over the years. In addition, our strategy of being pro-business, minimising bureaucracy, ensuring a competitive tax structure and improving the educational and skills level of our workers has been key to our success in attracting foreign investors.

The increasingly integrated global economic environment offers both opportunities and risks. The challenge for Singapore lies in reaping the benefits of the global market while safeguarding the basic soundness of our financial and economic system. In this regard, the Government remains committed to maintaining Singapore's conducive and competitive economic environment.

Mr Iswaran: Sir, will the Minister please comment what is the Government's position on the proposed Asia Fund to support regional currencies in moments of crisis and whether such a fund, if used, would be subject to IMF conditionality?

Dr Richard Hu Tsu Tau: The Member would have seen from press reports that such a fund has been mooted initially by the Japanese and subsequently discussed with the ASEAN Finance Ministers. In principle, the ASEAN Ministers have supported the concept of such a fund. But I think all are agreed that the fund should be subject to full IMF conditionality, plus probably additional safeguards on prudential overviews. The matter is under discussion now with the IMF and in consultation with the US Government. For the time being, I cannot say when and how such a fund will be finalised.

Dr S. Vasoo (Tanjong Pagar): Sir, two supplementary questions. One is the impact of the depreciation of the Singapore dollar against the US dollar on the economy and the other question is the plan to internationalise the Singapore dollar. Has that been reviewed?

Dr Richard Hu Tsu Tau: As I mentioned earlier, the Singapore dollar is measured against a basket of currencies, of which the US dollar is one component but by no means a major component. So whilst it has depreciated against the US dollar, this reflects a general strengthening of the US dollar against all international currencies. Depending on the type of exporter you are, the depreciation against the US dollar would benefit certain industries more than others. For example, I am sure that SIA would be very happy to have the situation continued. But overall, we are firming against the trade basket, so the impact of these currency changes will have no effect, we believe, on our imported inflation.

On the question of internationalising the Singapore dollar, MAS' policy has consistently been to allow a gradual increase in the use of the Singapore dollar for international purposes, but not at a rate which will lead to destabilising flows taking place which might upset the domestic economy. So we will continue to maintain this policy. Since last year, for example, we have increased the excess by foreign banks through Singapore dollar loans by $50 million from $150 million to $200 million, and we have been doing this gradually over the years. We have also allowed, under certain conditions, foreign companies to list their shares in Singapore dollars and we are contemplating easing some of the conditions to make it more attractive. These are the gradual ways in which we will allow the Singapore dollar to be used internationally but not at a rate which will destabilise our domestic Singapore dollar economy.

Dr Lee Tsao Yuan: Will the Minister please comment on the effect on the Singapore economy of, first, weaker regional currencies and, second, possible lowering of regional growth rates?

Dr Richard Hu Tsu Tau: I mentioned that the immediate impact is very small, certainly for this year. The longer term effect depends entirely on how long these large depreciations of the neighbouring countries' currencies persist. Clearly, in the case of, say, Thailand, the impact on us is not likely to be very large because their basket of export goods is very dissimilar to ours. Similarly, for Indonesia. The largest impact probably lies with the Malaysian currency. If the large differential persists, then of course, the issue of competitiveness against us becomes a little more important because there is some overlap in the middle range. So a great deal depends on how long the differential exists.

The lowering of the value of the Malaysian ringgit, for example, obviously has pluses and minuses. Where we purchase, say, consumption goods from Malaysia, like food products, over time the prices should ease. Of course, the negative effect is that it would make Singapore become much more expensive from the Malaysian consumers' point of view. So tourism will be affected. The impact varies across industries, but the most important factor is how long these economies will remain under stress and the longer term impact on us will depend very much on how the growth rates of these countries are affected.

Mr Chng Hee Kok (East Coast): Sir, the Minister has projected that our economic expansion will be 6-7% for the current financial year. My question to him is this: will he say that, with the current problems at the Johor causeway, the impact on us, even on a prolonged basis, will be minimal?

Dr Richard Hu Tsu Tau: I do not see that as a financial question, although indirectly, of course, it affects business. The Minister for Communications is not around. I think the reports in the papers already highlight the fact that it is a serious problem which lorry operators and businessmen on both sides of the causeway are concerned and they have made appeals to the Johor authorities and I believe some attempts have been made to ease the situation. For the longer term, of course, I cannot say what is going to happen if it persists.

Mr Ang Mong Seng (Bukit Gombak): ( In Mandarin): In the recent currency crisis in this region, the effect on the Singapore dollar is less as compared to the Thai baht, the Indonesian ruppiah and the Malaysian ringgit. We have done well but I would like to ask the Minister whether anything has been done to ensure that the Singapore currency will remain strong and stable. Secondly, will the recent currency crisis affect Singapore's endeavour to become a financial centre in this region?

Dr Richard Hu Tsu Tau: Sir, I think I have already answered the first part of his question. As to the impact of the currency turmoil on Singapore's position, as I said, it must make our position stronger because we have a very stable economy and a relatively stable currency.