COMPANIES AFFECTED BY ECONOMIC TURMOIL (Assistance)

Mrs Lim Hwee Hua asked the Deputy Prime Minister, given the current economic turmoil in the region, how the Government will help companies which are badly affected by both a reduction in demand and a tightening of bank credit, and whether the Government will work with financial institutions to assist such companies.

BG Lee Hsien Loong: Mr Speaker, Sir, Singapore cannot escape the regional financial turmoil which affects our neighbours. The Committee on Singapore's Competitiveness, chaired by Mr Lee Yock Suan, has gathered feedback from our businessmen on how they have been affected. The impact has been mixed, depending on the company's customers and whether its costs and revenues are denominated in regional currencies, Singapore dollar or US dollar. Those with export markets outside the region have not been too badly affected. But those who export to the region for local consumption have been hit by the weaker demand and the problem of debt collection.

Some tightening of bank credit is inevitable at a time of uncertainty. However, the MAS' figures show that overall bank lending to non-bank entities is still growing, not contracting. Loans to non-bank customers continued to increase, from $133 billion as at June 1997 to $139 billion as at September 1997 to $143 billion as at December 1997, although there have been some signs that new loans are decreasing now. Interbank rates have also been declining in recent weeks, indicating an easing of liquidity. After hitting a high of 14% in January, the 3-month interbank rate is now back down to 6_%.

I know that companies are concerned not just about the interest rate, but also that banks may be pulling back loans altogether. It is difficult and inappropriate for the Government to intervene in such cases. These are commercial lending decisions, which the banks themselves have to take, because the banks, and not the Government, will bear the consequences of the decisions.

Mr Lee Yock Suan addressed this issue in his speech on Chinese New Year's Day at the Singapore Chinese Chamber of Commerce and Industry. I quote:

`One issue which companies have highlighted to us is the tightening of bank credit as a result of the currency turmoil. There have been some calls for the Government to help companies tide over this credit squeeze. We are examining how to help the economy and companies through this difficult period. There are schemes in place such as the Local Enterprise Finance Scheme, where the Government joins the banks to extend credit to small and medium local enterprises, and share the credit risks. Commercial lending decisions by banks, both local and foreign, must continue to be based on the banks' assessment of their relationship and credit risks. Banks will naturally take a long term view of their customer relationships.'

However, what the Government can do is to enhance the Local Enterprise Finance Scheme (LEFS). We are studying this and the Minister for Trade and Industry will be explaining this later in his reply to Mr Tay Beng Chuan, if we have time to reach the Question today.

We must take the regional economic slowdown in our stride. The Government will continue to invest in economic infrastructure to build up our capabilities and productive capacity. Companies too should use this opportunity to trim costs, restructure and upgrade productivity, so that when the region recovers and becomes more competitive, they will not be left behind.

Mrs Lim Hwee Hua (Marine Parade): Sir, I would like to ask the Deputy Prime Minister that in the event of a severe liquidity crunch for companies, especially the smaller ones and those which do not qualify under the various assistance schemes, would the Government be prepared to deviate from its usual non-interference philosophy and persuade banks to consider restructuring or rolling over some of the short term domestic loans?

BG Lee Hsien Loong: Firstly, on a macro point of view, the tightness or the looseness of the monetary policy cannot be determined by whether or not we want to help particular companies. That is an overall parameter. If you loosen the monetary policy, it impacts your exchange rate. You cannot say you want your exchange rate to move one way and your monetary policy to move the other way. Many countries have got into trouble trying to do that. So the tightness of the monetary policy depends on market conditions.

As for leaning on banks, on individual cases, even in difficult circumstances, I think this is not wise. The banks have to judge the risks because they have to bear the risks. They know the customers, they know the history, they have criteria which are good borrowers, which are doubtful borrowers, which loans are good, which loans are doubtful, which are sub-standard, which are loss. What does the Government know, which the bank does not, for us to be able to tell the bank, "No, you do this." Are we saying, "You are wrong, this is a good loan, make it." Or are we saying, "You are right. This is a doubtful loan, but make it anyway." I think both put us in difficulty. Because if we say it is a good loan, you may hit, but if it turns out not to be a good loan, MAS will be the first one on their back asking them to make provisions for the bad loan. If we tell them that it is not very good, you make it anyway, the banks too have bottom lines to safeguard and have shareholders to answer to. And as I have explained, their profits are going to be down 30% this year. Banks are not charitable institutions.

Local banks and foreign banks will probably take different attitudes towards their relationships. For some foreign banks, it is known that they come in very quickly when the market is up, and there is good business to be done. But when the market is down and conditions look grimmer, they pull back, perhaps because of orders from the head office. But I do not think all foreign banks are like that. But it has been said that some are. Assuming that it is so, everybody knows this, it is not a new phenomenon, it has happened, we have been through the business cycle of up and down every so many years, the last time in 1985, anybody, who after knowing this, goes to a bank like that, to get a favourable rate during good times, then when there is difficulty, he comes running back to a more tolerant lender to say, "No, I have just been chopped, please help me." These are calculations which you have to make. I believe that the banks which have longer term stakes in the region, both foreign banks and of course the local banks, will take longer term views of their relationship with their borrowers. If you cut people off like that, you will gain a reputation which will not help you to get customers in the next upturn. So they have to decide, and I think that they will decide with a longer term point of view in mind, and if with that longer term point of view, they decide, "No, this is not a loan which they can make", I think we will have to abide by their decision. We are not in a position to second guess that.

I have told the banks this. I have told the Government officials and department this. We will help within our capabilities. We have the Local Enterprise Finance Scheme. We are looking to see how we can perhaps adjust the terms and widen the eligibility conditions. That is feasible. But if you tell me, "I am a very deserving case, and a very big sob story, please help", I will first ask, "I will introduce you to the bank. Come, let us have a heart-to-heart talk." If it works out, that is good. If not, that is the way business is done.

We are operating a system of free markets. I think the Government has been accused more often of being more interventionist than it should be, rather than not interventionist enough. Now we are being asked why we are not intervening sooner.

Mr Chng Hee Kok: In the extreme, what the Deputy Prime Minister has described is actually being practised by some other countries in Asia and would he say, in cases like this, this may lead to undermining of the system and loss of confidence by foreign investors if Government intervenes too much?

BG Lee Hsien Loong: Yes, if we intervene and prop up companies which should not be propped up, straightaway it affects our reputation and our standing, and everybody will know this is a different kind of system. It is not just half a percentage point, plus or minus, of the GDP. But is this a system where the rules stand and you go for the free market and you take the upside, and you lump the downsides? Or is this a system where you go for the markets, you take the upside and in a downside you run to me and my friends get help? That is a very important distinction and a key reason why in this period Singapore has not been as badly affected as the other countries.