Backdrop on global financial and economic crisis The world economy has witnessed one of the most tumultuous and challenging times. Global GDP is expected to contract in 2009, the first time in the post-War period. 1 The tremors that shook the financial markets surpassed the most extreme stress scenarios. Bank losses have now exceeded US$1.5 trillion and further writedowns are expected. In the six months following the collapse of Lehman Brothers, from September 2008 to March 2009, stock markets worldwide fell by almost 40%, wiping off about US$16 trillion in capitalisation. Singapore’s Straits Times Index (STI) also fell by close to 35%. In the fixed income markets, the rally in government bonds was offset by the sell-off in the non-sovereign sectors such that global bond markets in aggregate also declined over this period. Many institutional and individual investors were affected negatively. These shocks to the international financial system severely disrupted credit flows and led to dislocations in economic activity globally. The US – which was the epicenter of the crisis – as well as the EU and Japan, fell into a deep recession. The collapse in G3 demand, in turn, had a cascading effect on the emerging economies. As trade collapsed towards the end of 2008 and into the first few months of this year, Asia’s export-reliant economies were hard-hit. Against this external backdrop, the Singapore economy contracted sharply, as our manufacturing, transport, logistics and wholesale trade industries were closely tied to global and regional trade flows. By the first quarter this year, the economy had posted an output loss of around 10% from its peak a year ago, the steepest decline in its history. The unprecedented global financial crisis has weighed heavily on financial markets worldwide, leading to severe declines in valuation across many asset classes amidst heightened market volatility. MAS’ investments were negatively affected by the crisis. As at the close of the financial year on 31 March 2009, MAS recorded a net loss of S$9.2 billion, about 3.5% of MAS’ average total assets. This compares with profits of S$7.44 billion in the previous year and S$3.85 billion in FY06. This severe crisis has therefore pared back about 80% of the gains in the preceding two years. The extent of loss has been mitigated as we raised the liquidity profile of our portfolio in the early part of 2008, in the face of greater uncertainties. With the broad based upturn in financial markets after the close of the financial year, the valuation of MAS’ foreign assets has improved and more than half of the losses have been recovered. Despite the severe global conditions, Singapore’s financial system has, by and large, weathered the crisis well. In managing this crisis, MAS has focused on maintaining the strength of Singapore’s financial system, based on three key pillars: first, maintaining sound financial institutions; second, ensuring well functioning markets; and third, maintaining confidence of investors. Let me touch on these in greater details.
In July 2009, IMF upgraded its 2010 world GDP growth forecast from 1.9% to 2.5%. Its 2009 world GDP growth forecast was lowered slightly to -1.4% from -1.3% previously.
BIS Review 91/2009
Strengthening resilience – what MAS has done Given the openness of our financial system and the severe downturn in our economy, Singapore’s financial system cannot be insulated. MAS focused on maintaining the soundness of financial institutions in Singapore. We intensified supervision of financial institutions through close monitoring of their financial soundness, holding regular discussions with the board, management, and auditors of financial institutions, and for...