Monetary Policy in Singapore and the Global Financial Crisis

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Challenges for the Singapore Economy

tain the flow of credit and stimulatory fiscal packages to sustain

spending in the economy.

This was also the case in Singapore which, as suggested in Chapter 2,

was not significantly affected by the direct financial fallout from the sub-

prime mortgage crisis and resulting credit crunch. Although Singapore’s

banks had become more internationalized since the late 1990s and had

been active in cross-border mergers and acquisitions in the Asian region,

large foreign multinational banks are not dominant in the domestic

banking system, so it was easier for Singapore’s central bank, the

Monetary Authority of Singapore (MAS) to carry out its supervisory

functions and ensure a continuation of lending.

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Whilst discretionary macroeconomic policies in Singapore are

seen to be broadly countercyclical, especially during prolonged

downturns, when they can help to cushion the impact and prevent a

more severe deterioration in domestic activity than might otherwise

be the case, it has long been recognised that the power of such poli-

cies is limited by the ultra-openness of the economy. Not only is the

Republic particularly exposed to externally-driven demand shocks,

but any adjustment through a change in domestic expenditure is

weakened by a very high import leakage.

Monetary policy in Singapore since 1981 has been explicitly aimed

at providing an environment for sustained non-inflationary economic

growth and price stability over the medium-term horizon but, as we

shall see, it is also designed to be countercyclical in the shorter run,

especially when the economy is overheating and inflationary pressures

threaten, as in the second half of 2007. In addition the financial sys-

tem has, by and large, been well-regulated and a high savings policy

has provided a large and growing pool of foreign exchange reserves to

reinforce the credibility of exchange rate policy and provide the means

for the MAS to actively engage in the foreign exchange market to

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C. H. Kwan and P. Wilson

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According to an interview given by the Managing Director of the MAS to the

Singapore Straits Times on 10th April 2010, of the 150 foreign banks operating in

Singapore none of them suffered a “major incident” during the crisis. AIA, the local

subsidiary of the giant insurance company AIG was also largely unaffected despite

AIG itself being on the verge of collapse in September 2008.

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