July 6, 2007

Financial crisis, 10 years on

Senior Minister Goh Chok Tong gave a TV interview to the British Broadcasting Corporation (BBC) on June 26 for its special series on the 10th anniversary of the Asian financial crisis. The interview was broadcast yesterday. This is an edited transcript.

# BBC: What were your memories of the Asian financial crisis? In July 1997, the Thai baht collapsed. Was that a signal that the rest of the region should be worried?

SM Goh: We were worried. Actually, I was in Bangkok just a few days before the Thais decided to devalue the baht and, of course, the extent of the devaluation - 20 per cent - shocked us. The crisis took on mega proportions when a few weeks later, there was a currency meltdown - the Korean won, Malaysian ringgit, Indonesian rupiah and, to some extent, also the Singapore dollar.

That's when I felt that this was different - this was a big crisis. It was not just Thailand, it was sweeping across the whole region from South-east Asia up to South Korea.

My most vivid memory was of Indonesia. To me, Indonesia was like a Titanic sailing in stormy weather - not calm weather - and heading for an iceberg. The event which unfolded later on really was very tragic for Indonesia. I saw TV images of people looting supermarkets.

That was in January 1998, and a few months later, there were the riots, and of course, changes, political changes - Suharto had to step down and there was a new government and it took some time for Indonesia to recover. So for Indonesia, there was a huge political implication on the country.

# What about Singapore? As you said, a few weeks later, the crisis did affect the Singapore dollar to some extent, but Singaporeans themselves were very complacent at that stage. They weren't really aware that what was happening in the region was going to really impact them until several months later, wasn't it?

Yes, it took a few months, I think, for us to realise the impact on Singapore because the Singapore dollar also depreciated. But it was quite small compared to the other currencies and fundamentally, the economy was sound. So, Singaporeans were not too concerned. But those in charge knew what was coming and we actually took some measures to stimulate the economy. We knew that the economy would slow down. Given the crisis in the region, there would be less trade with Indonesia, Malaysia and Thailand. So, we came up with a S$2 billion stimulus package by enhancing the infrastructure to make Singapore more competitive in order to stimulate growth.

But that was just the initial phase of our measures to recover the Singapore economy. Some four, five months later, we came up with a bigger package and that was a cost-cutting package aimed at the long-term competitiveness of Singapore.

We brought down, for example, the compulsory contribution rate for employers to the Central Provident Fund from 20 per cent to 10 per cent. We also reduced the foreign worker levy. Some other taxes were also reduced. So, by and by, the cost-cutting measures amounted to some S$10 billion. That was an important signal to investors that we were aiming for long-term competitiveness, whatever the crisis might have brought us in terms of short-term pain.

# Do you think Singapore paid a heavy price? Even at that stage, Singapore was something of a financial hub. Now, you're seen much more as a financial hub of the region and, in fact, the wider region. People call Singapore 'the Switzerland of Asia', for instance. Back then, Singapore was also something of a financial hub, but less so. Do you think Singapore paid a heavy price for that?

No, on the contrary, I thought the actions we took and the relatively small depreciation of the Singapore dollar made Singapore more noteworthy in the eyes of investors. I mean, there was a price to be paid - the economy slowed down, the economy shrank, not quite a heavy price in that sense, but what we did was important.

We impressed upon investors that we knew how to handle the situation and this is a very disciplined society. We were able to swallow the bitter pill in order to recover from the crisis. So, the way we recovered, the way we handled the crisis, I thought, gave us some good points insofar as our standing as a financial centre was concerned.

# To what extent did the crisis impact relations with neighbouring countries? To some extent, it exposed a lot of regulatory issues, issues of transparency in neighbouring economies. To what extent do you think it impacted the credibility of those economies?

When the crisis came about, all of us were focused on resolving our problems and, of course, the Asian Tigers lost credibility. We became overnight the Asian Kittens, not the Asian Tigers. But at the same time, I was very happy that the countries which were less hit were rallying together to help the countries which were very badly hit.

When Thailand was hit, Singapore, amongst others, pledged US$1 billion (S$1.5 billion) as part of a line of credit to be extended by the IMF. And later on, when Indonesia was hit, Singapore was in the forefront to help Indonesia, and Japan also stepped in.

Even Malaysia, which was quite hit by the crisis, also pledged in a smaller way to help Indonesia. So, that sense of getting together was very important for us - that when one country was in trouble, others rallied behind the country.

# Malaysia froze a lot of assets of Singaporean investors at that time. Did that send a signal that perhaps Malaysia is not quite a place to invest in?

At that point of time, I would say most of us, if not all of us, thought that was the wrong thing for Malaysia to do. To introduce capital controls would scare off your investors for a long, long time. But in retrospect, when you look back, that was in a sense a right remedy for Malaysia. Malaysia recovered from the crisis with capital controls. So, if you look back, it seemed to be the correct way.

But Malaysia paid a price for it. By having capital controls, foreign investors in their stock market, for example, learnt that they should stay away for a while from Malaysia. Singapore too was affected and our investors were unhappy about the capital controls imposed by Malaysia. But that's what Malaysia had to do to find its own solution to its own problems.

# It actually started off as a currency crisis. People sometimes still call it the currency crisis, instead of the Asian financial crisis. The governance in Singapore, to a great extent, is fairly transparent. But the Singapore dollar still is weighed against a basket of currencies. To what extent has Singapore taken measures to be a bit more lax, compared to the markets in China for instance, which still regulate the yuan quite a lot?

When the crisis hit us, we widened the band for the Singapore dollar to fluctuate within. That made the Singapore dollar more flexible. So that same wider band is now maintained and, of course, we have learnt from the crisis that we have to have better corporate governance. So the supervision of banks is better.

But instead of just seeing banks from the point of a regulator, with a lot of regulations, we moved into disclosure-based supervision. In other words, we require banks to be more transparent. Let the market decide, and the transparency of information is very important for the market players. So Singapore has moved in that direction to make it more flexible and more transparent. But most important of all is to make sure that banks do not over-lend, do not have a huge portfolio of non-performing loans.

# Do you think Singapore was pretty much knocked as a result of that to improve its corporate governance and regulatory governance? The region as well, as a result, with the IMF loans, was forced to become more transparent. Do you think it was a lesson for the region?

Certainly, it was a lesson for the region that it just can't be creating a bubble, and if information is not adequate for the investors, then something will go wrong. The region has got together and they have also initiated some plans to have financial swaps. In case something happens again, then the financial swaps can be used as a line of credit in the short term for the country which is affected.

But more importantly, all countries have learnt that they must have good corporate governance and they must have transparency for their financial transactions. The data must be there for the people to decide.

What happened in the crisis was that the private sector was borrowing excessively in US dollars to finance local projects, which were earning revenue in local currency terms. And they were having a fixed exchange rate, and interest rates were very low for the US dollar. This just couldn't go on - the party just couldn't go on forever. So, at some point of time, the party had to stop. Unfortunately, it stopped and all of us suffered, some to a greater extent than others.

# That's interesting, because we are seeing something of a party now. China markets are booming and the rest of the region including Singapore STI has gone to record highs. Do you think this should be a warning? Can another Asian financial crisis happen again?

I don't think a financial crisis will happen. But whether the stock market will continue to go up, I don't know. But should the authorities warn? The market has got to decide, provided the information is there. People know the price-earnings ratio, they know the worth of a particular stock, whether the thing will go up. We'll let them decide. But at some point of time, there could be a correction. Now, who would dare say when? Let the market decide. But we are quite confident that the banks are all right. Even though share prices may come down at some point of time, the banks are not going to be affected. They are not over- lending, they are not over-committed. So I do not see a financial crisis coming, even if there's some correction in the share prices.

# Ten years on, has the paradigm - the political paradigm as well as the financial paradigm - shifted now with the focus being more on China and India as the new, rising powers, both politically and economically? How will South-east Asia contend with that?

The paradigm has indeed shifted. There's now more trade between Asean countries and China, and increasingly, there will be more trade between some of us in South-east Asia and India. The trade between Singapore and India, for example, has gone up. This is so not only in the absolute sense but also in the relative sense. If you take trade between Singapore, South-east Asia and China as a proportion of our total trade and compare it with the percentage of our trade with US, our trade with China has gone up.

China is a very important factor. It's like a huge elephant getting into a swimming pool. It's going to displace other swimmers in the swimming pool. What do we do? Do we just get out and don't swim? Or do we try to think of ways to enlarge the swimming pool? That's what we are trying to do, talk about a free trade area with China so that there will be a bigger swimming pool.

The water might be displaced by China but, nevertheless, now it's a bigger pool and there's more place to swim in. By that, I mean - take advantage of China's growth. Don't be afraid of China's growth. Adapt to it.

That's a very important shift in thinking on the part of those who are affected by China's growth. It's not a threat, it's an opportunity.

# Where do you see Singapore in about five years' time? That would be the point when the Integrated Resorts are established. Singapore is basically envisioning itself as this global hub, this very cosmopolitan city, full of exciting things and the arts. For Singapore to achieve that, do you think it will have to give up some of that conservative core?

The core values, we will not give up. But for the things which are less core - that means the outer circle - we might be more liberal, in terms of the arts, in terms of the kinds of entertainment you can get in Singapore. We have to create that buzz, not so much for ourselves, but for people who otherwise might not want to come to Singapore. To be a cosmopolitan city, we've got to cater to the needs of cosmopolitans, not to conservative Singaporeans alone.

In five years' time, the changes might be there. We can see it visually. There'll be a new Botanic Gardens in the downtown and the Integrated Resorts will be up. But I think the real change probably can be seen only in 10 years' time. By then, I envisage a Singapore which is very vibrant, not just in terms of business, but also culturally. I think that's very important for us. Singapore should move beyond being just an economy, which we have been doing for the last 10, 20 years, in a more concerted manner.

So in 10 years' time, if you come to Singapore, there should be many things for you to do. Whatever you want to do, you should be able to do in Singapore. That kind of change must come about because we need talent for Singapore. We need foreigners to come to Singapore. We hope they will work here. We hope some of them will become permanent residents and, of course, citizens. A cosmopolitan Singapore will be very different from a Singapore which is just multiracial in terms of having Chinese, Malays and Indians. That's the direction we are moving in.