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Introduction
The main purpose of this research project is to explore the extent to which Singapore is being
exposed to external economic turbulence given her high level of trade openness. Since the
colonial era and its foundational moments as an independent country, Singapore has emerged
as a trade and financial hub for the rest of the world, given its geographical location, low tariffs
and minimal capital controls.
Singapore is a very small economy with a population of 5 million people and growing, and a
land area of 712 km2 (SingStat, 2011).
The city faces three particular constraints, the city can by no means be the producer of all its
needs neither can it consume all of its production nor the source of the resources for that
production. Thus, the need for an external solution which is trade.
Free trade has been Singapores strong bet on its own economic development. But as we know,
such openness has its pros and cons. From Modern Trade Theory developed by Adam Smith,
David Ricardo and other authors, trade is not a zero-sum game, in the sense that both parties
will take advantage of the comparative advantage in production of the other player and enjoy
higher outputs.
Since Singapore is trade reliant, this whole framework brings us to the main question: how
susceptible is Singapore to external economic shocks?
The global economy has been volatile during the past years. The Global Financial Crises in
2008 brought the developed world into a recession. The Euro Debt crisis in Europes peripheral
countries such as Greece, Portugal, Ireland, Italy and Spain increased the risk premium of those
debt titles to historical levels and has caused the Euro a unprecedented drop since the creation
of the Common Currency. Also, during 2011, rating agency Standard&Poors downgraded US
credit rating from AAA to AA+, and more recently, rumors on an upcoming recession start to
become strong as the stock markets worldwide shake on that expectation.
Trade
Singapores economy, in terms of trade and investment inflows (FDI), is one of the most open
among the worlds economies. With an openness level of 297%, Singapore has the highest
openness level as compared to other countries. This is because Singapore rarely imposes any
tariffs on trade, and capital inflows into Singapore are free. Openness has been the centre of
Singapores economic development strategy, due to its small size and extremely limited
resources. Comparative advantage over other countries and competitive advantage amongst
industries is what maintains Singapores success in the long run.
Singapores industrial policies are directed towards sustaining growth and competitiveness. In
order to avoid head-on competition with more cost efficient countries in Asia (e.g. China),
Singapore has, over the years, moved from solely manufacturing industries towards valueadding knowledge-based industries. In addition, Singapores financial assistance schemes and
other industrial policies are geared towards providing aid to domestic exporters. For instance,

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the total aggregate savings on export tariffs for local exporters amounted to S$700million in
2009 (International Enterprise Singapore, 2010)
Singapores high degree of openness, albeit beneficial to its economy and sustainability in the
globalized world economy, makes it particularly vulnerable to global economic shocks from time
to time. In the following paragraphs, the effect of the 2007-2008 sub-prime mortgage crisis will
be used as an example to demonstrate the effect of global economic downturns on Singapore.

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FIG T1: Domestic
Exports
2007-2009
(Source:

(International Enterprise Singapore, 2010)

The 2008 sub-prime mortgage crisis resulted in a fall in global consumption and demand. Figure
T1 shows the contagion effect this had on Singapore. From 2008 to 2009, domestic exports of
Singapores goods experienced a relatively sharp decrease in almost every industry. Exports of
services also dropped from S$109 Billion in 2008 to S$100 Billion in 2009. The reason for the
relatively gentler decline in services could be Singapores higher competitiveness in terms of the
service and knowledge-based industries.
FIG T2: Re-Exports and Offshore Trade (International Enterprise Singapore, 2010)

As evident in Fig T2, there was also a decline in almost every industry in terms of Re-exports.
Offshore Trade, referring to trade numbers as a result of companies residing overseas which
engage in importing from Singapore and re-exporting to other countries, also fell from
S$624Billion to S$466 Billion from 2008-2009. (International Enterprise Singapore, 2010)
FIG T3: Overall Trade (International Enterprise Singapore, 2010)

Fig T4( Export + Import Growth Over Previous Year)

The above example clearly shows that Singapore is open and vulnerable in terms of trade. In
todays globalized world economy, it is hardly possible for any country not to get affected by
external economic shocks, especially ones like the scale of the 2008 sub-prime mortgage crisis.
Singapore, especially, would be affected by global economic shifts in demand and consumption.
That being the case, Singapore has to be prepared to ease the impacts of such economic
shocks and downturns. In its defence, Singapores government and government-related
organizations actively seek to aid Small Medium Enterprises (SMES) and trade-related
industries in terms of financial assistance and actively promote overseas business operations.
At the same time, it is also pro-active in seeking Free Trade Agreements with countries in order
to promote trade with less restrictions and risks.
In summation, government and trade policies may as a whole act as a protective measure for
Singapore, in the event of a global economy shock. However, being competitive to the highest
extent can only serve as easing the threats but not preventing them. This is because in the
current global economy, countries like Singapore, practice high interactivity in terms of trade and
financial activities(which will be elaborated on in the next section). In this regard, there is no way
Singapore would be able to prevent economic downturns from affecting its domestic economy.
Looking into the future, for Singapore to sustain its growth, it should look into domestic
consumption, in order to further ease fluctuations in global demand and supply. This way,
Singapore would not be extensively vulnerable to external shocks. A good example would be to
increase its population through promoting immigration or internal population growth.

The Singapore Financial Sector

With a correlation of 0.61 in stock market returns compared to the United States S&P 500 from
year 2000 to 2007, it is not difficult to tell that Singapores financial sector is very much affected
by the United States. This is due to fundamental reasons such as the high financial exposure
Singapore has to the United States. As of June 2006, Singapores financial exposure to the
United States stands at 129.2% of Singapores GDP (International Monetary Fund, 2008)
Other than the high financial exposure that Singapore has to the United States leaving
Singapore vulnerable to the United States, measures taken by their Federal Reserve (FED) also
affects us. This can be seen from the quantitative easing measures taken by the FED from
January 2009 to April 2010 and November 2010 to June 2011. During these 2 periods, the
Singapore Interbank Offer Rate (SIBOR) as well as the Swap Offer Rate (SOR) fell constantly,
reaching negative territories most recently. The cause of the falling SIBOR and SOR is due to
the excess liquidity overflowing from United States into Singapore. Both the SIBOR and SOR
can be seen in the chart below.
Source: http://smp-consulting.com.sg/smpc/?option=com_content&view=article&id=62

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Not only does the excess liquidity cause the falling of the SIBOR and SOR, it also causes asset
prices in Singapore to escalate as capital inflow increases. With a lower SIBOR and SOR,
domestic investors would be more willing to invest in the various asset classes, thus further
inflating asset prices. This can be seen by the following charts, which show the increase in both
the stock market and property prices in Singapore during the period of quantitative easing.

Source: Urban Redevelopment Authority

Such increases in asset prices is very likely to form an asset bubble and is by no means healthy
to the Singapore economy. Should the asset bubble burst, both foreign and domestic investors
would pull out of the market, causing asset prices to free fall. Investors who borrowed money
would not be able to finance their loan, and as a result default on their mortgages. This would
result in banks having a higher number of non-performing loans that would hit their balance
sheet. With banks reporting lackluster performances, investors confidence is bound to drop
further causing yet another round of a fall in asset prices.
Monetary policy
Since 1981, Singapore's monetary policy has been centered on the management of the Sing
Dollar exchange rate. The ultimate target of monetary policy can be defined as price stability or
low inflation. The monetary policy instrument used most commonly is the exchange rate. In the
context of Singapore's open capital account, the choice of the exchange rate as the focus of
monetary policy would imply that domestic interest rates and money supply are endogenous
(refer to next section on MAS exchange rate policy for Singapore). This is based on the
principle underlying the Theorem of the Impossible Trinity, also known as the Open-Economy
Trilemma, which states that a country cannot concurrently manage its exchange rate and
maintain an open capital market while pursuing a monetary policy (interest rate or money
supply) oriented toward domestic goals.
Apart from that, MAS money market operations are also aimed at ensuring that there is
sufficient liquidity in the banking system to meet banks' demand for reserve and settlement
balances. Interest rates volatility may occur overnight as banks attempt to meet reserve
requirements or settlement balance requirements by trying to fund account deficiencies or
dispose of account surpluses. For example, the banks in Singapore are required to maintain
reserve requirement or MCB with MAS equal to 3% of their liabilities base. In addition to the
demand for reserve balances, banks would also set aside additional fund as buffer to facilitate
settlement of interbank transactions.
MAS also provide many facilities to reduce interest rate volatility. An example would be the Endof-Day Liquidity Facility, which is a late-day refinancing facility, allowing banks to cover their net
debit positions that may arise at the end of the day. On a bank's request, MAS may provide
lending via overnight sale and repurchase agreements of SGS. Other facilities include Intra-Day
Liquidity Facility to ensure adequate liquidity for settlement purposes. This facility allows MAS'
appointed Primary Dealers to borrow intra-day funds from MAS via intra-day repos at a rate
determined daily by MAS.
Such a refinancing facilities offered has the effect of making the supply curve less steep or more
interest rate-sensitive, thereby leading to less interest rate volatility. These MAS functions are
carried out with the broader macroeconomic objectives in mind, including sustained medium-

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term noninflationary economic growth, financial and monetary stability, and development of
financial services sector.
Currency exchange policy
Since the 1981, the SGD exchange rate has been on an appreciating trend against both the
main global currencies and regional Asian currencies. This has curbed both imported and
domestic inflation. A basic philosophy underlying this policy is to preserve the purchasing power
of the SGD while maintaining confidence in the currency and preserve their value of workers
savings (e.g. CPF).
There are four main features of the exchange rate system in Singapore.
1. The Singapore dollar is managed against a basket of currencies of our major trading
partners and competitors. The composition of this basket is periodically revised.
2. The MAS operates a managed float regime for the Singapore dollar, allowing it to
fluctuate within an undisclosed policy band.
3. The band is periodically reviewed to ensure it is consistent with the underlying
fundamentals of the economy.
4. This policy implies that the domestic interest rate is not under the control of MAS.
Following MAS policy of keeping inflation under control, MAS will intervene in the FX market as
and when needed, to bring the S$ trade-weighted index (S$ TWI) within an undisclosed policy
band. When the S$TWI breaches the policy band on either side, or when there is undue
volatility or speculation in the S$, MAS will step in to intervene. Intervention operations may take
the form of a purchase of S$ against the US$ to stem the depreciation of the S$, or alternatively
a sale of S$ against the US$ to moderate its appreciation. As it affects the economy with some
lags, monetary policy has to be pre-emptive and forward-looking, with a medium-term focus on
low inflation and sustained economic growth.
Given that Singapore is such a small and open economy, the exchange rate is the most
effective policy instrument for maintaining domestic price stability. To add on, the governments
avoidance of fiscal deficit (a strong surplus) has allowed MAS to be effective in its course of
control.
Fiscal Policy

Source: MAS Macroeconomic Review, Volume X, Issue 1, April 2011

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The Domestic Liquidity Indicator (DLI)1 and Fiscal Impulse (FI)2 chart illustrates that the shifts in
Singapores macroeconomic policy have been fitting with the cyclical developments in the
economy.
The chart above indicates that Singapores macroeconomic policy has been expansionary
during the economic downturns. It also shows that, in 2010 the output gap turned positive as the
economy recovered decisively from the recession to post record growth. Appropriately, in 2010
the macroeconomic policy bearing was contractionary as the temporary fiscal policies (Special
Risk-sharing and Jobs Credit Scheme expired in 2010) were withdrawn. The policy setting was
progressively restored to that conducive to price stability and sustainable growth in the medium
term. (MAS Macroeconomic Review, Volume X, Issue 1, April 2011)
This shows that the policies rolled out have quantifiable effects on our economic performance
and that MAS has been managing it well.
MAS-guarantee
Amidst the uncertainty in the global economy, in October 2008, the government took the
necessary step in providing guarantee on all non-bank deposits in banks, merchant banks and
finance companies licensed by the MAS. Though the guarantee, expired on 31 December 2010,
it was still being views as an extraordinary measure that provided the much needed assurance
that has saved the banks from failing. (Monetary Authority of Singapore, 2011)
Due to such strong and decisive policies, MAS has proven that it will provide the necessary
support in developing Singapore as an international financial centre, and evidently, Singapores
financial centre has continued to grow in prominence, as the financial services expanded by
12% in 2010. (SingStat, 2011)
Singapores fiscal policy has a primary focus at promoting long-term economic growth, rather
than cyclical adjustment or distributing income.
Budget
The long-term objectives of the government budgetary polices are:
to promote and support sustained, non-inflationary economic growth;
to maintain a balanced budget, i.e. to finance total operating and development
expenditures from operating revenue over the course of the business cycle; and
to focus government expenditure on delivering essential public goods and services, e.g.
education, health care, infrastructure, housing and programmes to protect the
environment.

(Inland Revenue Authority of Singapore, 2011)

The objectives of the budgetary policies recognize the market forces that drive the economy and
its financial prudence. It also places an emphasis on human and infrastructure investment for
the long term good.
The national budget responds both to the immediate and future needs of the country by
adapting and shifting its fiscal strategy. This can be seen from the measures put out in the
budget of 2008, 2009, 2010 and 2011 respectively.

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FY2008, the budgets focus was on innovation, business competitiveness, growing financial
services and developing the maritime hub. While FY2009 budgets focus was on surviving and
helping Singapore through the crisis. It was also the year in which Singapore tapped on her past
reserves to fund part of the Resilience Package. The tides changed and so did the 2010
budgets focus. FY2010 Budget marked a shift of a policy focus from crisis-containment to
investment; aiming at enhancing productivity over the medium to long term.
Reserves
As of August 2011, Singapore has S$300 billion in her reserves (MAS, Official Foreign
Reserves, September 2011, From URL:
http://www.mas.gov.sg/data_room/reserves_statistics/Official_Foreign_Reserves.html).
Singapores deep reserves act like an immediate air bag to cushion Singapore from an
economic crash by providing a deep pool of reserve monies to fund any immediate stimulus
packages needed for the short-term crisis management as seen in 2008.
The government drew S$4.9 billion from her reserves during the 2008 financial crisis, a first time
of such a draw in all years of being an independent nation

(NASDAQ, 2011).
It was used to fund two temporary measures, the Jobs Credit and a Special Risk-Sharing
Initiative; which has helped Singapore through the financial crisis.
The reserves also provide the funds to pay off any overall budget deficit. For example, the
overall budget deficit for the financial year of 2010 was $3.0 billion, which was 1.1% of the GDP
and it was funded by the reserves. (Popatlal, 2009)
Though, the reserves are a source of confidence that Singapore can weather any crisis, it is
only the last viable option and the government has to continue to implement fiscal policies that
will protect her economic health.
FY2011 Budget
The FY2011 Budgets focus was to share the fruits of the 2010 growth with Singaporeans,
address the rising inflation and to further supplement the longer-term measures that were
introduced in previous budgets.
The FY2011 Budget contains both endogenous and exogenous measures but with the bulk
being exogenous; which is in lined with the long term objectives of the budgetary policies.

(Inland Revenue Authority of Singapore, 2011)

Conclusions

Source: MAS Macroeconomic Review

Singapores trade openness and financial exposure to the US attest that Singapore is in no
economic isolation from the rest of the globe. Her economy has undergone several stages of
recovery since its rebound from the trough in Q1 2009. In Q1 2011, the domestic economy
transited to a more stable stage of recovery.
The increase in economic activity in the first quarter of this year indicates a growth in
Singapores key export markets. Despite the headwinds from the uncertainty arising from the
spike in oil prices, the calamity in Japan and the financial cracking in US and Europe, the MAS
Economic Policy Groups assessment concluded that there is adequate momentum for the
global economy to grow at a moderate pace in 2011 despite these headwinds.(Monetary

Authority of Singapore, 2011)

Although infrastructure and strategic location has given Singapore some advantage, what has
propelled Singapore onto the international financial services arena and remains as one of her
core strength is her ability to create sound far-sighted policies and the ability to execute them
seamlessly. It was the relaxation of monetary regulation that brought the Asian Dollar Market
onto our shores. Her policies on education, large expenditure and the industry relevance
continue to churn skilled efficient workers for the economy.Her stringent monetary regulatory
framework ensures the quality in her banking system. Economic development board continues
to plan and execute economic strategies to promote Singapore as a business and financial hub.
In a nutshell, Singapores pragmatic approach to policy making and implementation, has been
and will continue to complement our advantages gained through sound infrastructure and
strategic location. Thereby, assuring Singapores protection from sudden economic shocks that
we have no control over.

References

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