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Singapore can't avoid next crisis, but it can strengthen its resilience: Heng

10 Sep 2018


The tools to mitigate worst of business cycles have also evolved since bank's collapse


A GLANCE outside the window of his Shenton Way office at the height of the 2008 global financial crisis was all it took for Heng Swee Keat, then managing director of the Monetary Authority of Singapore, to grasp the extent to which markets and economies around the world were connected.

"I could look into the port," said Mr Heng, who is now Singapore's Finance Minister. "At the height of the crisis, it was a really frightening sight, because normally you would see the cranes moving, and the containers were moving, and there was always a hive of activity. At the height of the crisis, the port looked so quiet, you know? And initially of course, as the older cargoes left, the container stacks became very low, but no new containers were coming in.

"Trade finance froze, and that in turn caused many of the importers and exporters to be very badly affected because there was no confidence as to whether your counterparty was able to pay.

"If you trace the linkages throughout the system, the linkages turned out to be far more extensive than what many regulators had thought of."

A decade after the bankruptcy of US investment bank Lehman Brothers triggered the global financial crisis, Mr Heng told The Business Times that another crisis is unavoidable. Whenever that happens, however, Singapore's ability to meet the new challenge will hinge on its ability to understand the impact of ultra-accommodative central bank policies, adapt to structural changes in the global economy and maintain a disciplined central bank, he said.

"The global economy goes through cycles all the time, and again, economic cycles have not been prevented. The ups and downs of the economy over the years; economists have tried very hard, they've studied this for a long time, and we've not been able to avoid business cycles."

However, the tools to mitigate the worst of those cycles have evolved since Lehman's collapse. The speed and extent to which the fallout spread around the world have led to global coordination of regulations and attention to firewalling and systemically important institutions, Mr Heng said.

Investor education is also now a significant part of the Singapore financial regulator's toolbox after large numbers of retail investors in Singapore and Hong Kong suffered losses from buying Lehman-issued structured products.

"The extent to which investors had bought into those, we had very little knowledge of initially," Mr Heng said. "But as the Lehman crisis deepened, more and more came out...That was a very, very difficult episode. I had full understanding of the people who invested in Lehman bonds.

"We tried as best as possible to have a proper resolution. It was extremely difficult, but in the end I think we acted in a way that was fair to investors. But I also understand that many people were hurt by the episode. And that's why after that we stepped up investors' education in a very major way."

While it may be difficult to predict how and when the next crisis might play out, Singapore can take steps to prepare for that inevitability, he said.

The first is to study the impact of the past decade's historically accommodative central bank policies.

"Central banks all over the world have had a period of ultra-accommodative monetary policy, and with very unconventional policies, in particular on these asset purchases and keeping interest rates at almost close to zero.

"We are still trying to look at the effects of this very prolonged period of ultra-accommodative monetary policy. Now, what risks have been built up with this, is something which I think we need to probe more deeply."

Singapore will have to face that uncertainty amid major structural changes in the global economic system, he said. Those changes include the shift of the "centre of economic gravity" towards Asia, demographic changes in the region and technological disruption. That is why Singapore's recent fiscal budgets have placed an emphasis on economic transformation, he said.

"With the structural changes that are happening, it's very important for every company in Singapore to undertake this structural upgrading of their operations seriously, to look at how we can embrace technology and how we can use technology to innovate better."

In the face of those changes, Singapore's financial regulator must also be steadfast in adhering to long-held principles of conservatism and discipline, he said.

"MAS has been and continues to be a conservative regulator. When I first went into the MAS, my regulators took great effort to tell me about why financial supervision is a very different ballgame from what I did when I was in the Ministry of Trade and Industry as a Permanent Secretary.

"The basics have served us well, because when we look at the many areas that we were supervising the banks on; from time to time we would get complaints that we were too difficult, we were too conservative.

"But we stuck to that policy. The fact that such a major crisis swept through the world, and that not a single one of our banks failed - we had no bank runs and not a single cent of our depositors' deposits in the banks was lost - I think is an important achievement."

But old lessons can be easily forgotten, he said.

"After a financial crisis - 10 years down the road, 20 years down the road - there will be a new team of players, a new team of bankers, a new team of investors with no experience of the last episode.

"And second, there's always a feeling that, no, this time it's different. We are investing in the right thing. And that's where financial crises have become a recurring feature of the global financial environment."