Table of Contents
Singapore has presented itself as a unique and interesting case among nations deeply affected by the global financial crisis. The Lee thesis (after Lee Kuan Yew, who formulated it succinctly) argued in sum that freedoms and rights hampered economic growth and development (Sen 1999). The combination of a moderated democracy with limited governmental transparency and little freedom of the press, free speech or welfare rights has seen Singapore controversially typecast as a soft authoritarian and anti-democratic state. Singapore, however, has found its niche in its ability to foster liberal enterprise based on manufacturing, service and speculative investment. Singapore presents itself as a nation built on the business acumen of its people, harnessed through meticulous planning and shepherded by benevolent-paternalistic government.
The People’s Action Party (PAP) has been the sole ruling political party in Singapore since 1959. Since the general election in 1963, with Lee Kuan Yew as its leader, the PAP has dominated Singapore’s parliamentary democracy and has been central to the country’s rapid political, social and economic development. Although the PAP professed a rejection of Western-style liberal democracy, it has, since its inception, accepted the need for some welfare spending and pragmatic economic intervention. Mauzy and Milne (2002) discern four major underlying principles of the PAP: pragmatism, meritocracy, multiracialism and communitarianism.
Singapore grew into South East Asia’s wealthiest economy and, in 2008, had kept its rank for the third successive year as the easiest place to do business in the world (Brook 2008). Nevertheless, notwithstanding an average growth rate of 8 per cent between 2004 and 2007, Singapore was the first East Asian country to fall into a recession as a consequence of the global financial crisis. Due to conservative economic policies—a remnant of the 1997 East Asian financial crisis, combined with an existing well-regulated market—the exposure of Singapore’s banks to sub-prime mortgages was limited. The country’s reliance on foreign investment, however, and its heavy dependency on trade made it particularly sensitive to volatilities and shocks in the global financial markets, and in particular, to key exports of manufactured goods to the United States and Europe, which in the past few years accounted for nearly 33 per cent of total non-oil exports (Thangavelu 2009).
The huge losses in Singapore’s wealth from the collapse of international stock markets further exacerbated already declining economic conditions. Although it was difficult to establish a true figure due to lack the of disclosure of their assets and trading activities, it was estimated that in 2008 alone the Government of Singapore Investment Corporation (GIC)—one of two government-funded institutions known as sovereign wealth funds—made an estimated loss of US$33 billion (Paris 2009). Temasek Holding Pty Ltd, GIC’s sister agency, accrued an estimated loss of US$39 billion in the eight months between 31 March 2008 and 30 November 2008. The vulnerability of Singapore’s two sovereign wealth funds was due mainly to heavy investments in distressed Western financial institutions such as Citigroup, UBS AG, Barclay’s Bank and Merrill Lynch.
With the constraints on democratic accountability operating in the Singaporean political system, the potential scope for any particular crisis to threaten the political fortunes or policy commitments of incumbent leaders is limited. There is no credible opposition party and past voting behaviour in Singapore indicates that PAP office-holders are firmly in the saddle. Still, a crisis that has the potential to destabilise the key pillars of prosperity on which much of PAP’s authority and public legitimacy rest, is worth closer examination. A crisis-induced rise in political disaffection among Singaporeans could have dented the long-term credibility of the PAP and, in particular, the Lee family.
Box 11.1 Singapore’s financial crisis trajectory, December 2007 – March 2009
25 December 2007: Temasek Holding Pty Ltd (Temasek), a Singaporean investment fund and arm of the Singapore Government, buys a large stake in US financial services company Merrill Lynch at 13 per cent less than market value—spending $14 billion. Temasek also holds an option to purchase a further $600 million worth of shares by the end of March 2008.
25 June 2008: Temasek buys £200 million worth of shares in British bank Barclay’s after the bank announced it would issue new shares worth £4.5 billion to bolster its finances, which had been hit by losses on US mortgage-backed securities.
29 July: Temasek increases its stake in Merrill Lynch. Temasek had previously paid $5 billion for new shares in the company; it is now entitled to a discount totalling $2.5 billion on this purchase. Temasek spends the discount returned to it by Merrill Lynch on an additional purchase of $900 million worth of shares in the company at a price of $24 a share—half of the purchase price paid in December 2007.
Mid-September: The Monetary Authority of Singapore (MAS) pledges to hold inquiries into potentially wrongly sold Lehman Minibond notes, though it does not indicate any commitment to order financial institutions to buy back the notes and denies having authority to compel financial institutions to compensate consumers. The total size of the Lehman Minibond program was S$508 million, of which S$375 million was sold to approximately 8000 retail investors through nine distributors. These notes are considered growth stock, as opposed to income-producing assets, of a high-risk nature.
October: Easing of monetary policy; lowering of trading band to allow depreciation of currency.
10 October: The MAS issues a statement that Singapore’s policy of modest and gradual appreciation of the Singaporean dollar’s nominal effective exchange rate policy, standing since April 2004, has been tightened to help mitigate inflationary pressures in lieu of sustained growth and rising commodity prices. Advanced estimates released by the Ministry of Trade and Industry show, however, that Singapore’s gross domestic product (GDP) has declined by 6.3 per cent—due mainly to external shocks transmitting into a domestic slowdown in financial and trade channels.
20 October: The government moves to guarantee all Singaporean dollar and foreign currency deposits of individual and non-bank customers until 31 December 2010. The PAP sets aside S$150 billion as sufficient to back S$700 billion of individual deposits and non-bank customers. This is a precautionary measure to avoid any potential erosion of Singaporean banks’ deposit base and to ensure an international playing field for Singapore.
Late October: The MAS establishes a US$30 billion swap facility with the US Federal Reserve as a pre-emptive measure to ensure dollar liquidity for the Singaporean banking system.
Early November: Singapore’s DBS Bank retrenches 450 workers to cut costs.
November: The government pledges $1.5 billion to help firms secure credit, followed by a further announcement that it is ready to run a bigger budget deficit to boost the economy.
11 January 2009: Temasek acquires shares in Bank of America by converting shares it had purchased in Merrill Lynch (see 25 December 2007 and 29 July 2008) into shares in Bank of America, which had recently purchased Merrill Lynch. Temasek now owns 3.8 per cent of Bank of America.
22 January: The government announces its 2009 ‘Resilience Package’ totalling $20.3 billion (8.2 per cent of GDP) made up of five components: jobs for Singaporeans; stimulating bank lending; enhancing business cash flow and competitiveness; supporting families; and building homes for the future.
6 February: Board of Directors of Temasek announces CEO, Ho Ching (wife of Lee Hsien Loong), is stepping down after Temasek’s ailing performance in 2008.
2 March: United Overseas Bank shares fall about 6 per cent to S$9.38—the lowest level in almost six years.
6 March: Recent Economic Development in Singapore report states that GDP has further contracted by 16.4 per cent in the fourth quarter of 2008 after the 2.1 per cent decline in the preceding quarter. It is reported as the steepest sequential contraction on record and is marked by rapid deterioration in trade-related industries and a sharp drop in financial services. Reported retrenchment of 13 400 workers in 2008 (a rise from 7700 in 2007).
2009: Government expects budget deficit of $8.7 billion (3.5 per cent of GDP) for FY2008—a significant rise from the budget deficit of $2.2 billion for FY2007.