Question

How did Singapore fare in the Asian Financial Crisis in 1997 and the Global Financial Crisis in 2008 relative to its other ASEAN partners (you may pick any one of them for discussion)?

Answer 1

declining regional demand for Singapore’s exports due to contraction in the crisis economies, slower growth

in real investment, and loss of competitiveness in the face of competitive devaluations posed new challenges for

Singapore which must adopt policies to combat the crisis. This paper examines the impact of the crisis on

Singapore and the effects of proposed policies using the computable general equilibrium (CGE) modelling

approach. We use two CGE models: a world model and a model of Singapore. First, the impact of the crisis is

simulated using the GTAP (Global Trade Analysis Project) model. Then the effects of policy responses are

examined using the Singapore model. In particular, we examine wage reduction, domestic demand stimulation,

and exchange rate policies.

Introduction

Singapore’s experience with the Asian crisis and its quick recovery following the policy responses

makes it a worthwhile and an interesting case study. In terms of both current and capital accounts,

Singapore has a very open economy, yet the impact of the crisis was less severe in comparison to

much less open economies in the region which have experienced dramatic economic and social

repercussions. In Singapore, the crisis impacted different sectors unevenly. Sectors such as

commerce, transport, tourism, and financial services, which have a large regional exposure, were

badly hit. Interestingly, the policy responses to the crisis were not to reject globalization and

liberalization and adopt capital control measures but to make much stronger domestic financial

system and to improve Singapore’s international competitiveness (Chia, 1998). Since the crisis,

many alternative explanations have emerged as the causes for the substantial economic downturn

in the region. Among these some political economy arguments and weakening of macroeconomic

fundamentals caused by the adoption of policies that are inconsistent with a peg exchanged rate

regime have occupied an important part of the debate (see Lee, 1999; Karunaratne, 1999).

______________________________

* This research was funded by a grant from the University of New England. The authors are grateful to two

anonymous referees for their helpful comments and suggestions.

UNEAC Asia Papers No. 6 2003 2

This paper examines the impact of the crisis on Singapore and the effects of proposed

policies using the computable general equilibrium (CGE) modelling approach. We use two CGE

models: a world model and a model of Singapore (Siriwardana and Schulze, 2000). First, the impact

of the crisis is simulated using the GTAP (Global Trade Analysis Project) model. Then the effects

of policy responses are examined using the Singapore model. In particular, we examine wage

reduction, domestic demand stimulation, and exchange rate policies.

The paper is organised as follows: Section two is a brief discussion of the Asian crisis and

its implications for Singapore. Section three outlines the theoretical framework of the GTAP

model which is used to quantify the impact on Singapore of the crisis. The simulation results

obtained from the GTAP model are discussed in Section four. Section five reviews her policy

responses to the crisis. Section six presents the results of policy simulations. Section seven

concludes.

The Asian Crisis and Its Implications for Singapore

The Asian crisis began as an exchange rate crisis in Thailand and spread almost immediately

to Malaysia, Indonesia, and the Philippines. This led to financial crises which, in turn, produced

severe downturns in real economic activity in these, and other, countries. While a full discussion

of the causes, propagation channels, and effects are beyond our scope,

1

some points need to be

made to show how, and to what extent, Singapore was caught up in the crisis. We focus on

Thailand, the first domino. An overvalued exchange rate pegged to the US$,

2

declining exports,

3

and a growing current account deficit made her vulnerable to a speculative exchange rate attack.

The falling yen and an effective depreciation of about 10 per cent of the yuan contributed to her

reduced export competitiveness

4

. The resulting devaluation triggered a financial crisis. Substantial

capital inflows, about 6 per cent of GDP, had fuelled price bubbles in real estate and the stock

market. Although these bubbles peaked at the end of 1993, by the end of 1997 share prices fell to

about 29 per cent of their 1995 levels while the property company share index fell to 10 per cent

of its 1995 level (Edison, Luangaram and Miller, 1998, p.4). In addition, relatively high domestic

interest rates and the pegged exchange rate led to increases in foreign short-term borrowing

5

that

was largely unhedged. As the exchange rate fell, financial institutions suffered large capital losses

as the value of their foreign denominated debt increased.

These losses were magnified since most bank lending was backed by collateral, particularly

real estate. Financial system solvency, already impaired, was further damaged as the value of their

collateral collapsed

6

and nonperforming loans increased. New domestic credit dried up, as did

foreign credit with capital outflows of about 2 per cent of GDP. Otherwise viable