MONETARY POLICY

The objective of monetary policy remained one of maintaining price stability for sustained economic growth. In view of the subdued inflationary environment and the need to facilitate the recovery in the economy, the Monetary Authority of Singapore (MAS) adopted a neutral exchange rate policy stance in 1999. In addition, given that currency markets have become less volatile compared with the year before, the MAS also narrowed the exchange rate policy band to its pre-crisis width.

Exchange Rate

The movement of Singapore dollar exchange rate against major industrial and regional currencies was mixed in 1999. Although it depreciated against the US dollar in the first half of the year, the Singapore dollar pulled back in the last two quarters due to the stronger-than-expected domestic economic recovery and renewed interest in the local bourse. Nonetheless, Singapore dollar depreciated by an average 1.3 percent against the US dollar in 1999, after the 11 percent depreciation seen the year before. Underpinned by Japan's improved economic outlook, the Yen had strengthened significantly against major currencies. Thus the Singapore dollar also weakened against it, by 14 percent in 1999 compared to a depreciation of 4.3 percent in 1998.

On the other hand, the Singapore dollar firmed against most European currencies in 1999. It strengthened marginally against the Pound Sterling and the Deutschemark by 1.1 percent and 2.9 percent respectively, in contrast to the double-digit depreciation in 1998. Against the French franc and Italian lira, the Singapore dollar appreciated by 3 percent each. Since its introduction in January 1999, the Euro depreciated by 14 percent against the Singapore dollar.

The Singapore dollar depreciated against most currencies of the ASEAN and NIE countries. With the economic turnaround and the return to relative stability, regional currencies rebounded in 1999, following the sharp depreciation experienced the year before. The Singapore dollar fell by 21 percent against the Indonesian rupiah, 16 percent against the Korean won, 8.9 percent against the Thai Baht, and 4.8 percent against the New Taiwan dollar. Against the Malaysian ringgit, the Singapore dollar depreciated by 4.2 percent compared with an appreciation of 25 percent in 1998. Given the Hong Kong dollar peg to the US dollar, the Singapore dollar also weakened against it by 1.1 percent.

Interest Rates

The external interest rate environment was generally tighter in 1999. While the US Federal Reserve had implemented a series of interest rate hikes over the year, the European Central Bank and the Bank of England eased rates in the earlier part of the year before tightening in the later half. Singapore¡¯s 3-month interbank interest rate reacted to some of these fluctuations. From 1.75 percent at end-December 1998, the benchmark rate ended the year at a 14-month high of 2.63 percent. However, at 2.03 percent on average, it was lower than the average of 5.18 percent in 1998. It also remained below the 3-month US dollar SIBOR, which was boosted to 6.06 percent at end-December by the three quarter-point hikes in US interest rates in 1999. However, the differential between 3-month US dollar SIBOR and the domestic interbank rate remained largely unchanged at 3.43 percentage points at end-1999 compared with 3.38 percentage points at end-1998.

Retail deposit and lending rates were stable in 1999. The average prime lending rate of the leading banks moderated slightly from 5.90 percent at end-December 1998 to 5.80 percent in January 1999 and remained unchanged throughout the year. The 3-month and the 12-month fixed deposit rates also slid marginally to 1.68 percent and 2.46 percent respectively, before remaining constant from March 1999 to the end of the year.

Money Supply

Growth of narrow money (M1) strengthened in 1999 to 14 percent, compared with a contraction of 0.9 percent in 1998. The rapid rise in narrow money was largely due to a 16 percent increase in demand deposits, up from 9.7 percent in 1998. The preference towards holding more readily accessible funds reflected the low interest rate environment and the pick-up in economic activity. Broad monetary aggregates, M2 and M3, also expanded, albeit at slower rates of 8.5 percent and 7.3 percent respectively in 1999, compared with 9.7 percent and 8.1 percent in the previous year. The moderation was due to the halving of the growth of fixed deposits, although savings deposits continued to increase at double-digit rates in 1999.

OUTLOOK FOR THE SINGAPORE ECONOMY

Global economic conditions have returned to normality in 1999, after the upheavals and uncertainties in the previous two years. The continued strong growth in the US, albeit some signs of deceleration in consumer spending, and the firming of the EU economy have been important. In Asia, the gradual recovery of the Japanese economy and better than expected growth performance in China; Hong Kong, China; Korea; and Malaysia also played a major role.

In view of the favorable external environment, the outlook for the Singapore economy is bright. Business expectations from the industry and services providers have also been positive. Going into 2000, the strong global electronics demand and the revival in intra-Asia trade will help reinforce Singapore¡¯s economic growth

Taking into consideration the above factors, the official GDP forecast for Singapore for 2000 is 7.5 percent to 8.5 percent.

Strategies and Adjustment Measures undertaken to Sustain the Recovery and Strengthen Markets

Cost-Cutting Package

With the regional economic storm now passed, comes the challenge to manage the recovery and restore economic growth on a sustained basis. While growth has become broader based and employment is down, the economy still has to address some weaknesses. For example, several manufacturing industries such as disk drives and petroleum refining continue to face severe cost pressures. Continuing restructuring is causing a steady stream of retrenchments.

In light of these developments, the government has reviewed its economic stance, and particularly the measures in November 1998¡¯s cost reduction package. In general, the package will continue as committed, but the tightening labor market has made it necessary to bring forward the restoration of employer CPF contribution rates. The improved economic outlook also justifies a higher quantum of year-end bonus for civil servants, and a restoration of the wage cuts imposed on civil servants. The Skills Development Levy has been adjusted, as skills upgrading is critical to keeping workers employable. In key areas of business costs, namely industrial land rentals and port and airport dues, the rebates have been extended for an additional year.