Impact of the Asian Financial Crisis on Singapore

Essay by ringaringUniversity, Bachelor'sA-, September 2006

download word file, 7 pages 3.7

1.0 Introduction

1.1 Asian Financial Crisis

Until 1996, many developing countries, especially the Southeast Asian countries were developing their financial markets, which attracted huge inflows of foreign capital. Coupled with weak supervision on continued liberalization of the financial markets, huge current account deficits, and adoption of fixed exchange rate system, these economies were vulnerable to speculative attacks.

The Asian Financial Crisis (AFC) started from Thailand, whereby the property and share market started declining and rumours of banks and finance companies caught in financial difficulties led to massive currency attacks stemming from loss of investor confidence.

1.2 Spread of crisis

The crisis spread to many neighbouring countries such as Indonesia and Philippines who were believed to have similar unstable economic situations. Although Singapore did not demonstrate similar economic situations such as current account deficits, Singapore's geographical proximity with its neighbouring countries and economic dependence resulted in Singapore being hit by the crisis too.

Evidence of current account surplus in Singapore is shown in Table 1. The current account balance to GDP ratio of Singapore was a 15.7% surplus in 1997, as compared to most of the other crisis-affected countries which experienced deficits.

Nonetheless, the impact of the crisis on Singapore was much less severe, and this report seeks to address the underlying reasons. All tables and figures referred to are in appendix.

2.0 Flexibility of exchange rate system

2.1 Managed float system

As Singapore is a small and open economy, it adopted a managed float system whereby the Singapore Dollar (Sing Dollar) is allowed to fluctuate within a target band. The target band is based on trade-weighted basket of currencies of Singapore's major trading partners. To prevent investors from speculating and reducing uncertainty especially during AFC, this target band is undisclosed.

2.2 Depreciation and widened band

In times of crisis, the...