Singapore during the Asian Financial Crisis

Updated: Jun 9


During the financial crisis, the contraction of the Asian economies was detrimental to Singapore's exports: a decline in investments and eroded competitiveness proved as significant obstacles for Singapore, which was in desperate need of policy revision. This paper evaluates and analyses the impact of the crisis of the Singaporean economy and the effectiveness of the policies introduced to tackle the economic impasse. Through the paper, we shall be examining the crisis from global and Singaporean perspectives.

Singapore recovered from the crisis relatively earlier as compared to its surrounding nations. Its quick comeback makes it an interesting case study. Even though Singapore has a very open economy, in terms of both current and capital accounts, the damage incurred due to the crisis was less severe than lesser open economies. Different sectors experienced different magnitudes of impact. Sectors such as commerce, transport, tourism, and financial services, which have sizeable regional exposure, were severely hit (Mahina Siriwardana & Anoma Iddamalgoda). However, the government's reply was not to reject globalization and liberalization but to enhance the domestic financial system and improve Singapore's international standing (Chia 1998). The exact causes of the financial downturn have remained ambiguous.

The exchange rate crisis in Thailand had a butterfly effect on neighbouring countries like Malaysia, Indonesia, and the Philippines. This led to worsening economic conditions and an eventual financial crisis in several countries. [1] Numerous causes led to an exchange rate attack on Thailand: an overvalued exchange rate pegged to the US$.[2], eroding trade,[3] Similar conditions experienced in China further aggravated the situation (Huh and Kasa, 1997). Large capital inflows created bubbles in the real estate and stock market.

Singapore, however, was least affected thanks to its strong macroeconomic fundamentals and healthy financial system. The M2 to foreign reserves ratio was comparatively lower than other ASEAN countries, and it also experienced better exchange rate performance. Through a variety of ways, the Asian financial crisis harmed Singapore. First, Singapore's exports to crisis-hit economies were severely harmed due to significantly reduced regional demand, owing in part to the depreciation of their currencies. Second, Singapore's exports in third-country markets grew less competitive versus these economies. Third, the banks of Singapore were harmed by their considerable loan exposure to these countries. Fourth, Singapore's massive outflow of investment to the region in the early 1990s, in response to the government-led regionalization programme, was severely hampered. Fifth, the Kuala Lumpur Stock Exchange (KLSE) introduced a new rule on August 31, 1998, mandating all Malaysian shares to be done on the KLSE. This impacted Singapore's brokerage firms. The new KLSE rule, along with Malaysia's application of exchange controls, effectively shut down Malaysian stock trading on Singapore's Club International.


The unemployment rate rose from 2.4 per cent in 1997 to 3.2 per cent in 1998 due to the economic crisis, reaching its highest level since 1989. In 1998, there were approximately 62,100 unemployed people, up from around 45,500 the year before. The number of unemployed people increased in the second half of 1998, reaching a peak of 4.5 per cent in December 1998, up from 2.3 per cent in June. Even so, Singapore's unemployment rate had remained low when compared to other countries in the region.

Singapore GNP rapidly declined to 1.5 per cent in 1998[1]. Since the manifestation of trade linkages brought about this sharp drop, the government adopted a policy package, which was recommended by the Committee on Singapore's Competitiveness (CSC) (Ministry of Trade and Industry, 1998). The primary clause was a 15 per cent reduction in total wage costs. Other seemingly redundant business costs like land and factory rentals, charges for government-supplied services and foreign worker levies were also removed.

The Committee estimated that this package would reduce business costs by about S$10 billion per year or about 7 per cent of GDP.[1].

The Budget Statement of 1999 announced measures to increase domestic expenditure and proposed a 6 per cent increase in government expenditure. These policies were expected to abate the effect of wage cuts on domestic demand. Furthermore, an extension of the Local Enterprise Finance Scheme was introduced to promote working capital flows to local businesses.

The decline in actual costs due to lower wages was responsible for the macroeconomic outcomes of the wage policy. This led to a severe devaluation of the Singapore dollar, which bolsters the price competitiveness of exports. The CSC policy of reducing wage costs benefited the economy in many ways. It produced outcomes that were aligned to increase employment and international competitiveness. While expanding the GDP, the policy increased the demand for labour and actual private consumption.

The Budget Statement of 1999 provided a 6 per cent expansion in government expenditure and implicitly suggested private consumption. The macroeconomic results of increased government expenditure highlight that it is moderately effective in generating employment opportunities. In contrast to fiscal expansion, the increase in private consumption increases employment coupled with moderate growth in real GDP.

Despite being a reasonably open economy, Singapore's experience with the Asian financial crisis was not as bad as some of the region's fewer open economies. The regional currency crisis had not weakened the Singapore dollar or jeopardized the banking sector's health. However, by the end of 1998, Singapore had slowed its growth rate and had a greater unemployment rate, indicating that it had not fully recovered from the crisis. The economy was less exposed to external shocks because of its solid macroeconomic and financial fundamentals and sound macroeconomic policy. Identifying diverse strategies that would affect growth in the short to medium term had been a significant difficulty for policymakers. Should wage costs be reduced directly or indirectly through exchange rate changes? What are the best ways to boost domestic demand as external demand rises due to greater competitiveness? Will an increase in government spending have a more significant economic impact than an increase in private consumption? We discovered that Singapore was harmed mainly as a result of decreasing commerce in the Asian region. As a result, her policy suggestions had to be focused on increasing competitiveness to boost trade with other afflicted economies.




Written by: Ananya Kohli

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