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The Beginning of the Crisis
The global Economic crisis of 2008-9 was the most critical and dangerous economic downturn since the global economic recession in 1930s. USA was the origin of these crises which had exerted massive impacts over the economy of the world. According to the economists in the economic crisis of 2008-9, the US government also made certain incentives that resulted in global crises, for example, the implementation of housing and urban development policy, Federal’s low interest Policy (because of this strategy, the US interest rate remained around 1% during 2003-4), and the Reinvestment Act ("GLOBAL FINANCIAL CRISIS: Coordinated Worldwide Measures", 2008). These incentives resulted in the economic crisis that caused several serious problems in the US market such as frozen money markets, overvalued assets, and the burst in subprime mortgages due to the lack of regulations, credit crunch, devaluation of the dollar, and the bankruptcy of the Lehman Brother holdings incorporation.
The rapid increase in the housing market in the United States overvalued the available assets for the consumers. Between 1991 and 2001, the housing market has regulated its prices under the government regulations introduced in the mid nineties to help Americans in owning a home, however, the increase in the prices of houses due to the increase in demand greatly affected the spending by consumers and resulted in a huge pressure on the economy. The regulation that was developed to help people in owning a home allowed banks and other financial institutions to grant loans to everyone regardless of their income as well as with little or no interest on the loan. According to Pozen, Freddie Mac and Fannie Mae, the potential lenders in the US owe around 45% of the US mortgage market in 2001 (Presbitero, n.d.). This shows that they owed about half of the US mortgaged market and therefore due to the bankruptcy of the Lehman brothers the overall US mortgaged market declined and faced the worst crisis of the history.
On the other hand the promulgation of the Reinvestment Act had also caused a huge interruption into the lending policies and mechanism of the US banks, because these policies require the US banks to lend money even to those lower class income populations, who do not even afford to pay back the money landed to them. This had encouraged the lower income population of the country to build such houses that they cannot afford to maintain in the future, which had exerted a twofold impact over the economy, i.e. on one side, it causes high inflation and on the other hand their inability of paying back the loans causes a huge vacuum in the money market of the country. In addition to that the low interest rate policy of the federal government has also supported the low income population to buy and make such houses that would be unaffordable for them in the long run. In 2003 and 2004, the US Federal Reserve Bank has retained the short term interest rate at as low as 2% with very low down payment, which was initially looking very supportive to the US economy, but in the long run it had exerted a very negative impact because the banks were unable to make a recovery from their customers ("Statistically speaking and the financial crisis", 2008). These are the major reasons that caused the downturn in the US economy and resulted in a huge financial crisis throughout the world, known as the great Wall Street Crisis of 2008.
Impact over Singapore
Initially, it was assumed by a majority of the economist that the crises are a subprime mortgaged problem of the US economy, but with the passage of time it had also affected most of the European banks, which in turn exerted a negative impact over the overall European economy. However, the Asian countries found their selves on the safe side from these crises due to the presence of the Great Chinese economy, but as a result of these crises the imports from US and European countries badly declined, which had directly affected the economic stability of the Asian countries, especially China, Hong Kong, Taiwan and Singapore, whose economies were mostly dependent upon their exports to the Europe and USA. Singapore was the first country that got a direct impact from these crises by reporting a negative growth in 2008 and 2009 because of the heavy reliance of its economy over the International trades (Gupta, 2011). However, their rebound was also very impressive and strong among the other three economies of Asia, as it had reported an annual growth of 12.46%, which was also much higher than its 2005 growth level. The government debt rate of Singapore was also drastically increased in 2008, which shows the country’s increasing financial needs during the crises (Bardhan, n.d.). Though the Singapore economy was negatively affected by the crises, but due to their strong foreign employee base, its unemployment rate remained comparatively lower than the other three prominent economies of Asia, i.e. Hong Kong, China and Taiwan.
Singapore had a well regulated market structure and therefore the exposure of the Singapore Banks to the US subprime mortgage crises was negligible, but even then the Singapore’s economy had suffered a huge loss of wealth and stability, especially the stock market of the country plummeted from 3500 points in 2007 to 1700 points in the last quarter of 2008. This in turn depressed the overall domestic demand and new investment in assets. On the other hand the amount of exports fell by 15% due to decline in imports by USA, Japan and European countries. The exports of electronics accounted for a third of the overall exports of the country, fell by 14%, pharmaceuticals that accounted for 22% of the overall industrial production of the country fell by 31% and the overall industrial production dropped by 12% (Jordan, 2010). The country had a great dependence over the industrial production sector and especially on the production of electronic goods, therefore the downturn in these industries had negatively affected the economic performance of Singapore and its stock market.
Response of Monetary Authority of Singapore to Global Financial Crisis
Singapore had an open and a small market economy that was greatly affected by the world financial crisis of 2008 and experienced a continuous cumulative loss in output by 9% over the four consecutive quarters in 2008, and reported as one of the deepest recession since its independence. However, shortly after the end of these crises, the country’s economy had recovered itself and now it had even exceeded the level that it had reported before the crisis, i.e. Last year its overall growth was reported at 14.7%. During 2008 and 2009, the importance of the Monetary Authority of Singapore (MAS) becomes more crucial for the success and recovery of the economy from the prevailing recession (Jordan, 2010). MAS had supported the objective of creating and achieving price stability in the medium term. It stated that we would not react to every single event that occur in the market or the economy of the country because this will create unnecessary uncertainty and volatility in the market and cause an apparent depression in the financial market. MAS had ensured that all the financial firms should have an equal and direct access to liquidity so that they can ensure long term sustainability and smooth functioning of the financial market. It had not only ensured a higher level of SGD liquidity in the banking system of the country, but also entered with the Federal Reserve Bank in a precautionary US$30 billion swap. Apart from the Singapore government bonds the Monetary Authority of Singapore had also accepted the AAA rated securities, i.e. SGD dominated securities as collateral securities. It had also decided to enter into a number of cross border arrangements with the central banks of other countries in order to accept the government debt and foreign currencies as collateral ("Global financial crisis: impact on Singapore and ASEAN - Eldis", 2016).
During the financial crisis of 2008, most of the corporate sector firms were unable to refinance their debts, especially the S-REITs, which were mostly invested in the real-estate properties of the country had short term debt obligation and highly liquid assets. At the time, when the situation was normal, the MAS had ensured that the browning of these property funds should be limited, so that they would not have to get liquidated at the bottom of the economic downturn. However, in the economic downturn of 2008, MAS relaxed the requirements for listed leverage, so that in this way it can facilitate the secondary fund raising by the listed issuers, which will in turn prevent the inappropriate selling of assets due to dramatic decline in the property prices. MAS had also imposed strict property lending limits, so that to make the property market less susceptible or sensitive to the economic boom or downturns. The regulatory loan to value limit of 80% energizes prudence with respect to home purchasers, and guarantees that financial institutions have a reasonable support in their advance portfolios. On the other side the commercial banks' exposures regarding property sector are topped at 35% to lessen their sensibility to a property downturn. As per the past experiences, these long haul administrative measures fired a war among moneylenders and permitted Singapore to avoid a coordination disappointment (Timberlake, 2016).
MAS had also predicted that the financial firms would fail to cope with the increasing uncertainty and volatility in the market and therefore created some well defined regulations that would help them in forecasting and provisioning the unexpected future losses. The accounting principles were also changed and imply that losses must be recognized well before the loss impairment can be made. This means that the recognition of loss should be delayed till the firm get a sufficient loan loss data. Therefore, MAS implemented a policy that the financial firms must keep 1% of their net receivables and loans as collective impairment provision. This gave a buffer to the firms, which would help them to cope with crisis because now the firms would be able to draw these provisions well before the recording of impairment charges. MAS had also created a number of policies for regulating such methodologies and measures that would deal with the short term liquidity problems. MAS have also created a number of organizations that would directly deal with the sharing of information with the customers in order to mitigate the risk of imperfect information sharing, i.e. Consumer Financial Protection Agency (Teng, 2016). It required the financial institutions to make some extra disclosures in the financial statements regarding their trade contracts and mechanism of debt clearing and other standardized contracts should be disclosed to the customers well before building business relationships with them. Similarly, it restricts banks from hiding liabilities in SIVs and shell companies, this will allow the investors to make a fair assessment of the financial health of banks and also allow them to take a profitable decision in terms of future monetary returns.
MAS had also made amendments in the banking regulations and stated that all institutions that are performing duties of banks would be treated as big banks in the future and would work under the banking regulations of the country. It had also invested huge sums in the training of employers that would help them in developing a competent and strong human capital, i.e. US$406.2 million. This showed a very strong impact over the reduction of the productive workforce and reemployment of competent workers in the labour market of the country. MAS had also focused upon the development of a sound political and legal environment for the foreign investors, so that they can not only increase foreign investment in the country, but can also encourage its local lenders and investors to compete with the foreign enterprises. This will help them in developing such entrepreneurship and technical skills, which would benefit the overall economy and financial industry in the long run.
Aftermath of the Crisis
As there is a famous saying that nothing remain forever, similarly soon after the financial crisis of 2008, the majority of the countries had started recovering their selves by creating certain new policies as well as making amendments in the existing policies related to the financial market of the country. However, it takes 2 to 5 years on average for most of the countries in getting recovery to its normal economic state, and some of the countries took more than that and even some of them are still struggling for reshaping and recovering their economies. As far as the impact of these crises over Singapore is concerned, we have discussed earlier that the country went into a worst state of their economy in 2008 and 2009, i.e. the electronic industry of the country initially declined by 14% in the start of the crises, while by the end of last quarter of 2008, it reported a further decline to 22.1% (Teng, 2016). Similarly, the manufacturing industries and banking sector of the country struggled till the end of 2010 for getting their selves into the recovery state. However, the implementation of certain new regulations and economic reform initiatives by the Monetary Authority of Singapore and the state government has helped the economy in not only recovering its old state, but it had also progressed much forward from that, i.e. Singapore had reported a growth of 14.7% during 2015, which is far better than the one it had reported in 2005, i.e. 7.5%. As per the general economic terminology, whenever an economy experience a downturn or recession phase, then in the recovery phase it usually outperform and report a growth that is even greater than it had reported well before the happening of the crisis. Similarly, the Singapore economy had also reported an annual growth of 18.90% in the second quarter of 2010, which is till today its highest ever growth rate. A number of laws were also passed by the government regarding the protection of labour rights and regulations related to the foreign direct investment in the country, so that they can manage their economy in a more responsive manner in the future. It also made a number of amendments in the banking regulations of the country, so that the banks can never get too much sensitive to the financial boom or downturn in the country ("Economy recovering after shrinking 6.5%, PM Lee says", 2016). In order to reduce direct dependence over the foreign or international economy, the country had also increased its focus upon its banking and services sector and established a number of new regulations in this regard, i.e. Financial Advisers Act (FAA), the Securities and Futures Act (SFA) and Financial Holding Companies Act (2013), etc...
Conclusion
On the basis of the above analysis and discussion, it has been concluded that the 2008 financial crisis was not only limited to the USA, but it had also greatly affected the rest of the economies and financial markets of the world. Although, initially its impact was very negligible over the Asian countries due to the presence of the Great China market, but with the passage of time it had greatly affected the four strongest economies of Asia, including Singapore, Taiwan, China and Hong Kong. The Singapore banking sector was comparatively stronger and had well defined policies and procedures regarding risk assessment and management, therefore, its banking sector was not that much affected, while on the other hand due to its high dependence upon the exports was proved problematic to it. The financial crisis had declined the consumer purchasing power around the globe and especially in the European and USA economies, which in turn reduces the imports of these countries and causes a decline in demand for the Singapore exports. Hence, negatively affected the Singapore manufacturing and industrial sector and causes a huge decline in the GDP of the country. Moreover, due to good employment policies and the presence of many foreign employees, the country’s employment sector was not much affected by these crises ("Economy recovering after shrinking 6.5%, PM Lee says", 2016). However, Singapore has dramatically recovered itself from these crises not only to its lost state, but also progressed ahead from that.
References
Bardhan, A. Of Subprimes and Subsidies: The Political Economy of the Financial Crisis. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.1270196
Economy recovering after shrinking 6.5%, PM Lee says. (2016). Singapore-window.org. Retrieved 18 March 2016, from http://www.singapore-window.org/sw09/090809BL.HTM
GLOBAL FINANCIAL CRISIS: Coordinated Worldwide Measures. (2008). Africa Research Bulletin: Economic, Financial And Technical Series, 45(9), 17979A-17981C. http://dx.doi.org/10.1111/j.1467-6346.2008.01927.x
Global financial crisis: impact on Singapore and ASEAN - Eldis. (2016). Eldis.org. Retrieved 18 March 2016, from http://www.eldis.org/go/home&id=41502&type=Document#.VuvFQOJ97IU
Gupta, V. (2011). Corporate Response to Global Financial Crisis: A Knowledge-Based Model. Global Economy Journal, 11(2). http://dx.doi.org/10.2202/1524-5861.1706
Jordan, R. (2010). Singapore in Its Worst Recession for Years. The Effects of the Current Economic Crisis on the City-State’s Economy. Journal Of Current Southeast Asian Affairs, 28(4), 95-110. Retrieved from http://journals.sub.uni-hamburg.de/giga/jsaa/article/view/172
Presbitero, A. The 2008-2009 Financial Crisis and the HIPCs: Another Debt Crisis?. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.1484383
Statistically speaking and the financial crisis. (2008). Acta Neuropsychiatrica, 20(6), 318-318. http://dx.doi.org/10.1111/j.1601-5215.2008.00347.x
Teng, A. (2016). Discuss: S’pore’s Manufacturing Output Falls For 9th Consecutive Month. VRForums | Singapore Technology Lifestyle Forums. Retrieved 18 March 2016, from http://forums.vr-zone.com/chit-chatting/3302531-sa-porea-s-manufacturing-output-falls-9th-consecutive-month.html
Timberlake, I. (2016). Singapore sees biggest-ever quarterly GDP fall: govt. Singapore-window.org. Retrieved 18 March 2016, from http://www.singapore-window.org/sw09/090102A1.HTM
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Appendices
Real GDP Growth Per Capita
General Government Debt
Unemployment rate % of labour force
Consumer Price Inflation
