Overall, this is akin to writing deeply out-of-the-money options, exposing the banking system to tail risk. That should not be too surprising given that commercial banks’ liabilities are money, and so they are in the business of providing liquidity insurance. But it does make it difficult for market participants to assess, and price for, how much risk there is, albeit contingently, in the system as a whole. Conclusion Many of the developments I have reviewed are, of course, good news. Most obviously, longer life expectancy! Greater macro economic stability; financial innovation distributing risk more efficiently – these are pretty good things too, including for you as corporate treasurers. As a result, some risks have been reduced or are now easier to manage. But risk management challenges do unquestionably remain for you as corporate treasurers. Some, such as those arising from pension provision, essentially boil down to your appetite for risk and the mix of business/financial risk you want. Others stem from a range of uncertainties in capital markets. When and how global imbalances will be resolved. Whether risk is underpriced. How still-new structured finance markets would withstand a marked pick up in defaults. You will each have your own list. Those uncertainties and risks have to be identified, priced and managed. The official sector cannot make them go away. But it is our mission to reduce uncertainties stemming from monetary policy and its implementation. Some important sources of uncertainty in the past were, in fact, avoidable.
Singapore’s financial system has, by and large, weathered the crisis well. However, we must not be complacent and we need to prepare ourselves to respond to any future challenges. There are three areas which MAS has been working on and which we will continue to focus on in the coming year: first, sustaining macroeconomic stability in the postcrisis period; second, strengthening the financial system; and third, maintaining the growth of Singapore’s financial services sector. Sustaining macroeconomic stability in the post-crisis period 4. The strong pace of growth seen in the first half of this year is not expected to be sustained. Growth is likely to have peaked at the middle of this year, and will moderate to a more sustainable rate, as external demand slows after the post-crisis bounce from stimulus measures and inventory effects wane worldwide. For 2010 as a whole, the Singapore economy is expected to expand by 13 to 15%. 5. After two quarters in negative territory, headline inflation turned positive in Q1 this year and reached 3.1% in Q2. For the rest of the year, headline CPI inflation is expected to rise, reflecting higher car and commodity prices on a year-ago basis. However, the outlook for underlying price pressures remains largely unchanged from MAS’ monetary policy review in April. Despite stronger-than-expected GDP growth, the pass-through of domestic business costs to retail prices due to tightening factor markets is expected to be moderate, alongside the slowing in the economy.