Introduction

There has recently been much discussion on the state of the regional economies coinciding with the tenth anniversary of the Asian financial crisis. As has been widely noted, the Asian economies recovered quickly from the crisis and are now amongst the fastest growing in the world. Since Asia has not experienced further crises in the past decade, can one infer that the region is now less vulnerable to the destabilizing effects of unfettered international capital flows? After all, considerable efforts have been undertaken to build buffers and reduce vulnerabilities. Compared to the pre-crisis period, the Asian economies are now run more conservatively, have strengthened current accounts, and have significant buildups in foreign reserves. Meanwhile, the financial systems in the region have become more resilient, with the restructuring of balance sheets and the enhancement of surveillance.

However, there has been a resurgence of private capital flows into Asia in recent years. This resurgence has largely been attributed to the search for high-yielding investments arising from low interest rates in developed countries.¹ In view of the pro-cyclicality of such capital flows (Kaminsky et al., 2004), some question whether the region's exposure to a capital flow reversal will lead to yet another financial crisis. It is clear that structural reforms and stronger economic fundamentals have increased Asia's robustness towards such financial shocks. In contrast to the 1997 Asian crisis, the region has greater capacity to accommodate the capital outflows so that a liquidity crunch or balance of payments crisis is improbable. Nonetheless, should there be a sudden large-scale reversal of capital flows and investor confidence is undermined, financial market distress and other risk scenarios may ensue (Khor and Kit, 2007). In particular, the attendant sharp corrections in asset prices will have an adverse impact on the economy especially through indirect channels.

The purpose of this study is to present Singapore's experience in managing the risks posed by capital flows as well as the retention of control over exchange rates and monetary conditions. At the outset, we note that Singapore has the support of strong economic fundamentals including persistent budget surpluses, huge foreign exchange reserves, substantial current account surpluses, high savings rates, low inflation, robust institutions, a sound financial system, and a stable currency. In this paper, we address three key issues: Singapore's exchange rate-centered monetary policy framework, monetary policy operations since the crisis, and the non-internationalization of the Singapore dollar. We consider how these three broad areas, along with a framework of consistent macroeconomic and microeconomic policies, contribute towards defending Singapore against instability arising from free capital mobility.

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