The Issue of Transparancy in the Monetary Authority of Singapore (MAS)

p Transparency

in the

Monetary Authority of Singapore

2007 TABLE OF CONTENTS

Section 1 . Introduction to the Study 4

Section 2 . Background on the Study 5

Section 3 . Regulation and Supervision 6

Section 4 . Exchange Rate Policy 8

Section 5 . The Need for Transparency 10

Section 6 . Transparency Reforms 13

Section 7 . Information Disclosed by the MAS 16

Section 8 . Transparency Shortcomings of the MAS 19

Section 9 . Conclusion

WORKS CITED LIST 21

Section 1 . Introduction to the Study

Transparency is an important means

of enhancing the performance and public accountability of a financial institution . Ideally , financial institutions should adopt a presumption in favor of the release of information , except where such release might compromise a well-defined need for confidentiality (Bank for International Settlements 1998

According to surveys examined by Transparency International , a non-profit organization based in Germany , Singapore has consistently been perceived as having the least corrupt public sector among Asian nations . Singapore ranked number 5 worldwide , with Hong Kong and Japan joining Singapore as the only Asian nations ranking among the top 25 countries . Asia 's largest nations - namely , China , India , and Indonesia - all scored in the bottom half of the 133 ranked nations (Dube 2003

In understanding why Singapore is perceived as the least corrupt , and therefore most transparent , nation in Asia necessarily requires an examination of the Monetary Authority of Singapore (MAS . The MAS is the central bank of Singapore . Its task is to formulate and execute the country 's monetary and exchange rate policy , and to issue Singapore currency . Since it is the banker and financial agent to the government , MAS also manages the country 's foreign reserves and issues government securities . In addition to these duties , MAS acts as the supervisor over the country 's banking , securities , futures , and insurance industries , as well as in the promotion of Singapore as an international financial center (Monetary Authority of Singapore `Introduction ' 2007 Monetary Authority of Singapore , `Economics Explorer 1 ' 1999

Section 2 . Background on the Study

In 1970 , the Parliament of Singapore passed the Monetary Authority of Singapore Act which lead to the creation of MAS on January 1 , 1971 Prior to 1970 , the different monetary functions associated with a central bank were performed by various government departments and agencies . However , as the country progressed , it became apparent that there was a need to develop a more dynamic , coherent policy on monetary matters . With the passage of the MAS Act , the MAS was given the authority to streamline all monetary , banking and financial sectors in Singapore . In April 1977 , the regulation of the insurance industry was also brought under the coverage of MAS . In September 1984 , the regulatory functions under the Securities Industry Act of 1973 were also transferred to MAS . In October 2002 , MAS merged with the Board of Commissioners of Currency , and now also assumes the function of currency issuance (Monetary Authority of Singapore , `Introduction ' 2007

However , unlike many other central banks such as the Bank of England or The Fed , MAS does not regulate the monetary system by interest rate to influence the liquidity in the system . MAS instead regulates the country 's monetary system through a foreign exchange mechanism by intervening in the SGD market (Wikipedia , 2007

Thus , the MAS assumes the role of overseeing and regulating the monetary , banking , financial , and insurance sector in Singapore . Since all these industries - crucial to the economic growth and stability of any country - are controlled by a single authority , certain concerns arise as to the transparency of its procedures . When one governmental body is given such a huge amount of power and responsibility over such significant sectors

Section 3 . Regulation and Supervision

The approach taken by MAS in regulation and supervision focuses on systemic risk rather than individual transactions . The concern is maintaining low inflation , or price stability , which is deemed as essential for sustained economic growth and for ensuring financial stability . The global financial industry has been changing rapidly due to falling regulatory barriers , advances in information technology , and the increasing number of mergers among financial institutions . As financial markets and activities become more consolidated and integrated , there is a need thus to foster an environment to hasten the pace of market development and innovation while at the same time maintaining financial stability

The response of the MAS to all this was to shift away from a one-size-fits-all ' regulation toward a risk-focused supervisory approach . It makes a distinction between regulation and supervision Regulation ' refers to the setting of prudential rules and guidelines for financial institutions , whereas supervision ' refers to ensuring that these rules and guidelines are complied with . In adapting a risk-focused supervisory approach , the MAS gives stronger financial institutions the flexibility to develop and innovate while maintaining stricter controls over weaker institutions . As a regulator , the MAS sets minimum requirements on capital and liquidity that institutions should meet as prudential safeguards . At the same time , it strives to align its policies with international best practices , and attempts to strike the right balance between prudential regulation and market development by consulting industry associations , market participants and professionals . Acting as a supervisor , MAS ensures that financial institutions comply with established rules and guidelines by conducting field inspections , examination of statistical returns , accounts , reports by external and internal auditors , and exchanges of information with other regulators . MAS has always also been vocal about promoting higher disclosure and transparency standards among financial institutions in to facilitate a greater degree of market scrutiny and discipline in the conduct of their activities (Monetary Authority of Singapore `Introduction ' 2007

Regulatory transparency is an essential element in making regulation effective and fair - and is thus a fundamental foundation for deep liquid markets . Lack of transparency in the implementation of laws and regulations can seriously impede the ability of financial institutions to compete fairly . Financial services firms face non-tariff barriers in the form of regulatory restrictions , and lack of transparency in the implementation and application of regulations . These barriers can prevent access in much the same way as tariffs but , unlike tariffs , no quantitative mechanism exists to reduce them (Lackritz , 2003

From a business standpoint , maintaining a high level of transparency is as essential to a successful financial services agreement as tariff cuts are to an agreement on trade in goods . Lack of transparency in the implementation of laws and regulations - including limited public comment periods on proposed regulations , non-transparent approval mechanisms for firms and financial products , or other practices that are not dealt with pursuant to written regulations can drastically impede the ability of securities firms to compete fairly (Lackritz 2003

Regulatory prohibitions also limit the ability of Singaporean firms to compete in foreign markets . In some cases , the sale of specific products requires regulatory approval . In other instances , the ability to establish is impaired by restrictions on new licenses . Elimination of these barriers is complicated , especially when the MAS determines these barriers are prudential ' in nature - that they exist to protect the safety of consumers and the soundness of the marketplace . However critics point out that many of the regulatory restrictions established by the MAS go beyond any legitimate prudential objective (Lackritz 2003

Section 4 . Exchange Rate Policy

From 1981 , Singapore 's monetary policy has been focused on the exchange rate which is deemed as a more effective tool in controlling inflation given the small size and the openness of the Singapore economy . The Singapore dollar (S ) exchange rate is managed against not only the US dollar or any single foreign currency , but against a basket of currencies comprising the currencies of the country 's major trading partners and competitors . The MAS regularly reviews and revises the composition of this basket of currencies , taking into account changes in Singapore 's trade patterns . This trade-weighted exchange rate is broadly maintained with an undisclosed target much , since how much the trade-weighted S is allowed to appreciate or depreciate depends on the level of global inflation and domestic price pressures , among other things (Monetary Authority of Singapore , `Introduction ' 2007

The choice of exchange rate , rather than money supply or interest rate has been further influenced by Singapore 's lack of natural resources The nation has to import even the most basic of necessities . Out of every S 1 spent in Singapore , 54 cents go to imports . This implies that domestic prices in Singapore are very much influenced by foreign prices , partly due to the fact also that its economy is of such a small size . As such , foreign price increases will lead to higher domestic prices which in turn can be offset by changes in the exchange rate (Monetary Authority of Singapore , `Introduction ' 2007

The exchange rate can also affect domestic costs and prices pressures Since Singapore has a small domestic market , its economic development strategy has always focused on producing exports for the rest of the world , with exports or external demand comprising about two-thirds of exchange rate can have an important influence on the demand for local resources , particularly labor . This is due to the fact that a weak exchange rate can lead to the overheating of the economy , a tighter labor market , and as a result thereof , higher growth of domestic wages and other costs (Monetary Authority of Singapore , `Introduction 2007

MAS is also very open to capital flows . Small changes in the difference between domestic and foreign interest rates would lead to large and quick movements of capital . Unfortunately , this makes it hard to target money supply in Singapore , since net flows of funds from abroad make up the bulk of changes in domestic money supply . In the same vein , domestic interest rates are largely determined by foreign rates and market expectations of the movement of the Singapore dollar Any attempts by MAS to raise or lower domestic interest rates over a long period of time would in effect be thwarted by a shift of funds coming in or out of Singapore (Monetary Authority of Singapore `Introduction ' 2007

Section 5 . The Need for Transparency

Transparency is an important tool for enhancing the performance and public accountability of a financial institution . In responding to the crisis in Asia , finance ministers and central bank governors from a number of systemically significant economies met in Washington , D .C . in April 1998 to examine issues related to the stability of the international financial system and the effective functioning of global capital markets . The April meeting was attended by finance ministers and central bank governors from Argentina , Australia , Brazil , Canada China , France , Germany , Hong Kong SAR , India , Indonesia , Italy , Japan Korea , Malaysia , Mexico , Poland , Russia , Singapore , South Africa Thailand , the United Kingdom and the United States . The heads of the BIS , IMF , OECD and the World Bank , as well as the Chair of the Interim Committee , attended as observers . In their discussions , ministers and governors stressed the importance of strengthening the international financial system through action in three key areas : 1 ) enhancing transparency and accountability 2 ) strengthening domestic financial systems and 3 ) managing international financial crises (Bank for International Settlements 1998

The Working Group on Transparency and Accountability considered the contributions that transparency and accountability can make to improvements in economic performance , as well as the nature of information needed for effective transparency and accountability Members particular importance to enhancing the relevance reliability , comparability and understandability of information disclosed by the private sector . They recommended that priority be given to compliance with and enforcement of high-quality accounting standards There was also a consensus on the need to improve the coverage frequency and timeliness with which data on foreign exchange reserves external debt and financial sector soundness are published . Furthermore members recommended that consideration be given to compiling and publishing data on the international exposures of investment banks hedge funds and other institutional investors (Bank for International Settlements 1998

These recommendations provided for by the Working Group on Transparency and Accountability have not necessarily been followed by the participants in the assembly , such as Singapore in this case . At best these recommendations are ideal or best-case scenarios to ensure transparency

When the Asian financial crisis erupted , many Asian economies were caught by surprise . Unlike Latin America , the crisis in Asia came largely from the private sector . If public institutions , such as central banks or finance ministries , were found wanting , it was not because they pursued inappropriate macro-economic demand management policies , but because they failed to safeguard the stability of the financial system . Countries in the region had rushed to liberalize their financial systems and capital accounts before adequate safeguards were in place . All was well as long as money continued to flow in . Banks were flushed with liquidity due to strong injections of capital and rising asset values . Unfortunately , banks lent excessively to increasingly unproductive and speculative sectors of the property and stock markets . When capital flows reversed and asset prices plunged collateral values collapsed and banks were caught with substantial loans that could not be repaid . Private firms had also borrowed excessively and short-term from overseas , without proper hedging and matching of maturities . In many cases , risk management and control mechanisms in banks and companies were mechanisms were adequate , banks and companies were lulled into complacency by the macroeconomic policy environment . The authorities were sending wrong signals to the market by implicitly guaranteeing stable exchange rates . Attracted by lower interest rates in offshore markets for the U .S . dollar and other currencies , domestic banks and companies borrowed heavily overseas . Institutional weaknesses not only contributed to the crisis , they also seriously impede the adjustment process . Asia urgently needed to build and strengthen its institutions so that the Asian nations could cope with changing macroeconomic conditions . During this call for rebuilding , the principles of transparency and accountability emerged as fundamental elements to the successful reform of institutions (Hu 1998

It is always dangerous to keep the markets guessing . Investors assume the worst when governments and companies are perceived to be withholding information . The regulators must share some of the responsibility for this . Weak company and securities laws do not compel firms to make adequate disclosure . To ensure transparency , there must be proper rules on disclosure , which helps enforce market discipline (Hu 1998

In Singapore , the MAS has continuously encouraged local banks to disclose their exposure to the regional economies . It has set up a committee on banking disclosure standards , consisting mainly of representatives of private sector banks , to recommend ways to improve disclosure . In addition , the International Monetary Fund (IMF ) drafted a code of good practices on fiscal transparency (Hu 1998

Its key points (four out of eight recommendations ) are that

roles and responsibilities in government should be clear

information on government activities should be provided to the public

budget preparation , execution and reporting should be undertaken in an open manner

fiscal information should be subjected to independent integrity checks (Hu 1998

Since the Singapore government 's endorsement of the Report on Banking Disclosures in May 1998 , there has been significant progress towards greater transparency in the finance sector . All eight recommendations are being implemented and some are already making a difference to the type and extent of information available . This was most clearly in evidence recently when one of Singapore 's Big Four local banks , OCBC d its annual report . New laws forced the company to reveal its hidden assets ' which many analysts had previously estimated at around twice the figure of S 2 .11 billion declared (Rodan 1999

Section 6 . Transparency Reforms

In the IMF 's 1999 assessment of Singapore reforms , it called for improved data on consolidated public sector operations and on medium-term fiscal projections , as well as on trade , reserves , and government assets held abroad . Transparency reforms are now an integral component of the government strategy to elevate Singapore to the status of a world-class financial center . The strategy included a comprehensive range of financial services , with particular focus on fund management and bond markets . MAS has a leading role in the transformation of Singapore 's regulatory and reporting regimes . By international transparency standards , though , Singapore starts from a very low base and it remains to be seen how far the government is prepared to go beyond the corporate disclosure agenda . Information control has in the past been a strategic element of the Singapore Inc . model - date is either unavailable or provided on a need to know basis to investors (Rodan 1999

Since the state has extensive direct and indirect economic influence important reforms for transparency would necessarily have to cover government departments and government-linked companies (GLCs . Temasek Holdings Ltd . owns more than 1 ,000 companies on behalf of the Ministry of Finance , GLCs control most land in Singapore , and national savings are largely steered through the state-run compulsory superannuation scheme or deposited in state banks . Yet reporting by many GLCs and public authorities have historically been limited . For example , Temasek reports only to the Finance Minister and a parliamentary budget committee . The Government Investment Corporation (GIC , which manages more than S 100 billion of Singapore taxpayers ' money , operates in virtual secrecy . Data on the levels and make-up of guest workers in Singapore and trade figures between Singapore and Indonesia have also been traditionally withheld for political or commercial reasons (Rodan 1999

Why would MAS benefit from more transparency ? The reason is that according to Index of Economic Freedom 2007 , Singapore 's economy is 85 .7 free , making it the world 's 2nd freest economy . This means that Singapore is considered as a world leader in all 10 areas of economic freedom (Index of Economic Freedom2007

94 .6 Business Freedom - In Singapore , starting a business takes an average of 6 days , as compared to the world average of 48 days Obtaining a business license and closing a business require only simple steps

80 Trade Freedom - In 2003 , Singapore 's weighted average tariff rate was 0

93 Fiscal Freedom - Low income tax rates . The top income tax rate is 22 and the top corporate tax is only 20 . In 2006 , overall tax revenues as a percentage of the GDP was 13

86 .2 Freedom from Government - consumption and transfer payments , are low in Singapore

89 .5 Monetary Freedom - Inflation is low , averaging 0 .8 between 2003 and 2005

90 Investment Freedom - Foreign and domestic businesses are treated equally , with no production or local content requirements , and nearly all sectors open to 100 foreign ownership

90 Property Rights

94 Freedom from Corruption - As earlier mentioned , Singapore ranks 5th out of 158 countries in Transparency International 's Corruptions Perceptions Index from 2003 and until recently in 2005

50 Financial Freedom - Regulated by the MAS

99 .3 Labor Freedom

80 Trade Freedom

Section 7 . Information Disclosed by the MAS

Transparency is important to better enhance these 10 freedoms . For instance , Singapore could do slightly better in Financial Freedom , which at 50 t is the only one of the 10 Economic Freedoms which is below 80 Despite the government 's lofty goals of promoting the nation as a global financial hub , state influence in the banking system persists . Although credit is readily available and generally allocated at market rates , the government controls the Development Bank of Singapore (the largest domestic bank group and publicly listed ) and indirectly holds significant minority shares in the other two domestic bank groups (Index of Economic Freedom 2007

In 2005 , the government launched the SME Access Loan Program , a new financing scheme for small and medium-sized enterprises . Foreign banks have been granted greater freedom to open branches and offer services but the government seeks to maintain the domestic bank share of deposits above 50 and requires that the majority of board members of domestic banks must be Singapore citizens and residents . Six foreign banks possess qualifying full bank ' licenses . Other foreign banks face more restrictions on their activities (Index of Economic Freedom 2007

A free trade agreement (FTA ) between Singapore and the US has greatly loosened restrictions on U .S . banks in Singapore . A report by the Securities Industry Association (SIA ) in the US provides that the FTA between the US and Singapore plays an important role in increasing trade in the financial services of both countries , enhancing and strengthening capital market efficiency , and bolstering financial sector stability The success of the FTA was measured in the following key criteria (Lackritz 2003

Permit 100 ownership , as well as right to establish in corporate form of choice

Provide national treatment (i .e , treat foreign financial sector participants and investors on the same basis as domestic investors for regulatory and other purposes

Commit to procedural aspects of regulatory transparency (including commitments on prior comment

Eliminate economic needs tests and

Permit dissemination and processing (within country and cross-b ) of financial information to provide clients with services necessary for the conduct of ordinary business

The underlying emphasis thus of such FTA is to call for the need for transparency . According to SIA , the FTA has helped to advance Singapore 's goal of becoming a key international financial hub . In 2002 investors from Singapore acquired 9 .2 billion of U .S . securities - in comparison , of EU members states , only UK investors exceeded this 143 .3 billion . In addition , purchases and sales of U .S . securities topped 252 billion , ranking in the top dozen most active countries (Lackritz 2003

The 2005 /2006 MAS Annual Report indicates transparency in a good number of areas . Common risk assessment and framework techniques for supervision are discussed , as well as Inspections and Supervisory Reviews such as Thematic Inspections Relation to Anti-Money Laundering /Countering Financing of Terrorism . New Legislation are also disclosed , as well as measures for Enhancing Regulatory Frameworks , such as Regulations for Islamic Finance and Revision to Requirements on Submission of Annual Audited Accounts . It further discusses Market and Business Conduct , Risk Management , Financial Market Activity , Building a World Class Talent Pool , Forging Alliances with the International Financial Community , Economic Developments and Monetary Policy in Singapore and in the world economy , MAS organizational initiatives , and most importantly , MAS Financial Statements . These include Financial Statement Highlights , MAS ' Income Statement , Balance Sheet , Auditor 's Report , Statement of Changes in Equity , Cash Flow Statement , Statement of Backing of Currency in Circulation , and Notes to the Financial Statements

In the MAS official website (www .mas .gov .sg , online financial statements are also available . It has Annual Reports from 97 /98 online until 2005 /2006 . Reports and Consultation s are also available showing comments and feedback on MAS ' existing or proposed regulatory measures , or important supervisory policy issues , and MAS ' reaction to these comments and feedback . MAS Surveys of Professional Forecasters for March 2007 and December 2006 are also available , as well as Surveys of the Singapore Corporate Debt Market from 1999 to 2004 , the MAS Treasury /FX Surveys from 1999 to 2004 , Surveys of the Asset Management Industry , from 1998 to 2005

In the MAS website , there are also Monthly Statistical Bulletins (which contains monetary and financial developments i .e . data on financial markets available in the website , Macroeconomic Review , Financial Stability Review , Financial Sector Development Fund for 2005 /2006 , Staff s , Information s , Monographs , Consumer Guides , and reports by other organizations such as the World Bank

Section 8 . Transparency Shortcomings of the MAS

The International Advisory Panel was established by the MAS in 1998 composed of the heads of the different major international companies operating within Singapore . IAP recommendations to the MAS has over the years conspicuously displayed an absence in any call for a free media to assist the finance sector 's development . Corporatist structures of the type which encourage free media participation would provide potential avenues for privileged information gathering and behind the scenes lobbying (Rodan , 2002 . According to Rodan (2002 , interviews with fund managers investing in Singapore also reveal that transparency 's importance to their decisions is neither static , nor principally determinant , and this may in part explain the surge for reform in Singapore during 1999 and 2000 . Unfortunately , even despite this reform trajectory , the MAS continued to be characterized by low levels of transparency - such as lack of disclosure in the limited sense in relation to detailed corporate disclosure regimes , or the more comprehensive sense that includes media freedom . Business leaders in Singapore also feel that transparency is mainly relevant to long-term investors and less important to traders with very rapid turnover stock in the search of quick returns . After all , in Singapore , the average holding period is merely 6 weeks . It is thus important to make the distinction between investors and punters . Investors make long-term decisions and thus want predictability . For them , the demand for transparency is greater , and disclosure of information is crucial to determine predictability and risk reduction (Rodan 2002

Section 9 . Conclusion

Although information disclosed through the MAS ' website , annual reports , and financial statements are quite comprehensive , the MAS continues to lack market transparency on a range of basic services . For instance , data on levels and make-up of guest workers in Singapore trade figures between Singapore and Indonesia , and many financial reporting involving transactions involving government departments and government-linked companies have historically been limited . Data is either unavailable or provided on a need to know basis only for investors . The lack of a political legitimacy for the absence of checks and balances , including the absence of a free press may threaten Singapore 's financial predictability and stability , and may scare of potential investors (Rodan 2002

Transparency however is the key element in predictability and risk reduction , the two main factors that long-term investors look for before they venture into business in Singapore or any other country . Improving transparency will help to increase the number of long-term investors in Singapore and will ultimately greatly enhance economic stability WORKS CITED LIST

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