Capital Flows and Exchange Rate Volatility : Singapore'S Experience

Singapore%u2019s experience with international capital flows over the past two decades or so has been a rather %u2013 although not completely %u2013 benign one, owing to strong fundamentals and generally well-conceived macro-economic policies. We begin by briefly discussing the experience in 1998 of Hong Kong, another city-state with a well-developed banking system and equities market, and operating on a Currency Board (CB) system (although with some differences from Singapore%u2019s CB system). The discussion serves to identify some %u2018areas of vulnerability%u2019 in the Hong Kong set-up at that time. We next discuss Singapore%u2019s policy background and early experience, and in the light of Hong Kong%u2019s experience are better able to appreciate how Singapore%u2019s policy framework served to circumvent or minimize important vulnerabilities. Particular attention is paid to Singapore%u2019s exchange-rate policy and its policy of non-internationalization of the Singapore dollar. Equity- and currency- market interactions are also considered. We next show how Singapore emerged relatively unscathed from the 1997 Asian Crisis. Lastly, we discuss Singapore%u2019s debt markets, and show how under the imperative of promoting the development of its bond markets the non-internationalization policy has been progressively relaxed, while retaining key safeguards