RTTNews - Singapore's current policy stance is appropriate to support the economic recovery and to ensure medium-term price stability, Managing Director of the Monetary Authority of Singapore, Heng Swee Keat said Thursday.

In his opening remarks at the MAS' Annual Report 2008/09 press conference, Heng said, Given that there remain stresses in the global financial system and job markets in the major economies continue to weaken, the domestic economy is likely to witness slow and uneven growth, rather than sharp and decisive recovery.

Tuesday, data released by the Ministry of Trade and Industry showed that the gross domestic product or GDP is now expected to contract by between 4% and 6% this year compared to its earlier forecast of a 6% to 9% shrinkage.

In its advance estimates for the second quarter, the ministry said the economy grew a seasonally adjusted annualized 20.4% in the second quarter from the preceding three months, compared to a revised 12.7% GDP decline in the previous quarter. The second quarter GDP is estimated to have fallen 3.7% compared with the same period last year, slower than the 9.6% drop seen in the first quarter.

Heng said the recovery of the domestic economy still depends on the strength of final demand in the G3 - the U.S., Japan and Europe. The collapse in G3 demand in the face of financial crisis had a cascading effect on the emerging economies. Asia's export-reliant economies were hard hit after trade crumbled towards the end of 2008 and into the first few months of this year.

The official said, In tandem with the weak demand and easing domestic costs, consumer price increases are expected to be muted. For the whole of 2009, consumer price inflation is expected to come in between minus 0.5% and 0.5%, Heng noted. Earlier, the MAS forecast inflation between minus 1% and 0% for the year.

Admitting that the country's financial system is not immune to the crisis due to its openness, Heng stated that Singapore's financial system has weathered the crisis well.

He said the stress tests, conducted in the first quarter to determine the resilience of banks and insurers in highly adverse scenarios, revealed that while financial institutions' financial resources would be affected by lower asset values, rising credit costs and moderating earnings, they are generally resilient even under stress conditions.

Singapore will be implementing changes to its regulatory framework to adopt new global standards over the course of the next one to two years. We are mindful of maintaining a balanced approach and not over-swinging the regulatory pendulum, Heng said.

The central bank is also planning to review the deposit insurance scheme to ensure that the scheme provides adequate protection to depositors.

Moreover, the MAS will accept AAA-rated Singapore dollar debt securities issued by sovereigns, supranationals and sovereign-backed corporates as collateral in the Standing Facility in addition to Singapore Government Securities or SGS. This will help banks to better manage their risks and liquidity profiles, Heng said.

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