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10 Introduction 11 Asian Financial Crisis Until 1996 many developing countries especially the Southeast Asian countries were developing their financial markets which attracted huge inflows of foreign capital Coupled with weak supervision on continued liberalization of the financial markets huge current account deficits and adoption of fixed exchange rate system these economies were vulnerable to speculative attacks The Asian Financial Crisis AFC started from Thailand whereby the property and share market started declining and rumours of banks and finance companies caught in financial difficulties led to massive currency attacks stemming from loss of investor confidence 12 Spread of crisis The crisis spread to many neighbouring countries such as Indonesia and Philippines who were believed to have similar unstable economic situations Although Singapore did not demonstrate similar economic situations such as current account deficits Singapores geographical proximity with its neighbouring countries and economic dependence resulted in Singapore being hit by the crisis too Evidence of current account surplus in Singapore is shown in Table 1 The current account balance to GDP ratio of Singapore was a 157 surplus in 1997 as compared to most of the other crisis-affected countries which experienced deficits Nonetheless the impact of the crisis on Singapore was much less severe and this report seeks to address the underlying reasons All tables and figures referred to are in appendix 20 Flexibility of exchange rate system 21 Managed float system As Singapore is a small and open economy it adopted a managed float system whereby the Singapore Dollar Sing Dollar is allowed to fluctuate within a target band The target band is based on trade-weighted basket of currencies of Singapores major trading partners To prevent investors from speculating and reducing uncertainty especially during AFC this target band is undisclosed 22 Depreciation and widened band In times of crisis the flexibility of the exchange rate system allowed MAS to widen the target band and depreciate Sing dollar namely the nominal effective exchange rate NEER
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