We are in for some very tough times. The currency crisis started in Thailand in July last year. It then spread quickly to the rest of the region. In some countries, the financial and economic problems triggered off social and political upheavals.

The turmoil has gone on for more than a year now, but the end is still not in sight. Matters are likely to get worse before they get better. We must prepare ourselves for a gloomy scenario – continued difficulties in the region will mean minimal growth for Singapore over the next 1 to 2 years.

We need to be realistic about the prospects. But there is no reason to be despondent. We have the resources and resolve to withstand the external shocks. We do not have the weaknesses of the badly affected economies. But we need to organise ourselves to weather the storm, and use this period to gain a head start for the race ahead after the storm has subsided.

Steering through this storm to safety is Singapore’s biggest challenge since I became Prime Minister eight years ago. Fortunately, I have a capable and steady team of ministers, permanent secretaries, and senior civil servants. But they cannot do this job by themselves. They need your co-operation and support to succeed.

Let me go back to how the regional crisis started and how we got sucked in.

Thailand was one of the new economic tigers. Last year in June, when I visited Thailand, the signs of trouble were there, though they were not yet obvious. I saw scores of magnificent new buildings, many unoccupied, in Bangkok. There were large tracts of newly-prepared but vacant industrial sites at the Eastern Seaboard.

The Thai baht had run into trouble in May. The ministers could not agree on how to handle the problem. On the last day of my visit, Prime Minister Chavalit hosted me to a golf game along with his Finance Minister Amnuay Virawan. During the game, Chavalit whispered to me that he was trying to persuade Amnuay not to resign. Later, I spoke to Amnuay. He confirmed that it was true. He had held back his announcement out of courtesy to me. Immediately after the golf game, Amnuay met the press to announce his resignation.

Thai companies had borrowed too much in US dollars. They spent the money on property projects which earned Thai baht, not US dollars. This was all right provided the projects were sound, and the baht exchange rate was stable. Unfortunately both assumptions turned out to be wrong.

Many of the projects were not sound. The property boom had become a dangerous bubble. Thai banking supervision was weak. Nobody stopped banks and finance companies from risky lending. In fact many lent to their owners, relatives and friends.

As the Thai economy weakened, the baht became over-valued. Fund managers and currency speculators saw an opportunity. They bet that the baht would go down, and sold the baht short.

The Bank of Thailand spent US$20 billion in a futile attempt to defend the Thai baht. Eventually it ran out of US dollars, and gave up. The Thai baht immediately depreciated by 17 percent, to 29 baht per US dollar. Today, the Thai baht is 42 baht to one US dollar, down by 42 per cent.

When the baht fell, companies which could not pay back the US dollars went bust. Foreign lenders recalled their loans. Thai banks and finance companies were left with huge amounts of bad debt, and became insolvent. The whole financial system was shaken. The economy almost collapsed. Thailand had no choice but to call in the IMF.

Malaysia did not have huge foreign debts, but its domestic debt was large – nearly twice its GDP. Many foreign investors had invested in Malaysian shares. When they lost confidence in Malaysia and sold the shares, the Kuala Lumpur Stock Exchange crashed. Many companies had borrowed heavily from banks against their shares. Their collateral was reduced to a fraction of the value they had pledged to the banks. The companies became insolvent. The banks’ non-performing loans went up dangerously high.

Singapore companies on the whole have not borrowed excessively, whether in US dollars or Singapore dollars. Our banking system is sound. But the Singapore dollar also went down against the US dollar, although by less. Our economy is so interlinked with our neighbours that their problems inevitably affect us.

When Latin America was hit by a financial crisis in 1994, investment analysts called it the "tequila" shock. That crisis had originated from Mexico, well known for its punchy tequila. For the Asian crisis, they called the contagion the "tom-yam" effect. But the tom-yam soup was very spicy. Unlike the tequila hangover which went away after one year, the tom-yam effect has remained. Now some call the crisis an Asian flu. But the strain is apparently resistant to the antibiotics prescribed by the IMF.

What has happened in Indonesia is a major tragedy.

The rupiah today is worth only one-fifth of what it was against the US dollar last June. The banking system has almost collapsed. The economy is expected to contract by 15% this year. 90 million Indonesians, nearly half the population, are living below the poverty line, i.e. on less than S$30 a month. 40 million face the threat of starvation.

The May riots will put Indonesia back by many years. The Indonesian Chinese minority community bore the brunt of the violence. Media reports have drawn international attention to what happened. Hundreds of internet websites are carrying "yellow ribbons" to demand justice for the victims of what is widely believed to be organised lawlessness.

Many Indonesian Chinese and foreigners fled Indonesia in terror. Some have not returned. Others went back only to salvage what was left of their businesses, but not to rebuild or re-invest. TVRI showed retailers selling their wares outside burnt-out shops.

The Indonesian tragedy struck home vividly when I learnt of what happened to Wong Kwei Cheong, our former MP for Cairnhill. After leaving NUS, he poured his energy and capital into investments in Indonesia. He started several factories in Indonesia with a Japanese partner to produce TVs, video cassette players and other electronic goods. He did well, and built up a chain of distributors.

Like most companies, he borrowed foreign currency to finance his investments in Indonesia. His products were sold in Indonesia. He borrowed at about 2,500 rupiah per US dollar. At 5,000 rupiah he could still survive. But beyond that, it was impossible.

His distributors owed him money. They could not repay and offered to do so with their shops. I advised Wong Kwei Cheong against taking over the shops. I told him, "You will lose them. There will be social unrest." That was in February. He said that he had no choice. Also he intended to build up his own chain of shops to distribute his products. Unfortunately, I was right. Many of his shops were looted and burnt. He has suffered a severe setback, but he will bounce back. I have confidence in him.

I also received a letter from a 65 year old retiree recounting how a close relative, a Singaporean, suffered the same fate during the Jakarta May riots.

His relative, a young entrepreneur, had built up a sizeable food distribution business in Jakarta, "after tears and sweat for five years" as he put it. On 14 May, his relative’s two super-markets, two coffee houses, a bakery, two warehouses, an expensive "cold room", three freezer trucks and a car were looted and set on fire. His home was also broken into and stripped of its contents.

The retiree wanted the Government to know that there were Singaporean victims of the May riots, and that charity should begin at home.

I feared the worst for Indonesia when the crisis started. That is why I visited then President Soeharto three times. I also spoke to President Clinton, Prime Minister Hashimoto, Prime Minister John Howard and Chancellor Kohl. I impressed upon them the seriousness of the Indonesian situation, and urged them to help.

We tried, but alas we failed. All of us pinned hope on the IMF solution in restoring investor confidence in Indonesia. On hindsight, we should have tried harder to get President Soeharto to understand that signing the Letter of Intent with IMF was only the first step, and that results would show only 6 to 12 months after he had fully implemented the IMF conditions.

Senior Minister and I knew that President Soeharto was not happy with some of the IMF measures. We suggested that he appoint Paul Volcker as his adviser to intervene with the IMF. Paul Volcker is a former Chairman of the US Federal Reserve Board with a formidable reputation. He would have had the standing to argue against the IMF. The IMF would not lightly dismiss Volcker’s views, nor would the market lose confidence if Indonesia followed Volcker’s advice instead of the IMF’s.

Paul Volcker was approached. He visited Indonesia, but decided not to take up the appointment. He must have found the task of helping Indonesia too difficult, given the government’s policies at that time.

We have a vested interest in Indonesia’s stability, growth and prosperity. It is our close neighbour and a major trading partner. We have more than S$4 billion of investments in Indonesia – in Batam, Bintan, Karimun, Sumatra, Java and elsewhere. Our banks have another S$4 billion in loans to Indonesia. An Indonesian collapse will hurt us, besides scaring off investments from the wider region.

Singapore will help Indonesia within the limits of our ability. We are a small economy. Our GDP (US$82 billion) is a mere 1% of the United States GDP (US$8111 billion), and 2% of Japan’s GDP (US$4190 billion). It is only one fifth of Australia’s GDP (US$395 billion). We are not in the same class. After all we are only three million people. Just a little red dot on the map. Where is the capacity to help 211 million people?

Whatever we do, within our means, it should make some real difference to Indonesia. We pledged US$5 billion to help Indonesia along with the IMF in November last year, to show confidence in Indonesia. MAS also participated in joint intervention to support the rupiah exchange rate. Unfortunately the intervention was overtaken by events and failed. We still have several trillion rupiah deposited with Bank Indonesia.

Singapore is giving humanitarian assistance to Indonesia. Beyond that, our best and most practical contribution now is not to finance Indonesia’s budget deficit or food subsidies through the IMF, but to help Indonesia restart a part of its economy which has stalled. Foreign banks have stopped accepting Letters of Credit issued by Indonesian banks. We tried to help with a guarantee scheme. We sought the support of Indonesia’s major trading partners for a US$20 billion Multilateral Trade Finance Guarantee Scheme. I wrote to leaders of the G7 plus a few other countries. From their replies, it was clear that most preferred to have their own bilateral schemes and be in full control of their own funds.

At the request of then President Soeharto and his Economic Ministers, Singapore subsequently offered its own Bilateral Trade Finance Guarantee Scheme (BTFG) to Indonesia using the US$5 billion pledged under the second line financing package with the IMF. We put up our proposal to Indonesia. Officials from both sides held one meeting in April. The Indonesians took the proposal back to study. They commented that the scheme had too many safeguards.

Singapore has no experience at all in trade finance guarantee schemes. Safeguards are necessary to prevent unscrupulous traders from abusing the scheme through fraud and cheating. This would not only defeat our objective, but harm the reputation of the scheme and further erode confidence in Indonesia. We are taking advice from experienced international institutions like the World Bank or the Exim banks of the big exporting countries to learn how to improve on our proposals without losing discipline and control.

Guaranteeing trade transactions in an unstable environment is a risky business. The Indonesian newspapers recently reported that a syndicate of 12 Indonesian banks had been cheated of US$18 million in a trade financing scam. The banks only discovered that the imports were fictitious when the company concerned failed to make payment.

Ultimately, Indonesia’s recovery depends on the Indonesians themselves. Investors must have confidence to bring their capital to Indonesia. Foreign investors will take the cue from Indonesian investors and entrepreneurs. According to Michael Backman, an Australian expert on the Overseas Chinese, in FEER (30 July): "So much of the wealth in Indonesia is driven by the Chinese that any crisis affecting them affects the overall business sentiment about Indonesia." The Asian Wall Street Journal of 17-18 July put it more frankly: "Until Indonesia’s Chinese are convinced that staying isn’t a grave risk, commerce will languish, trade will break down and food will remain scarce". And a major American investor told our GIC officer in New York that he was watching whether the Indonesian Chinese bring their money back to Indonesia. If they do not, he will not invest in Indonesia.

President Habibie has appealed to Indonesians who fled the country to return home, including ethnic Chinese (Straits Times 13 August). In his Independence Day address to the Parliament, he lamented that "not many of the businessmen whose companies were destroyed have begun to rebuild their businesses. They are still awaiting new development", and that "looting still continues here and there, done by irresponsible groups", which "is slowing down the restoration of our economy."

According to Indonesia’s Information Minister, President Habibie believes that the reports of mass rapes and other excesses during the May riots appeared to have been blown out of proportion. In the information age, reports, accurate or otherwise, circulate across the globe electronically and instantly. Without objective investigations to uncover the truth, coloured accounts will gain currency. For example, it has been established that some of the gruesome photographs circulating on the internet are not genuine.

Nevertheless, President Habibie has acknowledged that crimes and violence did take place. In his Independence Day address, the President condemned the looting and rioting, and in his words, "the violence and sexual harassment against women, mostly ethnic Chinese". He said: "All these irresponsible acts are indeed very disgraceful; they have streaked the face of our nation, a nation renowned for its good character and high morals, with shame. As a civilised and religious nation, we curse these barbaric acts."

Since then the Indonesian Foreign Ministry has issued a statement strongly condemning "all alleged incidents of sexual assault and rapes", and undertaking to investigate the incidents thoroughly, and prosecute anyone found responsible "to the fullest extent of the law".

This is a courageous and honest stand. President Habibie’s new policy of openness, and his willingness to talk frankly about what used to be "taboo" subjects, has impressed foreign media and governments, and increased the credibility of Indonesia’s reforms.

Open and thorough investigations are the best way to establish the full facts, and show up exaggerated or faked accounts. When those responsible are brought to justice, it will strengthen President Habibie’s and Indonesia’s international standing, especially with the US and EU, countries that place great emphasis on human rights. Such investigations can also reassure the people, especially the victims, that these "barbaric acts", as President Habibie described them, will never happen again. This can be the catharsis that cleanses Indonesia’s body politic and helps the country to recover.

Indonesia is in political transition. President Habibie has a very tough job. He has to forge a national consensus on political reform, and prevent further social unrest. He has to piece together an economy in shambles, and restore investor confidence. Politics is now in command. But political stability depends on economic recovery, which in turn depends on political stability. Singapore hopes that Indonesia will restore its stability and regain the steady economic growth that had benefited the whole of ASEAN for 30 years.

Turning to Malaysia, some people have likened our bilateral relationship to that of a husband and wife – you quarrel then you make up, you quarrel again, then you hug and make up again. But the metaphor is not accurate. Singapore and Malaysia were married, found irreconcilable differences, broke up and went their separate ways.

Straits Times (18 July) recently reprinted a commentary by Rustam Sani, a Malaysian columnist. It had originally been published in Utusan Malaysia, a Malaysian newspaper, with the title "Singapore and the Holocaust". It argued that the relationship between Singapore and Malaysia would always remain volatile because "there never have been any attempts to fully resolve the basic contradictions in relations between the two neighbouring countries."

Rustam Sani did not explain what the basic contradictions were. From his comments on how Singapore is interpreting its history during its Malaysia years, it is clear that he was referring to race, and to the two countries’ different approaches in handling race relations.

He quoted me at the opening of the National Education Exhibition on 7 July. I said,

Rustam Sani commented that what I meant as the historic lesson is the series of racial riots that occurred in the 1960s – the two racial riots in 1964 when Singapore was part of Malaysia and the 1969 racial disturbances which spilled over from the May 13 riots in Malaysia.

He called these events a "Singapore Holocaust" because Singapore uses them the way the Israelis use the Holocaust as "a very symbolic reminder of a terribly supreme suffering".

He went on to say that I regard "a deep understanding of the riots as very important in shaping the consciousness of Singaporeans that their country is a multi-racial country." He is right here.

Race relations are always sensitive in a multi-racial society. I do not want racial riots ever to take place again in Singapore, either through our own stupidity or through spill-over effects from outside. Rather than sweeping sensitive problems under the carpet, we discuss them openly but sensitively and constructively, at the right time and in the proper context. By getting Singaporeans to understand the causes and costs of racial riots, we minimise the chances of riots ever happening again.

We have always stressed that the majority Chinese community must make special efforts to give our Malay, Indian and Eurasian communities an equal place in Singapore to enjoy security, progress, opportunities and prosperity like all others.

Rustam Sani asserted that we use Malaysia as a bogey to unite Singaporeans and to win elections. There, he is wrong. In fact, we had first planned to do the recent National Education Exhibition in late 1996. It would have been just before our general elections. We did not want Singaporeans to misinterpret and discount it as a pre-election ploy, so we postponed it till this year. The NE Exhibition was a serious effort at nation building, as the 600,000 Singaporeans who watched the show found.

Singapore and Malaysia are partners as well as competitors. We take Malaysia seriously as a competitor in many fields, and welcome healthy competition. But in this dynamic global economy, our toughest competitor is not each other, but the rest of the world. We regularly remind Singaporeans of what other countries, including Malaysia, are doing, so that Singaporeans will work harder and smarter to stay ahead.

Recently, Malaysian newspapers have carried absurd allegations that Singapore is happy that Malaysia is experiencing economic difficulties, and that we are sabotaging them or even stealing their cargoes. They are totally wrong. Our economy is closely intertwined with Malaysia’s. If Malaysia gets into serious trouble, Singapore will also be affected.

Malaysia is Singapore’s second-largest trading partner, and we are their third-largest trading partner. Half the tourists who visit Malaysia are Singaporeans. 15% of our exports go to Malaysia. Malaysia is also Singapore’s top overseas investment destination. We have more than S$10 billion invested there, spread over 1,000 companies. The investors include Government-linked companies like DBS Land, Keppel Land and Pidemco. Our banks’ exposure is another $21 billion.

A Malaysia in recession means reduced returns and opportunities for Singapore investors. Our manufacturing investments in Malaysia, which are mainly export-oriented, have already been hit by Malaysia’s credit crunch and higher import costs arising from the weaker ringgit. Several companies have reported that their operations in Malaysia face financing problems.

Some Malaysians believe that banks in Singapore are deliberately offering high interest rates for ringgit deposits in order to sabotage Malaysia. Finance Minister Richard Hu has explained in Parliament that the Government does not determine interest rates of foreign currency deposits in Singapore. Interest rates are set by the market. When banks in Singapore offer high interest rates on ringgit, it means that someone else wants to borrow ringgit from them at even higher interest rates. Otherwise, the banks will lose money paying these interest rates on ringgit. This has nothing to do with the Government. But despite Richard Hu’s explanation, the issue has not been put to rest.

This apparent lack of understanding of how the markets work has complicated our relations with Malaysia. Our inability to interfere with the market is misinterpreted as sabotage. But far from wanting Malaysia to stumble, I am anxious that it recovers quickly.

That was why I met Dr Mahathir at Sebana Cove in Johor in January. I met him again in Sentosa a few weeks later, and followed up with a working visit to Kuala Lumpur from 16 to 17 February, plus another visit to Johor Bahru on 18 April. In between, I saw Dr Mahathir in London on 2 April. Five summits in four months. For what purpose, if not to improve ties?

Ties did improve, for a time. Dr Mahathir and I issued a joint statement after my KL visit to affirm our mutual desire to work towards realising the full potential in the relations between our two countries, based on the principle of "prosper-thy-neighbour".

We have tried to resolve bilateral issues and enhance relations within a wider framework of cooperation. We discussed Pedra Branca, the Points of Agreement on Malaysian Railway land, CPF withdrawal for West Malaysians, water and financial co-operation. Dr Mahathir assured me that Malaysia would continue to supply water to Singapore after the existing water agreements have expired. I reciprocated by offering financial support to Malaysia.

We have yet to close the deal. But Singapore has already helped by holding on to several billion ringgit in our foreign reserves, even though we could see the ringgit steadily depreciating. Had we sold them, the ringgit would have depreciated further. In addition, we have deposited some of these ringgit with Malaysian banks in Malaysia, even though the interest rates are much less than we could earn by leaving the ringgit offshore in Singapore.

Meanwhile, relations have changed from summer to winter. Several issues arose or resurfaced and caused friction. They include the CIQ, CPF withdrawal, Clob International, Rotary Club tour programme, and airspace. Most were old issues.

As close neighbours, Singapore and Malaysia will not always see eye-to-eye on every issue. When relations are going through a rough patch, we must deal with the difficulties rationally and soberly. We should not over-react or let disagreements on individual issues spill over to affect the overall relationship. We should try to resolve, or at least contain, the issues.

We may not always succeed, in which case we will let the facts speak for themselves, and stand our ground firmly, but quietly and calmly, on the side of the law. We have to adhere to national and international laws, and to agreements reached by both sides. Otherwise we will have no basis for resolving conflicts. Commitments solemnly given will have no meaning, if they can simply be set aside later whenever one side is unhappy with them. The CIQ issue is a case in point.

Rustam Sani is correct to note that basic differences between the two countries will make their relations always sensitive and complex. But I do not share his pessimistic conclusion that bilateral relations will therefore always remain volatile. Both sides have much to gain by pragmatic win-win co-operation. Over the long term, we should work for better relations based on equality and mutual respect. I hope that both countries can provide Malaysians and Singaporeans a new basis for long term co-operation and competition that is open, equitable and fair.

Japan and China provide the regional backdrop to the Asian crisis. The Japanese economy itself is sick and is not getting better, despite all the stimulus measures introduced by successive Governments. Over the past 7 years, Tokyo has implemented a series of stimulus packages that total over 80 trillion yen (S$1 trillion). Yet the world’s second largest economy after the US is not responding. The Japanese people have lost confidence in their economy and their political leadership. When they were given tax cuts, they save the money in banks instead of rushing to spend it in the shops.

Japanese economists had a "flying geese theory" of how Asia would develop. The Japanese economy would fly in front, and lead the way for the NIEs, ASEAN and the other economies, just like wild geese flying in a V formation. Now it is not working.

At the ASEAN Summit meeting with Japan in Kuala Lumpur last year, I told Prime Minister Hashimoto: "The Japanese goose has become too thin and weak. You must nourish it so that it can fly again and lead the other geese to greener pastures". He laughed and threw up his hands, saying that the Japanese goose has refused to eat.

That was almost a year ago. This year, Japan has gone into recession. This is the first contraction in 50 years. Unemployment is over 4%, a post-war record. The banks are still encumbered by enormous amounts of bad loans, reported to total US$600 billion. The Japanese yen is down to ¥146 per US$, compared to ¥115 on 1 July 1997.

Japan’s economy is twice the size of all the other East Asian economies combined, including China. The regions’ troubled economies need Japan to pull them out of their difficulties. They need Japanese tourists to fill up their hotels and golf courses, and buy their souvenirs. They need Japanese investments badly. They need Japan to buy their exports. Otherwise, despite their cheaper currencies, they cannot grow their way out of the recession. As President Clinton said in Shanghai, "We cannot see growth restored in Asia until it is restored in Japan."

China and Taiwan are the only two Asian economies which still enjoy good growth rates this year. But the weakened Japanese yen has put pressure on Chinese renminbi.

China has repeatedly stressed that it will not devalue the renminbi so as not to create another wave of competitive depreciation in Asia. This is a constructive and helpful commitment. But the Chinese economy is slowing down. Premier Zhu Rongji has acknowledged that China is experiencing deflation, i.e. prices are going down, and inflation is negative. People wonder for how long China can withstand the pressure on the renminbi.

When I saw Prime Minister Zhu Rongji in London in April, I put across this point obliquely. I told him, "Many foreign leaders and investors have asked me how long can China resist the pressure to devalue its currency." I told Zhu Rongji that my reply to them was, "At least 12 months".

Zhu Rongji roared with laughter but did not reply. He knew that I was passing a message that people were concerned about China’s ability to keep to its word.

A few days later, he told a meeting of overseas Chinese in London that I had not given China’s commitment sufficient respect. "Only 12 months", he repeated what I said. He said that he was not a man who boasted. What he said he would do, he would carry out. He had said that he would not devalue the renminbi.

He was using me to affirm to the international community that China would not devalue its currency despite the Asian crisis.

President Jiang Zemin repeated the same thing to President Clinton in June.

I believe China will not devalue during the Asian crisis. The top leaders have staked their personal reputations, and they can break this promise only at great cost to themselves. But if China is forced to devalue against its wish, that will indeed be bad news for all of Asia.

All the things I have said earlier form the regional backdrop to our challenge. These problems will not go away quickly. The IMF recently studied how long emerging economies took to recover from currency crises or crashes. The answer was 1.5 to 2 years. Add in a banking crisis, and the average recovery time goes up to 2.5 years. In this case the whole region is affected, and we have to add in political problems in many countries as well. So recovery will take even longer.

Singapore should recover ahead of our neighbours, because Singapore does not have the same problems as them. Also many of our trade and investment links are with the OECD countries. Even then, we must accept the reality of slow growth and probably even recession, over the next two years.

We cannot wish away these external problems. But we can and will take short term measures to weather the storm, and long-term measures to enhance our strengths.

When this storm began, our cost competitiveness was not a problem, unlike in 1985. But the landscape has altered. For example, the ringgit has gone down by about 25% and the Indonesian rupiah by about 75% against the Singapore dollar since 1^st July last year. This makes their wages and other costs much cheaper than ours. Let me give some examples.

I asked Lim Boon Heng why the unions were holding seminars at Genting or Malacca instead of in Singapore. He told me, "It is cheaper to hold them there. It is even cheaper than the NTUC Pasir Ris Resort". I hope the union members will draw the right conclusion – their wages have made their union’s business uncompetitive!

During the June holidays, there were fewer cars on our roads. I checked newspaper advertisements for package tours. A 5-day package to Korea cost S$599. A 3-day package tour to Bangkok cost only S$228. No wonder thousands of families went away in June.

An MTI official who recently went to Jakarta for a meeting came back with several pairs of Nike shoes – for himself, his family and friends. Each pair costs him $25, one-quarter of what it costs in Singapore.

Recreational facilities and services are cheap too. I hear many Singaporeans go to Batam, Tanjong Pinang and Karimun, for R and R.

This is no laughing matter. Thai, Malaysian, Indonesian and South Korean exports have become more competitive. Singapore exporters have come under pressure. We are keeping a close eye on our costs. We must not let our costs get out of line, or we will have more retrenchments and factory closures, and our economy will get hollowed out.

Our solution to contain costs is not to depreciate the Singapore dollar to match the baht, ringgit or won. There is no need to, because we do not have the same problems. Besides that will make all Singaporeans poorer, and diminish the value of your CPF savings. What we must do is to tackle business costs directly – land, government charges, taxes, and also wages.

Affordable land prices are a key element of business costs and competitiveness. During the boom, property prices went up sharply, in Singapore and all over the region. Now we are in a totally different situation. Property bubbles have burst everywhere. In Hong Kong, prices have fallen by 40% in 9 months.

In Singapore too prices have come down, but less drastically, because we acted to cool down our property market earlier, in May 1996. Last year our office rentals were the seventh highest in the world, and the third highest in the region, after Hong Kong and Tokyo. Since then our rentals have fallen. This will help us to attract foreign firms to set up overseas and regional headquarters here.

Our industrial land prices also need to soften further. They were pushed up during the boom years in the mid-1990’s because of strong economic growth. Buyers bid high prices for industrial land, sometimes expecting to use part of it for commercial or other purposes. But they forgot that our industrial land has to be competitive with industrial land prices in other countries. We can charge a premium because we are Singapore, but the premium cannot be too big. If industrial land is over priced, even high-value-added, high-tech industries like wafer-fabs, pharmaceuticals, and petrochemicals cannot afford to be in Singapore. If they all move elsewhere, how can the economy grow, let alone sustain high property prices?

For private residential properties, we will let the market find its own level. We will not push prices down, but neither will we prop them up. We have already acted to ease the over-supply. For example we have stopped government land sales, and allowed developers more time to complete their projects. But we have not loosened up on the demand side, for example to allow banks to lend up to 100% of the value of a property for a mortgage, or CPF to be used for the 20% down-payment, despite repeated calls to do so.

That would be most unwise. Banks would be exposed to greater risk should the market fall or the borrowers default. We would be transferring the problem from the property market to the banks. Fortunately Singapore banks did not become over-exposed to the property market in the boom, otherwise by now we would be in the same serious difficulties as our neighbours.

The public housing sector is still healthy because the Government has all along adopted prudent policies. In March 97, the HDB queue reached a record 146,000 applicants. The Government resisted pressure to speed up the building programme. Instead HDB adjusted its allocation policy to give priority to first-timer families who needed flats more urgently. It also revised the resale levy and rationalised its mortgage financing policies. This dampened demand for HDB flats. The queue has now shrunk to 110,000.

If we had built more HDB flats to clear the queue, we would have created an excess of new HDB flats. HDB resale values would have crashed when the market turned. As it is HDB resale values are softening, because these were pulled up by private property prices in the boom, especially prices of the larger flats. But this cannot be helped. The resale values are still higher than the prices you paid when you purchased new flats from HDB. At the lower end, the Government is buying back 3 and 4-room flats to house low-income Singaporean families and skilled foreign professionals. This has helped to support their prices.

Another key element of costs is wages. This is not a time to expect normal wage increases. When conditions are hard, for a business to be able to save 10% of its wage costs may well make the difference between struggling through and going under.

We introduced flexi-wage after the last recession precisely to meet this situation. On average, the variable component now makes up 16% of total wages. In the unionised sector, it has reached 20%. Now we must make sure flexi-wages are really flexible. This will help to preserve jobs, and help us ride out the storm.

A large part of flexi-wage is in end-of-year variable bonuses. Payments will vary from company to company, depending on performance. Even now some companies are doing well, and should reward their workers. But the overall tone should be a strong one of restraint.

Most workers have got this message. But some still have not. I have heard that workers in some Government linked companies are telling their union leaders that they do not have to worry, because GLCs cannot fold up. I would caution them not to put that to the test.

Analysts and investors are also watching to see whether we can get flexi-wage to work. One recent (I.D.E.A) report titled "Wake up Call for Singapore" noted that our Unit Business Costs had gone up 3% in the second quarter. It concluded that this was because of "inflexible labour markets", as labour accounts for 50% of business costs. It suggested that in the second half of this year, "Singapore must work hard to address failing competitiveness. The much-touted ‘flexi-wage’ system would have to be implemented more seriously, failing which a CPF cut may occur."

We must therefore get flexi-wage to work. The public sector will set the example. But if despite cutting bonuses and variable payments, things still worsen because the region continues to deteriorate, we cannot rule out a CPF cut.

We will not do this lightly. I am very conscious that CPF is part of workers’ pay, and that workers have been counting on their CPF savings for their old age. After the last CPF cut in 1986, it took us many years until 1994 to build up the employer’s CPF contribution rate back to 20%, and the total to 40%. But we may have no choice but to cut CPF to avoid more severe job losses next year.

I know that compared to 1985, many more CPF members have committed their CPF money for housing. So if we do have to cut CPF, the Government will help members who have committed to mortgages, as we did in 1986. For example, we can extend the loan repayment period for HDB loans, and offer ballooning schemes to defer part of the repayment till later. For those who have bought private property on bank mortgages, we can also offer them bridging loans at special rates.

I realise that wages are not the only component of costs, so we will surely attend to the other components as well – government charges, rentals, etc.. Workers will not have to bear an unfair part of the burden.

But whatever the adjustments to our wages, they will still be higher than those of our neighbours. A factory worker in Batam earns S$30 to $40 a month with lunch and lodging provided. A chauffeur in Jakarta earns only S$25 a month. How do we compete against such low wages?

Our wages cannot go down to the level of our neighbours, nor do they need to. We have to provide that extra performance, in terms of our business environment, efficiency and productivity, to make it viable and worthwhile for businesses to locate in Singapore. That has always been the way Singapore has grown and prospered.

PSA is a prime example of this. PSA is the number one transhipment port in the world, not simply because of its strategic location but because of its efficiency. Many ports along the East-West sea-lanes share similar geographic advantages as Singapore – Kaohsiung, Hong Kong, Port Klang, Colombo. But PSA has capitalised on its higher efficiency, and built up a hub port servicing the region and beyond.

PSA turns container ships around faster than any other port in the world. It holds the world record in loading and unloading containers – 229 containers an hour on one of the largest container ships. PSA can turn around a ship which requires 2,000 container "moves" – i.e. to load or unload 2,000 containers, in less than 10 hours. No other port comes close. Faster turnarounds mean higher volumes with the same number of cranes and berths, and thus lower unit costs. Shippers also save because every hour the ship spends in port means extra wages for the crew, extra depreciation on the vessel, and a longer sailing schedule.

Exporters and importers in many countries find it more convenient and cost effective to tranship through Singapore rather than ship direct to their final destination. For example, Western Australia sells ice-cream to Japan. But instead of shipping the refrigerated containers direct to Japan, the Australians ship them through Singapore. Ships sail direct from Fremantle to Japan only twice a week. But every day ships call at Singapore from Fremantle, and four ships leave Singapore for Japan. So Australian ice-cream reaches the Japanese market 3 days earlier when shipped through Singapore.

More than 110 container shipping lines call at Singapore. PSA is linked to more than 400 container ports. Besides Fremantle, feeder cargoes come from as far as Durban (South Africa), Madras (India), Ho Chi Minh City (Vietnam), and Dalian (China). For them to tranship through Singapore is simply the cheapest, fastest, and most reliable way to get their cargoes to their final destinations. They are not doing Singapore a favour. Nor has any of them accused PSA of stealing their business.

Some years ago, Radius Prawiro, a former Minister of Trade of Indonesia, told me that but for PSA, Indonesia’s exports would be more expensive at the final destination. He said that PSA’s efficiency benefited Indonesia. I had got to know him well when we worked together as economic ministers on ASEAN economic co-operation. His comment showed that Indonesia’s protectionist thinking had changed. It also showed insight and pragmatism.

PSA must expect competition from new ports. Some, like Port Klang, aspire to displace PSA as the regional hub. This is a legitimate ambition. But it is the performance of the ports, and market forces, which will determine which port becomes the hub. If another port outperforms PSA in terms of efficiency and price, shippers will naturally start using it instead of PSA, without any official encouragement. But if countries resort to administrative and legislative means to force exporters and importers to bypass PSA, when they are unable to provide the same quality service to shippers, they will just hurt their own economies.

When I met Dr Mahathir earlier this year, I told him that after the uproar following SM’s remark on Johor last year, Malaysian customs officers had harassed some Singapore companies in Johor. As a result the companies had held back their expansion plans. Dr Mahathir told me to let him know in future so that he could put things right.

Many of these companies went to Johor because it was convenient for them to ship through PSA from Johor. Forcing these companies to use Port Klang instead of PSA will be a more costly intervention than having customs officers find fault with customs documents. In extremis, the companies may decide to relocate to Batam or Bintan, or even Vietnam or China.

PSA is a star performer because it has good management, skilled and dedicated workers, and a cooperative and enlightened union. The company is run tightly and rationally, staff are promoted and rewarded on merit, and they have built a capable team, with a strong sense of mission to make PSA the best port in the world.

But PSA is only able to do this because the whole of Singapore works like this too. The same values underpin our nation – meritocratic, rational, fair and cohesive. If Singapore were not a clean, efficient country, PSA could not be a clean, efficient port. What PSA has achieved, every other organisation in Singapore is out to do. Indeed that is how Changi Airport, SIA, the Monetary Authority of Singapore, and the SAF have become what they are today.

The PSA’s efficiency depends on working smart. It is not just an extra-hardworking crane operator that allows PSA to move 229 containers an hour on a ship. It is the whole system – the communications to find out before the ship arrives what containers it is carrying, and which ones need to be moved; the computer software to plan the sequence of loading and unloading; the organisation to distribute boxes from one big ship to 50 feeder vessels, and the collection of boxes from 50 feeder vessels for reloading on to the big ship, without mixing them up. It requires knowhow, skills, discipline and ideas.

Without natural resources, we have always competed on our wits, ideas, and drive, and so created wealth and prosperity for ourselves. But we need to do more to foster an environment where creativity and enterprise can flourish. The new buzzword is "knowledge economy".

A knowledge economy is about manufacturing as well as services. It is for everyone, young and old, well- or poorly-educated. It requires a mindset of continuous learning, to keep up-to-date and stay at or near the leading edge, as new products, services and ideas develop.

New York and Silicon Valley are two good examples of knowledge economies. New York is driven by services. It is the financial capital of the US and perhaps the world. New York’s dynamism also comes from being a media and communications capital, a centre of excellence in medical sciences, education, the arts, fashion and much more.

Silicon Valley is driven by thousands of bright students, researchers and entrepreneurs: young people with a brainwave, the passion and the dare to turn their dream into reality, change the world, and make it big. For every Yahoo!, hundreds of startup companies set out, equally promisingly, in pursuit of that pot of gold. Perhaps one out of 20 achieves some success. But that is enough to attract a continuing flow of people with bright ideas and enterprise, to try, to fail, and to try again, until they succeed one day.

We are not New York or Silicon Valley. But we are working hard to become a leading financial centre in this time-zone, a centre for educational and medical excellence, a manufacturing headquarters, and an information hub. Some of our home-grown enterprises are establishing an international name for themselves, e.g. Sim Wong Hoo’s Creative Technology; Intergraph, which provides platforms for movie editing and animation; Glen Goei, whose recent movie "Forever Fever" is being distributed in many countries; and Jack Neo’s "Money No Enough", which is rolling-in big money but "no enough" for Jack Neo.

We need creative ideas not just to generate economic wealth, but also to solve national problems, to transcend our constraints and sustain the nation where Singaporeans can thrive and fulfil themselves. However great the external pressure, however serious the regional crisis, we never give up. We will find a solution and a way to a brighter future.

Singapore is short of land. But we have increased our land area by 7,000 hectares, through reclamation. We are creating a whole new island – Jurong Island – to build an integrated petrochemical industry. EDB has gone round the world marketing Jurong Island to petrochemical companies. EDB has been offering to sell them plots of land for their plants, often when the sites are still under the sea. One Japanese CEO, after hearing EDB Chairman Philip Yeo’s sales pitch, flew here quietly to visit Jurong Island by himself, to find out if it was all for real. He was convinced, and invested $200 million.

But eventually we will run out of land to reclaim from the sea. Reclamation becomes more expensive as the sea gets deeper. Also PSA has been complaining that soon there will be no sea left for ships to anchor in our port.

Our solution is to use land more productively. For example, we have six sewage treatment plants. Some are sitting on prime land. Due to the smell nuisance, land use around 1 km of these plants is restricted. So we are building a Deep Tunnel Sewerage System, to replace the existing sewage treatment plants on the surface. This will free up land equivalent to half the size of Ang Mo Kio, which can be used for higher value purposes like housing.

Even for water, another basic constraint, we will find long-term solutions. We are surrounded by the sea. So long as we can afford to build and operate desalination plants, we will not go thirsty. It will be more expensive than present sources of water, but it will not break us.

We have decided to build our first desalination plant. It will be a 30 mgd multi-stage flash desalination plant in Tuas. It will include a 1 mgd pilot plant using reverse osmosis, to test the technology under local conditions. PUB will be calling tenders next year, so that the plant will be ready by 2005.

Despite the regional economic crisis, Singapore remains attractive to investors. Last year, EDB attracted $8.5bn worth of manufacturing investments. We should meet this year’s target of $7.8bn. The next few years will be more challenging, but EDB will press on with promoting new investments.

$7.8 bn this year will eventually create at least 15,000 new jobs. For the first 6 months of this year, we secured $3.9bn of investment commitments and generated 10,500 jobs. That means an investment of about $400,000 per worker. 10 years ago, investment per worker was only $90,000. But now each worker has more equipment, more technology, and more knowledge to back him up and make him more productive.

We must train and retrain our workforce for these skilled jobs. We do not have enough skilled workers for all the investments EDB is bringing in. The NTUC has the Skills Redevelopment Programme (SRP), to help older workers learn new skills and find new jobs. The Government is supporting the SRP strongly. So far we have pledged or committed $220m to the programme. We will gear up training institutions – the polytechnics and ITEs – to take more workers. Provided the programme is effective, there will be no question of "money no enough". Retraining workers is much better than having them stay at home, becoming harder and harder to re-employ.

We must reach out to as many companies and workers as possible. Companies now realise how the scheme can help them during the slowdown. The most cost-effective time for companies to retrain workers is now, during the lull period. In fact by sending workers on the SRP, the company saves 70% of salary, since SRP pays for 70% of payroll. Workers are also getting the message on training. In January, they wanted full pay to go for training. Now they are eager to go for training even without pay.

The issue is now what skills to train workers in. EDB and other economic agencies will work with NTUC to job-match workers and companies. They will identify skills that are in demand, and try to match worker training with the investment pipeline. Wherever possible, we will train workers for specific jobs, where they can be placed after training. EDB is strongly encouraging incoming companies to hire mature workers, provided they have the right skills and can be hired at competitive pay.

But we cannot force new companies to hire only older workers, or only Singaporean workers. If they cannot find enough of these workers, we must allow them to employ younger workers or foreign workers. Otherwise the investments will go elsewhere. The real solution is to upgrade our unskilled workers into semi-skilled and skilled workers. We must also change the mindset of workers, so that they are willing to work shifts, work in clean rooms, and travel some distance from their homes, e.g. in the petrochemical park on Jurong Island or the wafer fab park in Woodlands.

We must continue to bring in international talent. Last year, I explained the fundamental importance of doing this. To compete successfully in the future, to build the best home for Singaporeans, we must tap the best talent from around the world. In today’s much harsher environment, some Singaporeans are questioning whether this is still the right policy. Workers have asked union leaders why we do not cut down the number of foreign workers here, and save jobs for Singaporeans.

I know many Singaporeans are concerned about their jobs. Architects are having a tough time and many of them cannot find employment. Likewise lawyers and doctors. I have met recent graduates who have applied for several jobs in the last two months but have not been called for a single interview.

I can understand their frustrations and anxiety. Workers and professionals who have lost jobs also have families to feed and mortgages to pay. There will be more retrenchments before we come out of the slump. But chasing away foreigners, hoping to free up more jobs for Singaporeans, will only make our problems worse.

Let me give specific examples. Our construction industry is heavily dependent on foreign workers. If we send them away, I do not think many unemployed Singaporeans will want to become construction workers. We will just hobble the industry. It will cost much more, and take much longer, for us to build schools, HDB flats, the North East MRT line.

In manufacturing, even high-tech companies employ many foreign workers, because they cannot find enough Singaporeans with the right skills. A company which has 40% foreign workers creates jobs for the other 60% of workers who are Singaporean. Many of these companies are struggling. If we cut their foreign worker quotas, it does not follow that suitable Singaporeans will now become available, or that the company will recruit more Singaporeans to fill those jobs. The company may close down or relocate. Either way, the 60% of Singaporeans will also lose their jobs.

It is the same in business and the professions. MTV, a world leader in entertainment, located its hub in Singapore partly because they could complement their Singaporean staff with creative talent from around the world with television and entertainment experience. If we had told MTV to employ only Singaporean VJs (video jockeys), they would not have come to Singapore, and we would have created no jobs for our own people.

One outstanding CEO of a large company can create hundreds of jobs, and millions of dollars of business and profits. Microsoft is the archetypal knowledge company. Its capital is the brainpower of its people. Bill Gates was here recently. He told us that each year Microsoft gave awards to its most outstanding employees, and he would meet them personally. He noticed that their names are mostly unpronounceable, because so many were Eastern Europeans or Asians.

Microsoft has systematically scouted for and attracted the cleverest software programmers from all around the world. They made Microsoft into the world-class company it is. Of course at the top of Microsoft, Bill Gates himself is key to the company’s success. So if our companies want to be as successful as Microsoft, then they too must make talent a burning corporate priority. When they hire, they must go for the best person, whether Singaporean or foreign. This is what DBS Bank has done in hiring an American as CEO, and OCBC hiring someone from Hong Kong as CEO.

Look at the French World Cup football team. In the final against Brazil, I picked Zidane as the most outstanding French player. He is of Algerian descent. Of the 22-players, more than half did not look "French". They looked Argentinian, Armenian, Basque, Caribbean, Ghanaian, New Caledonian. Some were born in France, but of immigrant parents. Others are first generation French citizens. When they went up to receive their medals, President Chirac embraced all of them as Frenchmen. He sent a strong political signal for multi-racialism and against xenophobia: that in France, so long as you contribute to the French cause, it does not matter what colour your skin is or where you were born.

Last year I told you Singapore would never have a chance in the World Cup, because the rules require all players to be citizens. But after watching the French victory, I have changed my mind. Maybe if we change our immigration criteria to bring in top football talent and make them citizens, then one day we too can get into the finals. In fact we intend to do just this, to bring in sports talent.

After the Singapore team scaled Mount Everest, there was a lively debate in the newspapers as to whether this was a Singaporean achievement, because many members of the team were Permanent Residents or PRs, including Edwin Siew and Khoo Swee Chiow who made it to the top. I thought this was not the right approach. I congratulated them and all the team members. This team achieved what they did because Singapore gave them the opportunity. It was a Singapore team that put our flag on the summit; it was a Singaporean effort, a Singaporean achievement.

Singapore values non-citizens who contribute to Singapore. The non-citizens on the Everest team made an essential contribution. We should embrace them as part of our community, and be happy that they have taken up permanent residence here and identified themselves with Singapore. But of course we also hope that in time they will take that important last psychological step, to carry a pink IC themselves, and want their children to do so. For while we attract foreign talent and welcome foreigners who contribute to our economy, Singapore must always have a hard core of citizens, cohesive and totally committed to the country, around whom we can attract other talent and build a nation.

This regional crisis is a critical test for Singapore. The National Education Exhibition told the Singapore Story, but the story is not completed. We have gone through difficult times before: Confrontation in the 1960s, the British withdrawal in the early 1970s, and the severe recession in 1985. These crises have prepared us, as a nation, for the trials we face today. In time, how we surmount this regional crisis will become another chapter of the Singapore Story.

In this time of trial, we should all put national interest above sectoral interests. We will do what we can to ease the short term pain. We must continue to build up our strength for the long term, and use this storm as an opportunity to forge quietly ahead. We must do nothing to compromise our long term competitiveness, nor be rattled into taking unwise actions under pressure.

The crisis can either open up cracks in our society or it can bring us closer together. Investors, analysts, friends and competitors are all watching closely. We ourselves want to know how successful our nation building has been. Let us show the world that we have the courage, resourcefulness, and determination to endure the storm, bond as one people, and build a better Singapore for ourselves and our children.

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