Embracing an international existence while safeguarding the health of the domestic economy is a balancing act for central bankers, but for Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), the task is even more critical. The financial crisis has exposed how vulnerable Singapore is to shocks in the global economy and now its central bank has to deal with the consequences of loose monetary policy abroad as well as the impact of economic restructuring at home.
The danger for Singapore, and its neighbours, is that the monetary easing in markets such as the US, Europe and Japan means that asset bubbles could form. “The large amounts of liquidity in the system pose risks to Asian economies. As the West is deleveraging, the East is releveraging. Excess liquidity is something we need to watch closely,” says Mr Menon.
Capital controls
When asked if he would consider introducing capital controls as a response to this liquidity conundrum, Mr Menon says: “We have taken the view that it is better to have a free flow of capital into and out of the economy. You cannot indefinitely insulate yourself from the rest of the world. Even when [capital controls] are intended to be temporary, they tend to be longer lasting and will inevitably affect investors’ expectations.”
Mr Menon adds that where the flow of funds into and out of the economy is excessive, it is better to have targeted macro-prudential measures on the affected sector, such as the property market, rather than “capital measures that seek to block the funds at the gate”. Over the past three years, the Singapore government has aimed to cool the property market by introducing caps on loan-to-value ratios, for example.
At some point, such capital controls would have to be reversed, which is also the case for developed markets that have charted a course of aggressive monetary easing. “The world needs accommodative monetary policies but careful thought is needed on exit strategies. Getting out will be more difficult than getting in,” says Mr Menon. He argues that monetary and fiscal policy alone will not solve Europe’s problems. “Structural reforms are more important than ever,” he adds.
Structural reforms
Singapore has embarked on structural reforms of its own to push its economy higher up the value chain and reduce its reliance on cheap foreign labour as a source of competitiveness. However, as the reforms take shape, growth has contracted and inflation is a concern.
Singapore’s gross domestic product declined by 1.4%, on a quarter-by-quarter basis, in the first quarter of 2013, losing the momentum that had been gained at the end of 2012. And inflation for March on a year-on-year basis stood at 3.5%.
Of the structural reforms, Mr Menon says: “This process comes with a fair amount of price pressure. There is a scarcity of labour and scarcity of land [in Singapore]. That relative price change feeds into broader inflationary pressures. We have not been hit in a big way yet, but the tightness in the labour market is no doubt seeping into consumer price inflation. We accept that some temporary increase [in inflation] was unavoidable.”
The challenge for MAS, says Mr Menon, is to make sure inflationary expectations do not become unhinged, allowing inflation to take on a life of its own. “We have to maintain that very careful equilibrium. It will take a few years [to complete the restructuring]; easily to the end of the decade,” says Mr Menon.
Such long-termism also applies to Mr Menon’s other aims at MAS. “The work here is not measured in a calendar year, it is ongoing,” he says. He goes on to explain that one of his main objectives is to “position Singapore firmly as a robust, trusted and purposeful financial centre”.
MAS’s work includes undergoing a health check from the International Monetary Fund, continuing to stress-test the system, guarding against the flow of illicit funds, and also developing Singapore as a financial centre for offshore renminbi. “We want to make sure that we are a purposeful financial centre,” says Mr Menon, adding that Singapore’s purpose should be to support economic growth and provide jobs locally and in the wider south-east Asian region.
