Singapore expects neither a recession nor a stagflation next year, as the global economic outlook dims considerably with central banks worldwide forced to fight inflation at the risk of over-cooling economies.
“The extent of the growth moderation will depend in part on how the scenarios for the global economy will pan out,” says Ravi Menon, managing director of the Monetary Authority of Singapore (MAS).
“But there are considerable downside risks in the global economy which bear close watching,” says Menon at a July 19 briefing to release MAS’ FY2021/22 annual report.
Global inflation was already picking up with the recovery of the pandemic. This worsened when Russia invaded Ukraine and triggered spikes in commodity and energy prices.
MAS has, over the past year or so, moved to strengthen the Singapore dollar so that imports will be relatively cheaper. The Singdollar has strengthened 4% against the Pound Sterling, 5% against the Euro and 9% against the Japanese Yen.
However, the moves came at a cost in the form of forex losses, which contributed to the $7.4 billion loss reported by MAS for its financial year ended March 2022. In the preceding year, MAS had made $5.2 billion.
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This is the first net loss since FY2012/13. For FY2021/22, MAS made no contribution to the Consolidated Fund nor return of profits to the government. MAS had contributed $1.1 billion to the Consolidated Fund the year prior.
Despite challenging market conditions and concerns over monetary tightening by global central banks to address higher inflation, as well as slower global growth and geopolitical tensions, MAS was able to chalk up investment gains from interest income, dividends, and realise capital gains.
However, these gains were outweighed by “negative currency translation effects” as the Singdollar strengthened “significantly”, adds MAS.
The MAS’ use of currency as a monetary policy tool instead of adjusting interest rates comes with its own set of challenges.
“There are some years when we have embarrassingly large profits — more than $20 billion,” points out Menon.
He adds: “A good part of it is because of the positive forex translation, because the Singapore dollar depreciated against the currencies in which we were invested in.” The reverse is true in the latest set of results.
Total expenditure of $2.8 billion was due largely to interest expenses on MAS bills and other borrowings for domestic money-market operations. During the financial year, MAS subscribed to $75.0 billion of Reserves Management Government Securities (RMGS). RMGS facilitates the transfer of Official Foreign Reserves that is above what is required for the conduct of monetary policy and financial stability, from MAS to the Singapore government for longer-term management by GIC.
As at March 31, 2022, total capital and reserves of MAS was $40.1 billion, down from $47.5 billion the year prior.
Notably, MAS, like many of its counterparts, added to its gold holdings in a bid diversify its reserves. Between FY2020/21 and FY2021/22, the value of gold assets held by MAS grew tenfold, from $285 million to nearly $2.43 billion.
This was largely due to the rapid rise in the bullion’s price, as MAS only increased its holdings from 4.1 million fine troy ounces to 4.9 million fine troy ounces.
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“The increase in gold holdings appears larger in value terms than in volume terms. This is because gold prices have risen significantly over time,” says Jacqueline Loh, MAS deputy managing director (corporate development). “This is part of ongoing efforts to ensure that our portfolio remains resilient against a range of economic conditions, including higher inflation.”
‘Taming inflation means slower growth’
Inflation was the key theme for Menon at the media conference, where he spoke at length on the impact of this economic phenomenon on global and domestic economic outlook, financial stability, financial-sector performance and MAS’ financial operations.
Singapore’s monetary policy is centred on managing the exchange rate of the Singdollar. “When inflationary pressures build up, MAS allows the trade-weighted exchange rate to appreciate faster. A stronger exchange rate helps to directly reduce imported inflation as well as restrain export demand, providing relief to labour market pressures,” explains Menon.
Since October 2021, MAS has tightened monetary policy four times, starting with a pre-emptive move when core inflation picked up from 0.7% in 2Q2021 to 1.1% in July-August 2021.
In January 2022, a month before Russia’s invasion of Ukraine, MAS added slightly to the rate of appreciation of the policy band in an off-cycle move to lean against gathering inflation momentum.
In April 2022, MAS re-centred upwards the exchange rate policy band and further increased its rate of appreciation, after Russia’s invasion of Ukraine spooked the markets and commodity prices rose.
Most recently, in another off-cycle move on July 14, MAS again re-centred upwards the exchange rate policy band as price pressures became more persistent.
Menon cautions that the full effect of these policy moves to wrestle with inflation will only be felt in the coming 12 months. “The appreciation of the exchange rate is estimated to dampen core inflation by 0.9% points in 2H2022. Over 2022 to 2023, the four tightening moves to-date are estimated to restrain core inflation by an average of 1.2% points each year.”
However, taming inflation means slower economic growth, warns Menon. “The outlook for a gentle easing of inflationary pressures globally is also premised on strong monetary policy actions by central banks … A slowdown in economic growth is necessary to restore macroeconomic balance.”
GST hike amid inflation
Given how MAS is focused on dealing with inflation, could the Goods and Services Tax (GST) hike expected next year add to the inflationary pressures seen today?
Menon reasons that a GST hike will not raise inflation permanently. Rather, its impact will only last for about a year. “It has a one-off effect on prices [and] it comes back down once the base effect is gone.”
The GST is slated to rise from 7% to 8% in 2023, and further increase to 9% in 2024. “In past episodes when the GST was raised, it has always had that one-off effect. After a year, inflation comes back to normal,” says Menon.
He adds: “Now, you could make the argument that at a time of high inflation, the risk of the effect could be longer. But that risk has to be weighed against the other risk: We need to have sufficient revenue to tide over these challenging times.”
The government’s judgement is that the timing is right, says Menon. “But we need to watch very closely that it does not lead to a longer-term impact on inflation.”
Crypto consultation to come
Following recent reports of beleaguered “Singapore-based” crypto companies, Menon distanced Singapore from the insolvent Three Arrows Capital and the scandal-hit TerraForm Labs and Luna Foundation Guard, saying they have “little to do” with the relevant regulations here.
According to Menon, Three Arrows Capital was not regulated under the Payment Services Act. “It had operated under the registered fund management regime to carry out limited fund management business, but had ceased to manage funds in Singapore prior to the problems leading to its insolvency.”
Menon says the key lesson from the recent upheaval in the global crypto industry is clear. “Investing in cryptocurrencies is highly risky.”
In January, in a move to protect consumers, MAS prohibited the cryptocurrency exchanges from advertising in Singapore, resulting in some “bad press”, says Menon. “I think there is considerable confusion over these issues, and people conflate many of these issues together. I think we need to clearly delineate what it is that we are promoting.”
Menon underscores the difference between digital assets running on blockchain technology versus cryptocurrency tokens. The former is something that can solve “real problems” ranging from international settlement to trade finance.
Cryptocurrency, meanwhile, is just a “small sliver of that ecosystem” that has “unfortunately taken a life of its own”, says Menon. “When people talk about crypto, they’re just talking about Bitcoin and Ethereum and all the other cryptocurrencies. For them, it’s just an investment vehicle. But it is not a good investment vehicle for retail investors, because the price volatility is huge, and you can lose large amounts of money.”
MAS will launch a consultation on crypto regulation by October. “We want good, strong crypto players to be based here and to do solid innovation work in Singapore, and that’s what our licensing regime aims to achieve,” says Menon.
He adds: “When we put up a consultation, when we say what are the additional areas that we will regulate, it will capture a wider ambit of players … If a company is doing pure engineering services, technology development [or] software development, but they’re not carrying out financial activities or any of the expanded areas that we’re looking at, then there’s no need for them to be licensed.”
If there is a “nexus” to carrying out financial activity by themselves, however, these blockchain companies will need to be regulated, adds Menon.
‘Far-reaching effects’
The global environment has become more complex and challenging this past year, says Tharman Shanmugaratnam, chairman of MAS. “Even as countries are progressively emerging from the Covid-19 pandemic, Russia’s invasion of Ukraine has had, and will continue to have, far-reaching effects on supply chains, inflation and the outlook for growth.”
MAS’ tightening of monetary policy should slow the inflation momentum, adds Tharman. However, it cannot fully mitigate the pass-through of higher global inflation, especially in food and energy prices. “The domestic labour market is tight and some pick-up in consumer services inflation is to be expected. However, MAS expects core inflation to stabilise by the latter part of the year.”
The financial sector should continue to grow handsomely, says Tharman in his prepared message. “It performed strongly through the pandemic, growing an annual average of 7.2% over 2020-21. Growth has been broad-based, across banking, insurance, asset management and payment services. The past two years also saw a net creation of 5,800 jobs in financial services.”
Looking at the US, the hope is that they avoid a recession, that there is a slowdown in growth and inflation comes under control, says Menon. “But the window for that is quite narrow.”
“In a bad scenario, [they] could have a more severe downturn that has a more prolonged impact on the economy. That will be very bad not just for the advanced economies, but also for the rest of the world,” says Menon.
“It’s very difficult at this stage to put any probabilities for these outcomes,” he adds. “The best way to think about this scenario is to be prepared for their potential impact on the rest of the world.”
Photos: Albert Chua/The Edge Singapore
