Cognitive Dissonance: Singapore Fiscal Policy

I kept getting this promoted tweet on my Twitter feed over the last couple of days, from the Lee Kuan Yew School:

2 principles shape SG's fiscal policy: balancing the budget and keeping government small. #SG52 #SGpublicpolicy https://t.co/VLrH1Sg2Ud pic.twitter.com/mJzJRc0Uny

— Lee Kuan Yew School (@LKYSch) August 8, 2017

I usually don’t bother with promoted tweets, but curiosity eventually won over and I read the article. It’s a fair description of Singapore’s fiscal policy framework, although the part on the management of past reserves could have been expanded for clarity (there’s no mention of GIC or Temasek in there for example, or the endowment funds the government set up).

There is however, one part I’m in violent disagreement with (excerpt; emphasis added):

Wages, Productivity and Growth

I’ve been meaning to write about this, but life and work kept getting in the way. Makes for a good story, except its almost totally wrong (excerpt):

High wages flash recession warnings in Singapore

...Indeed, while the city state's economy is expected to grow between 1-2 percent for the year, analysts say the wage-cost pressures are flashing warnings of a recession.

At roughly 43 percent of gross domestic product - though below the 55 percent world average - wage costs in Singapore are now at levels which historically had preceded recessions in 1985, 1997 and 2001.

The trouble is that the higher wages are raising business costs at a time when export-oriented Singapore has been hard hit by a cooling China, subdued domestic consumption, a downturn in commodities and global uncertainty due to Britain's vote to leave the European Union....

Tears For Singapore

Condolences to the people of Singapore, for the passing of Lee Kuan Yew. Love him or hate him, nobody can deny his achievements or what he has meant for Singaporeans.

The sad thing is that Singapore is now at an economic crossroads, and probably needs LKY’s brand of pragmatism more than ever. Whether this next generation of leaders will be able to steer the country through the challenges it faces now remains to be seen.

Jesse Colombo Smackdown Part II

Mr Bubble is at it again, but this time, I’ll leave it to someone more qualified to issue the rebuttal:

Is Singapore Headed to an Iceland Style Meltdown: Part I

The piece by Jesse Colombo asking whether Singapore is headed to an Icelandic style meltdown received a lot of attention but not a lot of analysis. I think it is important to examine not only the factual basis for the arguments put forth but also the bigger picture philosophical framework for predicting financial crises. Today in the first part, I will place the arguments in a type of philosophical framework and the biases we have with regards to economic and financial analysis….

You can read part II here.

For what it’s worth, I’d agree that Singapore’s property markets are frothy, credit is expanding way too fast, and external exposure uncomfortably high. But I’d also agree with Prof Balding – it’s a stretch to say this will presage a meltdown.

I’d be far more concerned about structural issues in Singapore’s economy – the ageing society; the lack of productivity growth that has had to be papered over by immigration; the low provision of public goods; the high inequality of wealth and income. All these are probably more important – and immediate – concerns, than a putative bubble about to burst.

The Strange And Mysterious Workings Of Singapore’s Monetary Policy

Singapore is a pretty unique economy, what with being a very open island trading nation, and with its political and social history.

Its approach to monetary policy is just as unique. Unlike the vast majority of central banks, Singapore’s Monetary Authority (MAS) uses the exchange rate as its primary monetary policy instrument. While this in itself is not too radical, unlike exchange rate regimes in the past the application of this policy is not through targeting a level of the exchange rate, but the slope and breadth of its appreciation.

This makes economic sense, as inflation is an appreciation in the general price level, not the price level itself. If the goal of monetary policy is stable prices (and/or economic growth), then a policy of exchange rate appreciation to regulate an increase in prices is appropriate.

A Singaporean Mystery (Partially) Explained

Three months back, I highlighted some issues raised by Prof Christopher Balding regarding Singapore’s public finances. Somewhat unusually, the Singapore government has deigned to publish a public rebuttal (excerpt):

Is there something wrong with our Reserves?

From time to time, there are claims that the Singapore Government is covering up losses in our reserves, or that Singaporean CPF monies are not safe. Some recent online postings have even claimed that GIC and/or Temasek are reporting false returns to cover up losses, or that the Government siphons monies from its Budget or from Government borrowings so as to pad up GIC and Temasek’s books.

The Government does not publish the size of assets managed by GIC, although the asset size of MAS and Temasek are published. On the basis of the information that the Government has published, as well as the full system of checks and balances, these recent claims are baseless. Indeed, they are fantastical, but let’s look at some basic facts…

A Singaporean Mystery

I was alerted to something quite interesting a few days ago by warrior 231 – there appears to be hole in the Singapore government accounts, a fairly substantial one.

The one man crusader pursuing this issue is Christopher Balding, Associate Professor at Peking University’s HSBC Business School. Here’s a sampling from his blog:

The Importance of Economic Capture and Government Surpluses

…However, if we add in GIC numbers, everything begins to fall apart. As I have already covered in previous posts, we actually know pretty closely how much GIC manages. In March 2011, with Temasek declaring its holding at $193 billion SGD and the government holding cash of $125 billion SGD, the balance sheet reveals a GIC upper bound estimate of $387 billion SGD, pretty close to outside estimates…

Want To Know How Singapore Manages Monetary Policy Differently From Everybody Else?

Get a load of this analysis from Morgan Stanley (Excerpts):

To Tighten or Not to Tighten?

Market conditions are not forcing the MAS's hand in tightening the currency policy either. Based on our model, the S$NEER has been tracking in the upper half of the bandwidth since the last monetary policy review in Oct-09 - but not pushing against the upper band as yet. Indeed, the S$NEER has been quite range-bound, broadly moving sideways since Oct-09 before trending down in Dec-09, then trending up again from the second week of Feb-10. It now stands marginally below the levels seen at the Oct-09 review, at roughly 1% above the midpoint of the bandwidth. From a balance-of-payments perspective, the appreciation pressures on S$NEER seem to have abated somewhat. Foreign reserves in Feb-10 have fallen slightly to US$187.8 billion from a peak of US$189.6 billion in Jan-10. Indeed, the monthly trailing accretion rate in the past three months has been somewhat patchy compared to the three months prior.

Separately, our conversations with our currency traders also suggest that the MAS's action in the currency market recently has been mainly smoothing operations rather than aggressive intervention or leaning-against-the-wind.

As a side note, one possible way in which the MAS could curb inflation pressures, so far primarily external cost push-related, without compromising on growth would be to re-center the midpoint of the bandwidth higher to the prevailing level of S$NEER but still retain the zero appreciation slope. This is possible but not probable, in our view.

Recall that during the boom years of 2004-07 when the economy showed signs of overheating, the MAS ran a gradual and modest appreciation stance and only increased the S$NEER slope in Oct-07 when inflation went above 2%. This time round, trailing inflation is still low and together with the poor growth visibility, we doubt that the MAS will take action to curb import-led inflation, given the low starting point on inflation at this stage.

Singapore adjusts the monetary policy stance wholly through changes in the exchange rate, unlike the more common interest rate/inflation rate-based targeting used virtually everywhere else. It works for them simply because the scale of trade is so much bigger in relation to their economy, and because they have virtually no natural resources of their own.

One consequence is that because the exchange rate functions as the policy instrument, both interest rates and money supply are fully market determined, and hence also highly volatile. It’s a case of picking your poison, but it works for them (and not necessarily for anybody else).