Asiamoney (AM): How has the role of your central bank and that of central bank governors changed over the past 25 years?
Ravi Menon, MAS: The Monetary Authority of Singapore has evolved considerably during these last 25 years. Two important changes are worth highlighting.
In 1998, at the height of the Asian financial crisis (AFC), MAS undertook a fundamental review of its approach to regulating and developing the financial sector. To manage systemic risks effectively while allowing financial institutions more latitude to innovate and grow, MAS shifted away from one-size-fits-all regulation to more intensive but risk-focused supervision. We maintained high prudential standards even as we stepped up efforts to develop the capital markets and asset management industry.
These changes helped set the stage for the subsequent strong growth of Singapore’s financial centre while fortifying the financial system to ride through the AFC, and global financial crisis a decade later.
From 2010 onwards, MAS implemented a series of innovative macroprudential policy measures to contain a rapid increase in real estate prices and build-up of leverage in the economy caused in part by the prolonged period of low interest rates globally.
Economies and financial systems have become more linked, contagion and spillover effects more common. Central bank governors have to understand not only monetary policies and their implications for the economy and prices, but also financial markets and how they interact with monetary policies to affect financial stability.
AM: How independent is your central bank from the government?
Menon, MAS: Although MAS does not have statutory independence, it enjoys considerable operational autonomy in the conduct of monetary policy and the supervision of financial institutions. MAS underwent a Financial Sector Assessment Programme (FSAP) under the International Monetary Fund (IMF) last year and the FSAP assessors were unable to find any instance where MAS’s operational independence had been compromised. Monetary policy decisions are taken entirely within the MAS without reference to any other government ministry or agency.
MAS could be described as being independent within the government but not of the government. Never has the government, in the last 42 years of MAS’s existence, pressured MAS to ease monetary policy, given a licence to a bank that MAS was not inclined to admit, or refrained from taking action against a financial institution that did not behave.
AM: Who has been the most influential central bank governor in Asia over the past 25 years?
Menon, MAS: It takes time to fully assess the impact and influence of central bank governors, given the long lags and gestation periods of their policies. But if I had to make a choice, I would pick governor Zhou Xiaochuan of the People’s Bank of China (PBoC), governor Zeti Akhtar Aziz of Bank Negara Malaysia (BNM), and Joseph Yam, former chief executive of the Hong Kong Monetary Authority (HKMA).
Governor Zhou took the helm of PBoC in 2002 and has overseen many important monetary and financial reforms since. He has been instrumental in the gradual liberalisation of the renminbi, breaking the peg to the US dollar in 2005, and subsequently engineering the revaluation of the currency and gradually widening its daily trading band.
He has been one of the key architects of internationalising the renminbi through swap lines, trade settlement arrangements, and clearing banks. The renminbi is now the second and seventh most used currency in trade finance and global payments, respectively.
While vulnerabilities remain in China’s financial sector – as Zhou would be the first to acknowledge – the bold measures he initiated to reform the banking sector have put the banks on a sounder financial footing.
Governor Zeti has overseen a long period of macroeconomic stability in Malaysia. Inflation has averaged 2.6% per annum during the last 10 years, a testimony to BNM’s proactive approach to monetary policy under Zeti’s leadership. Zeti has also been an effective crisis manager, steering BNM skilfully through the AFC and GFC.
She pegged the ringgit to the US dollar at the height of the AFC in 1998, which provided stability while Malaysia addressed the stresses in its external balances and accelerate financial reforms to strengthen resilience. Zeti has also led efforts in Asean (Association of Southeast Asian Nations) financial integration and capacity building, and helped develop Malaysia as a pre-eminent centre for Islamic finance.
Joseph Yam was one of the longest serving central bank chiefs in the world when he stepped down in 2009. He was decisive in defending the Hong Kong dollar’s peg to the US dollar when it came under attack during the AFC. This strengthened confidence in Hong Kong’s monetary system, which has weathered many financial storms since. Yam was also instrumental in growing Hong Kong into an international financial centre.
AM: What should be the key economic and monetary targets of your country for the coming years? How can the central bank best help the country achieve these goals?
Menon, MAS: The overriding objective of MAS’s monetary policy has been, and will continue to be, the pursuit of price stability over the medium-term. In seeking low and stable inflation, we will take into account two major imperatives for the Singapore economy: restructuring the economy domestically and adjusting to the normalisation of monetary conditions externally.
Domestically, Singapore economy is increasingly running up against the physical constraints of limited land and labour resources. Efforts are underway to reduce the economy’s reliance on foreign labour and improve labour productivity, but these will take time to bear fruit.
Externally, the gradual withdrawal of extraordinarily loose monetary policies in the advanced economies could lead to new financial stresses and potential market dislocations. Shifts in global interest rates and cross-border capital flows can materially impact domestic financial conditions and asset prices, affecting economic and financial stability. Macroprudential policy will therefore remain an important complement to monetary policy.
AM: What is your biggest challenge for the coming 12 months?
Menon, MAS: With resident labour force growth declining and the capacity to absorb foreign labour reaching its limits, the risk of a resurgence in wage and cost pressures remains significant, even as GDP growth prospects remain modest with sub-par growth globally. Monetary policy would therefore need to tread a fine line between guarding against the risk of a wage-price spiral and ensuring that policy is not so tight as to tip the economy into recession or hinder the ability of firms to restructure.
AM: What would you consider to be your key achievement to date as governor? What is your biggest disappointment?
Menon, MAS: There are five key achievements by MAS during my tenure as governor, all of which are the result of the collective efforts of an entire organisation as well as the work of earlier generations.
First, we have brought inflation under control without undermining economic growth. A moderately tight monetary policy since 2010 helped reduce CPI (consumer price index) inflation to 2.4% last year, down from 4.6% in 2012 and 5.2% in 2011. That we managed to do this while keeping GDP growth around trend (4.1% last year) amidst an environment of weak global demand is not bad.
Second, we have slowed the build-up of leverage in the economy and facilitated a moderation of the property market. The series of macroprudential measures we have taken in recent years, namely tighter loan-to-value ratios, caps on loan tenures, and a total debt service ratio, have encouraged financial prudence in a “low for long” interest rate environment.
Third, we did very well in the IMF's FSAP. The assessment found Singapore’s financial sector to be well-regulated and highly developed, with a supervision framework that was among the best in the world. The financial system was assessed to be resilient against some fairly extreme stress test scenarios.
Fourth, we made strides in making Singapore a trusted and clean financial centre. We completed a comprehensive review of the financial advisory industry that produced recommendations to raise the standards of professionalism in the industry and empower consumers of life insurance and investment products to make informed choices. We strengthened our regime to combat tax crimes by working with the financial industry to enhance their controls to detect and deter tax-illicit funds.
Fifth, we made strong progress in developing Singapore as a vibrant financial centre. It was the largest foreign exchange trading centre in Asia and the third largest globally according to the 2013 triennial BIS survey. It also became the second largest wealth management hub globally with assets under management of about $1.29tr in 2013. We also laid strong foundations for Singapore as an offshore renminbi hub, introducing a renminbi clearing bank facility, an enhanced bilateral currency swap agreement with the PBoC, and opening new renminbi cross-border channels.
The biggest disappointment is with the slow pace and insufficient consistency in the implementation of reforms in OTC (over-the-counter) derivatives trading globally. Following the GFC, the international regulatory community has done much work to bring greater transparency to the OTC derivatives markets. But there remain inconsistencies in the cross-border application of these rules, which could potentially lead to a fragmentation of liquidity in the OTC derivatives market.
AM: What goal would you like to achieve before the end of your time as governor?
Menon, MAS: More than any specific policy or outcome, the key task of any leader is to leave the organisation stronger than he found it so that it can deal effectively with whatever the future holds. MAS is a strong organisation to begin with. My goal is to strengthen it further — deepen the capabilities of our people to deal with an increasingly complex operating environment, improve efficiency and effectiveness in all that we do, and build a more integrated and cohesive organisation that maximises the synergies across its varied functions. AM