If Heng Swee Keat, managing director of the Monetary Authority of Singapore, ever feels troubled about momentum in Singapore’s economy, he need only look out of the window. The 29th-floor executive offices of the Monetary Authority of Singapore (MAS) overlook the vast container and crane yards of what is, by some measures, the world’s busiest port, the emblem of Singapore’s pivotal position in Asian trade. In fact, when the Port Authority of Singapore wants to take pictures for its presentations, it often asks to pop round to the MAS with a photographer since the central bank has the better view.
But there hasn’t been much cause for Heng to be troubled recently. Singapore’s economic outlook has just been upgraded to a full-year figure of between 6.5% and 7.5% – not a China standard, but higher than almost any developed country in the world. “That number reflects two things,” says Heng. “One is the cyclical factor, and the fact that the global and Asian economies are doing well. The second thing, which gives us much greater satisfaction, is that the economic restructuring that has been taking place since 2001 is showing results.” That has been reflected in growth across the board: high technology, pharmaceuticals, financial services, logistics, retail.
He sees no short-term threats to that picture, with the US, Europe and Japan all in reasonable shape. But unlike his chairman [see interview], he has concerns about geopolitical tensions and the oil price feeding through into higher production costs and inflationary pressures, and probably higher global interest rates.
Challenge of inflation
“For the Singapore economy, the challenge clearly is on the inflation side,” he says. “Energy intensity is quite low, the second lowest in Asia, because of our policies, but the concern is how inflation impacts global growth.” If inflationary pressures push up interest rates around the world, that dampens global growth, “and in turn would feed into the Singapore economy, which is dependent on external demand”.
The MAS is a more open central bank than some, certainly more open than the Federal Reserve, and releases more information than it used to about the state of the economy, issuing twice-yearly monetary policy statements followed by detailed macroeconomic views. One thing it doesn’t disclose is the precise method of regulating the currency, which is allowed to float within a band, using a basket of currencies reflecting Singapore’s trading partners, to decide where that band should be. Why not disclose it? “You clearly don’t want speculators to attack the currency,” he says. “But this method gives us a much greater flexibility [than a fixed peg] to respond to changes in economic conditions.”
Corporate bonds
Singapore has its areas of success as a financial centre, among them foreign exchange, private banking and asset management. One area of mixed fortunes has been the corporate bond market. Singapore was really the first local currency bond market in Asia to kick off in the late 1990s, and it quadrupled its scale between 1997 and 2004, but then slowed down, and seemed outpaced by other markets in the region. “This year, it’s picking up again very strongly,” Heng says.
“In the first six months of this year, total issuance is already over S$8 billion ($5.1billion), more than double last year at the same period.” What’s most interesting is the diversity of issuers, such as a recent S$400 million issue by Emirates Airlines – despite the fact it has no need for Singapore dollars, and instead swapped it into US.
Middle Eastern issuers have been quite prolific in this market, and count towards a figure of 60% of issuance that comes from non-Singaporeans. “That augurs very well for the future development of the market in Singapore,” says Heng. It is also stretching into other markets, allowing banks to issue murabaha securities (an Islamic finance structure), and trying to attract listed hedge funds to Singapore.
But what about unpredictable shocks? Has the MAS stress-tested against what would happen if there were a bird flu outbreak? Yes, it has, in some detail, ordering all banks to stress-test their portfolios. Heng says the impact would come on domestic demand, external demand, and supply, and says research has been conducted on the impact on each channel. “That has been a very useful exercise, but it’s an event nobody knows for sure how it will pan out, and how people would react,” he says. “The purpose is not to come out with a particular set of numbers but condition ourselves to thinking about contingencies.” And the banks’ projections? “There would clearly be fairly major impacts, but in terms of systemic stability, we are quite assured.”