Turning Back The Tide: Are We Going To See An End To Financial Liberalization In Singapore?
October 21st 2008 12:12
Singapore is undoubtedly one of the best-run economies in the South East Asian region. Through heavy government intervention resulting in a period of sustained growth lasting for decades. Not bad considering it is basically governed by a (basically) one party, semi-authoritarian system. Even more impressive is how, despite having virtually no opposition and being in rule since the country was formed, the government has been able to fend off the insidious threat of corruption that plagues other nations in the region.
Now, the Singapore government has traditionally displayed very conservative fiscal policy, and as a result has generated consistent budget surpluses. The government has always had a very strong presence in the economy. However in recent years we have seen a rising degree of market liberalization in Singapore, especially in the wake of the East Asian financial crisis. The collapses of 97-98 showed the Singaporean government the dangers of too much intervention, and subsequently they have been moving towards a more liberal approach. Indicative of this rethink is the reduced level of taxes, which are among the lowest in the both the region and the world, except for the GST (which has been increasing over the last few years).
In terms of monetary policy, the main concern is the exchange rate. The value of merchandise imports/exports in 2007 stood at 344% of GDP, so any fluctuations in the price of the Singaporean dollar are a major concern. The government has allowed the dollar to appreciate by 8-9% against the US$ to counteract the inflation that comes along with sustained economic expansion.
Which leads me to my question: how will the global recession (which now seems inevitable) affect an economy as exposed as Singapore's? In a word: badly. The dependence of the Singaporean economy on foreign trade will result in some tough times ahead. Singapore, with their well governed banks, should avoid the majority of the fallout from the sub-prime crisis, even though the government recently guaranteed all bank deposits for the next couple of years. This could indicate that their economy will not fare as badly as others, at least not in the short term. However, a global recession will cut into that trade that is so vital to the health of the Singaporean economy, which will be a worry to the government.
I am in two minds about where the Singaporean dollar is heading though. I can see two major factors contributing to any shifts.
1. The Future - Singapore, like I said, does not have smooth sailing ahead, given that a global slowdown will hurt them more than basically anyone else. This is not, however, hard to see, and people will want to get their cash out of Singaporean dollars before it begins to depreciate.
On the other hand:
2. Economic and Political Stability: The last time an economic crisis rocked this region, it resulted in the fall of the ruling regime and the near-destruction of the regions largest economy. The fallout from our current crisis is anyone's guess. Singapore, however, is a safe haven in the region, a center of stability both in their economy and government. People in the region will want somewhere safe to put their money until things quieten down, and Singapore is probably it.
So we have one force that could potentially drive the currency down, and one that could see it appreciate... In my opinion, we will see the Singaporean dollar strengthen until the outcomes of this crisis are more apparent, at which point we will see investors regain some of their appetite for risk and return to the more volatile south east asian economies.
However, is a long-term downward trend really what the government there wants? No. Above all, the Singaporean government associates predictability and sustainability with a good environment for businesses, and therefore will not want to see any unpredictable fluctuations in the economy. This is why, in my opinion, we are going to see a reversal of the current trend of market liberalization in Singapore, and see the government adopt a more interventionist approach as they try to maintain the economic stability that has served Singapore so well to date. Whether or not they will be able to achieve these goals is another matter though.
Now, the Singapore government has traditionally displayed very conservative fiscal policy, and as a result has generated consistent budget surpluses. The government has always had a very strong presence in the economy. However in recent years we have seen a rising degree of market liberalization in Singapore, especially in the wake of the East Asian financial crisis. The collapses of 97-98 showed the Singaporean government the dangers of too much intervention, and subsequently they have been moving towards a more liberal approach. Indicative of this rethink is the reduced level of taxes, which are among the lowest in the both the region and the world, except for the GST (which has been increasing over the last few years).
In terms of monetary policy, the main concern is the exchange rate. The value of merchandise imports/exports in 2007 stood at 344% of GDP, so any fluctuations in the price of the Singaporean dollar are a major concern. The government has allowed the dollar to appreciate by 8-9% against the US$ to counteract the inflation that comes along with sustained economic expansion.
Which leads me to my question: how will the global recession (which now seems inevitable) affect an economy as exposed as Singapore's? In a word: badly. The dependence of the Singaporean economy on foreign trade will result in some tough times ahead. Singapore, with their well governed banks, should avoid the majority of the fallout from the sub-prime crisis, even though the government recently guaranteed all bank deposits for the next couple of years. This could indicate that their economy will not fare as badly as others, at least not in the short term. However, a global recession will cut into that trade that is so vital to the health of the Singaporean economy, which will be a worry to the government.
I am in two minds about where the Singaporean dollar is heading though. I can see two major factors contributing to any shifts.
1. The Future - Singapore, like I said, does not have smooth sailing ahead, given that a global slowdown will hurt them more than basically anyone else. This is not, however, hard to see, and people will want to get their cash out of Singaporean dollars before it begins to depreciate.
On the other hand:
2. Economic and Political Stability: The last time an economic crisis rocked this region, it resulted in the fall of the ruling regime and the near-destruction of the regions largest economy. The fallout from our current crisis is anyone's guess. Singapore, however, is a safe haven in the region, a center of stability both in their economy and government. People in the region will want somewhere safe to put their money until things quieten down, and Singapore is probably it.
So we have one force that could potentially drive the currency down, and one that could see it appreciate... In my opinion, we will see the Singaporean dollar strengthen until the outcomes of this crisis are more apparent, at which point we will see investors regain some of their appetite for risk and return to the more volatile south east asian economies.
However, is a long-term downward trend really what the government there wants? No. Above all, the Singaporean government associates predictability and sustainability with a good environment for businesses, and therefore will not want to see any unpredictable fluctuations in the economy. This is why, in my opinion, we are going to see a reversal of the current trend of market liberalization in Singapore, and see the government adopt a more interventionist approach as they try to maintain the economic stability that has served Singapore so well to date. Whether or not they will be able to achieve these goals is another matter though.
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