Singapore Avoids Stimulus as Minister Acts on Bubble Risk

Singapore Finance Minister Tharman Shanmugaratnam said there’s no need for monetary stimulus in a country with full employment, leaving policy makers reliant on unorthodox tools to prevent asset bubbles.

“We don’t have an output gap, and evidence of that is in an extremely tight labor market,” Shanmugaratnam, 56, said in a Bloomberg Television interview with Haslinda Amin yesterday. “In that context basically, you can’t have an easy monetary policy, which in our case is an exchange-rate policy.”

The minister, who also discussed so-called currency wars and Singapore’s efforts to limit the influx of foreign workers in an hour-long interview, said property prices need to stabilize further even as measures implemented earlier this year begin to take effect.

A search for higher-yielding assets amid monetary easing in developed economies has fueled record property prices in Singapore, sparking inflationary pressures and social tensions. The central bank tightened monetary policy in 2012 by allowing faster currency gains even as the economy grew the least in three years.

“We can’t just rely on exchange-rate policy and monetary policy to prevent bubbles from being formed,” said Shanmugaratnam, who is also deputy prime minister and chairman of the central bank. “You’ve got to find ways of throwing sand in the wheels, you’ve got to add some friction in the process.”

Property Curbs

Singapore has imposed steps to cool the housing market since 2009, with the last round in January including an increase of as much as 7 percentage points in stamp duties. The finance minister said he is “pretty confident” that the government will get a handle on the situation.

“We’re still in a wrong part of the cycle,” and there is still “some ways to go” before prices are at an acceptable level, he said. “It’ll happen through a combination of income improvement, as well as prices certainly not going up further, but some correction in prices will not be out of order.”

While the government will never be able to tame the “sentiment-driven” market, it has to limit gains because of the social impact when people can’t afford to buy homes, Shanmugaratnam said.

“We can prevent a real bubble from being formed which then eventually crashes, and that’s our objective,” said the minister, who obtained his master’s in economics from the University of Cambridge and holds a master’s in public administration from Harvard University in Cambridge, Massachusetts. “We can’t use the full arsenal in one shot,” he said, referring to seven rounds of property curbs since 2009.

Last year, six of the top 10 gainers on the Straits Times Index were real estate-related companies. The benchmark’s property index, which tracks 39 builders, fell for the first time in three days today.

Entrenched Inflation

The city forecasts growth of 1 percent to 3 percent in 2013. Expansion “could come out at the lower end” of the range, Shanmugaratnam said in the interview at the Ministry of Finance.

Singapore’s jobless rate fell to a five-year low of 1.8 percent last quarter as companies hired more local workers after the government tightened the inflow of foreign labor.

“There is no need to ease policy at the moment,” said Vishnu Varathan, an economist at Mizuho Corporate Bank Ltd. in Singapore. “They don’t want entrenched inflation expectations especially as the labor market has not loosened.”

Singapore sets monetary policy via the nation’s dollar, guiding the exchange rate against a basket of currencies within an undisclosed band. The Monetary Authority of Singapore adjusts the pace of appreciation or depreciation by changing the slope, width or center of the band.

Biggest Issue

Singapore’s currency has depreciated 1.2 percent against the U.S. dollar this year, after reaching an all-time high on July 27, 2011, and climbing 6.1 percent in 2012.

Located at the southern end of the 600-mile (965-kilometer) Malacca Strait and home to one of the world’s busiest container ports, Singapore has remained vulnerable to fluctuations in overseas demand for manufactured goods. The government has boosted the financial services and tourism industries to become less reliant on exports.

“The biggest issue is still what happens in the most developed economies,” Shanmugaratnam said, referring to potential threats to Singapore’s growth. “As a highly open economy, as an economy that lives by being global and regional, that matters to us.”

Shanmugaratnam, who is also the chairman of the International Monetary Fund’s steering committee, said policy makers in developed economies such as the U.S., Europe and Japan “have their monetary settings about right.”

Currency War

The risk of a currency war has surfaced as monetary easing from Japan to the U.S. spurs demand for higher-yielding assets and boosts inflows into emerging markets. Russia said in January policies which end up weakening currencies may lead to reciprocal action as nations try to protect export industries.

While talk of currency wars “has run further than the reality,” there is now a good understanding among “major players” about what is appropriate, Shanmugaratnam said. “There might have been a little bit of clumsiness in public statements.”

Shanmugaratnam unveiled tighter curbs on foreign labor for a fourth consecutive year when he presented the annual budget on Feb. 25. In a white paper released in January, the government said total workforce growth will ease to 1 percent to 2 percent annually through 2020, compared with an average rate of 3.3 percent per annum in the last three decades.

Labor Force

“The foreign workforce can’t keep growing faster than the local workforce, not indefinitely,” Shanmugaratnam said. “That’s why our key priority now, our most important economic and social strategy is that of raising productivity to a new level.”

After years of letting companies bring in thousands of foreign laborers to work at hotels, shipyards and restaurants, public discontent over the influx has diminished support for Prime Minister Lee Hsien Loong’s government. Several thousand Singaporeans unhappy with the growing presence of foreigners and overcrowding held the country’s biggest political protest since such events were allowed in 2000, when they gathered Feb. 16 in a downtown park.

The government has stepped up efforts since 2010 to restructure the way companies operate and make productivity a cornerstone of the economic blueprint for this decade. Officials blamed some industries’ use of cheaper, low-skilled foreign labor as a reason for low productivity in the last decade.

“If you don’t raise productivity, it’s hard to raise incomes,” Shanmugaratnam said. “And if you can’t raise incomes for the average person, for the median household and for those at the lower end of the wage ladder, your society frays.”

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