IMF's advice on Singapore's monetary policy

The International Monetary Fund (IMF) recently commented on the relevance of Singapore's monetary policy (which will be covered in Topic 17 and 18)

The full article is below:

Sep 1, 2009
Keep monetary policy: IMF
WASHINGTON - THE International Monetary Fund (IMF) on Monday urged Singapore to keep monetary policy at current levels until the economy was clearly out of recession and on a healthier path.

In its annual review of Singapore's economy, the IMF said current monetary policy settings were 'broadly appropriate' and supportive of domestic demand without undermining exchange rate stability.

'The focus now is to preserve financial stability and to ensure that Singapore is well positioned to rebound once the global economy recovers, taking advantage of the ample room for maneuver at the authorities' disposal,' the IMF said. 'Further along the recovery path, a tightening stance would be warranted to safeguard price stability, through targeting a trend appreciation of the nominal effective exchange rate,' it added.

Singapore's central bank manages monetary policy by adjusting the Singapore dollar against a secret basket of trade-weighted currencies. In April, it shifted the midpoint of the trading band lower. Its next review of monetary policy is in October when many analysts believe the central bank will keep its accommodative monetary policy despite stronger-than-expected economic performance in the second quarter.

It said Singapore's economy would likely contract by about 8 per cent in 2009, with the trough in gross domestic product probably occurring in the fourth quarter. GDP should reach about 2.5 per cent next year, the IMF added. An IMF staff document noted that the authorities believe growth in 2010 could be stronger given signs of resilience in intra-regional trade and in advanced economies.

The Fund said staff assessment of the value of the Singapore dollar showed the currency 'appears to be somewhat weaker than its medium-term equilibrium level' but should recover once the world economy rebounds. 'The real effective exchange rate would likely strengthen, in line with fundamentals, once a global recovery takes hold,' the IMF added.

IMF staff documents said the government believes the Singapore dollar was broadly in line with its fair value. It added, 'Staff and authorities agreed that unusual uncertainty clouds these assessments.'

The IMF said the large fiscal stimulus provided by Singapore's government in January should help limit damage from the recession on households and businesses. It also welcomed the authorities' readiness to take further stimulus measures should the economic rebound prove weaker than currently expected.

'Over the medium term, fiscal policy will need to play a part in preparing the economy for shifts in the pattern of global demand,' IMF said, also calling for higher public investment in infrastructure and more flexible labor and product markets.

In addition, the IMF said Singapore should continue rigorous stress-testing of its financial system to shore up confidence in the sector.

IMF staff documents noted there was broad consensus that credit quality will deteriorate in the near term as the recession drags on although at present these pressures looked manageable. -- THOMSON REUTERS

How will this affect Aggregate Demand?

This announcement was in the news on Tuesday 22 October 2008.

Any comments on how aggregate demand (total spending in the economy) will be affected when the government restarts some of the public sector projects?

Government to reconsider deferred projects

These projects were put on hold during good times when there was a high demand for construction materials so as to prevent a further increase in the prices of these materials. Why is it a good idea to restart these projects now that the Singapore economy is in a recession?

British Inflation Rate

As we learn more about inflation, it is also useful to have a look at inflation rates of other countries. This article is about the inflation rate in the UK.

British Inflation

More interestingly and effectively worse for British citizens is how the price of electricity and gas has increased - electricity price inflation is 30.3% and gas price inflation is 49.9%. We can compare this to the recent price increase of electricity in Singapore of about 20%.

The Financial Crisis - What and What Now?

Most of us are aware that the world's financial markets and economies have been severely hit. The good news is that today, the markets have taken some form of recovery.

Some students have been asking me about the causes and possible remedies. This article by the 2008 Nobel Prize winner in Economics, Prof Paul Krugman, lays out the points very succintly.

Gordon Does Good

Not explicitly mentioned in the article is how the crisis was already long-expected although not many anticipated the severity of the situation - with top investment banks and even AIG declaring huge losses.

Essentially, the crisis started with the "bursting of the housing bubble". What does this mean? Well, for the past few years, banks have been freely lending to borrowers who really cannot pay back their loans. (A common term used for this is 'subprime lending'). The loans held by the banks were then bundled together as another form of financial instrument or asset and sold to investors, including top investment banks and insurance companies.

A very simple example: Mr A, Mr B and Mr C all have housing loans with Consumer Bank H. What Consumer Bank H then does is bundle together all of these loans as an asset e.g. "Bond 1" and sells this to Investment Bank Y. The trouble is that Mr A, Mr B and Mr C actually have no means to repay their loans, and once they default on their loans, Consumer Bank H is in trouble and worse still, Investment Bank Y's so-called asset is worthless (and is known as a toxic asset). On an economy-wide level, this is the bursting of the housing bubble.

What Prof Krugman mentions in the article is absolutely correct: the cause is the bursting of the housing bubble; the effect is that banks do not have the capital (i.e. money) to provide people and companies with the credit they need to continue their businesses. And in turn, economies suffer.

The solution therefore as mentioned in the article is actually quite straightforward -for the short and medium term time period - provide banks with the capital they need to lend so that businesses can resume, the economy can gain momentum again and confidence in the markets can be restored. This is the approach taken by the British Government and now followed by the rest of the other governments.

What the US government proposed initially in their financial bailout was absolutely illogical. They wanted to spend US$700billion to purchase the toxic assets - the assets which are essentially worthless because the borrowers cannot repay their loans. Why would anyone want to do that and who will buy these assets in the future?

What the British Government has done, for example, is to invest / buy shares worth US$64 billion in the top banks like Royal Bank of Scotland, thereby injecting capital into these banks and helping these banks run smoothly again, and in a few years' time, when the economy is better, sell their share of the banks to potential investors. Doesn't this sound wiser? It is good thing that now the US government is following the British Government's lead.

Let's hope for better days ahead. It's definitely looker brighter now.

Articles on Inflation in Singapore

Here are two articles on Singapore's inflation and rising prices:
July Inflation
Vegetable Prices

An Alternative View on Recession

This is quite an interesting and somewhat realistic approach to measuring recession.

Redefining Recession

The general definition of recession is a fall in Gross Domestic Product (GDP). Some governments prefer to define "recession" as a reduction in GDP growth - for example, from 6% to 3%. However, this article emphasises the use of unemployment measurements as a better gauge of how the economy is performing.

The Importance of Economics

As we learn more about Economics, we will realise that there are many schools of thought and different inclinations.

In the States, some have labelled the policies of Robert E. Rubin as "Rubinomics" - economics that focuses more on the role of corporations than on the people. On the other hand, one of the more textbook schools of thought is Keynesian economics which is slanted towards government intervention and public spending.

As we will see in the coming months (and years perhaps?), it will be crucial which angle Senator Obama's economic policies are inclined towards.

http://www.nytimes.com/2008/06/12/business/12econ.html?ref=business