Mr Bubble is at it again, but this time, I’ll leave it to someone more qualified to issue the rebuttal:
Is Singapore Headed to an Iceland Style Meltdown: Part I
The piece by Jesse Colombo asking whether Singapore is headed to an Icelandic style meltdown received a lot of attention but not a lot of analysis. I think it is important to examine not only the factual basis for the arguments put forth but also the bigger picture philosophical framework for predicting financial crises. Today in the first part, I will place the arguments in a type of philosophical framework and the biases we have with regards to economic and financial analysis….
You can read part II here.
For what it’s worth, I’d agree that Singapore’s property markets are frothy, credit is expanding way too fast, and external exposure uncomfortably high. But I’d also agree with Prof Balding – it’s a stretch to say this will presage a meltdown.
I’d be far more concerned about structural issues in Singapore’s economy – the ageing society; the lack of productivity growth that has had to be papered over by immigration; the low provision of public goods; the high inequality of wealth and income. All these are probably more important – and immediate – concerns, than a putative bubble about to burst.
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Great piece of analysis, but Singapore is Singapore and Iceland is Iceland, I see no reason comparing both economies like apple to apple. It is like saying that in the event of any financial meltdown in Singapore, "Well, that's not an Iceland-style meltdown". With all due respect to the author, I think his analysis should be more absolute and not relative.
ReplyDeleteFung
@Fung
DeleteI think Singapore might run into trouble when the Fed starts raising interest rates; but 1) that's a while off; and 2) it's going to be more of a speed bump than a metldown. The key trigger point for a catastrophic crisis would be a FX liquidity problem, but SG has more than enough reserves (plus bilateral and multilateral swap agreements) to weather that kind of storm. As Prof Balding points out, most SG FX deposits are onslhore, not offshore as in the case with Iceland. There's small likelihood of a general pullout.
Note that looking at SG's experience post Asian Financial Crisis is pretty instructive. They lost some reserves, but didn't really need to prop up the currency.
Thanks for the value-added view.
DeleteFung
Pardon my lack of knowledge and understanding, but wasn't Iceland meltdown got to do with their inability to dictate their own currency due to them joining the Euro zone, and they cant "print" more money? Singapore on the other hand have the flexibility?
ReplyDeleteIceland? I don think they are part of the euro, i think you are referring to Ireland.
DeleteI believe the Kroner was pegged to the Euro as a precursor for Iceland to enter the Eurozone, so the comparison might be valid. However, Iceland's case was different to the PIGS, as bank liabilities were FX denominated (including GBP), not Kroner. Under those circumstances, the ability to print your own money isn't a good deterrent. You really need FX reserves, but Iceland bank liabilities far exceeded FX assets available to Iceland.
DeleteFrom layman's point of view, I think its good that policy makers and central bankers stay high on alert over the next 15-20 months as Fed taper the QE :)
ReplyDeleteOK all, please do not let the "tapering" freeze us. They are mainly in the "finance" sector that has not much to do with the real economy, that is, we still need to eat, shop, build houses, infra, etc etc. Come on life goes on and lets make the best of it.
ReplyDeleteMy view is the future market ought to be highly regulated. Like why should the banks be involved in buying billions of oil future if they do not own any refineries? They add not a single cent to the supply chain except miseries to the world population.
Be like Stevie Job or Dyson (vacuum cleaner), create something to sell to the world, now that is adding value!!
Hishamh,
ReplyDeleteIf you were a singapore government official defending LHL or Thaman's financial policy, I may have agreed with you. Well, you aren't. Otherwise, it would be disastrous to institution such as LSE & Cambridge producing such mediocre leaders........Thaman is an economist, you know.
I think a more neutral analysis would be described by this gentleman
http://bambooinnovator.com/2014/01/24/why-singapore-is-not-iceland-and-why-despite-its-healthier-condition-the-republic-still-needs-to-be-vigilant-to-keep-its-economy-sound/
Hishamh,
I strongly suggest you should worry more about Najib's ability in handling the economy.
Sorry looes74, covering Singapore is part of my job. You'll have to live with it.
DeleteI'm Singaporean, not very advanced in economics, but I enjoy reading your blog cos I think it's quite objective. And I like the way you keep cool in response to some inflammatory comments in other of your posts which would have elicited a far more, well, inflamed response had I been the writer... Cool cool blog...
ReplyDelete@The Slug,
DeleteThanks very much, and I hope you keep reading!
Hi there
ReplyDeleteTotally unrelated to the above article. Would appreciate should you could discuss on the relationship of current trend of ringgit and inflation. I find it strange that ringgit is down whilst inflation is up..was it due to lack of export of Malaysian goods?
@anon
DeleteThere's no inconsistency with higher inflation and a weaker exchange rate. That's in fact pretty much what's predicted by standard economic theory - a weaker exchange rate results in more expensive imports, and thus gives a boost to inflation. Conversely, a stronger exchange rate should have a dampening effect on import prices and inflation.
However, in our present case, the two are pretty much unrelated. The Ringgit is being sold down due to the general withdrawal of foreign funds from emerging markets, while inflation in Malaysia is mainly due to subsidy rationalisation.