Tharman Sees Global Inflation Risks

Singapore Finance Minister Tharman Shanmugaratnam chaired the 23rd Plenary Meeting of the IMF's International Monetary and Financial Committee this week. As reported by iMarketNews.com, speaking to reports at the communique briefing, our finance minister had this to say:

Indeed, Shanmugaratnam, described the global economy as being in "a fragile situation."

Responding to questions, he seemed to focus more on looming inflation threats than on anything else.

Shanmugaratnam said "a combination of strong credit growth and some economies approaching an overheating situation, together with supply shocks in the commodity field (pose) a risk of inflation and rising interest rates globally, not just in emerging markets."

There is a "danger of spillovers" of inflation from the emerging markets to the rest of the global economy, adding that "we've learned from very painful experience in the last few years that nothing is isolated ... . (A problem in one region) rapidly gets transmitted to the rest of the world."

Shanmugaratnam said the stage could be set for "global inflation and possibly an interest rate problem."

From a Singaporean perspective, it is interesting to note that the government appears to be quite aware of the inflation problem and has taken steps to tighten monetary policy by allowing the SGD to appreciate more rapidly, especially against the USD.

Given that General Elections are coming soon, what I would like to see are longer term plans to fight inflation, as I firmly believe that this is going to be a structural rather than cyclical issue. Getting hawkers to hold off on price increases is not the right solution, as it merely results in their margins being squeezed and does nothing to address the underlying structural issues. Much as I am an advocate that Singaporeans take steps to defend themselves against inflation, I believe that it is realistic to acknowledge that given the government's command of vast economic resources, it does have the policy tools to address inflation at a structural level if it decides to do so.

Global Imbalances

On the related note, the minister also raised his concern about global unemployment and the fiscal problems of the developed world when he spoke earlier in the week at the Bertelsmann Foundation conference.

To me, this signals the government's awareness of the need for rebalancing in the global economy, with the emerging countries moving away from an export-led growth model and the West accepting the fact that it has lived beyond its means for many decades now. While the minister has to be polite and politically-correct when addressing this issue in public, I wonder if he or the government really thinks that rebalancing can be done without significant upheaval to the global economy in a manner that would adversely affect Singapore as well.

Given the violent union protests in Europe and the inability of the US political elite to understand the concept of 'we are bankrupt', I would bet my money on greater instability in the global economy as people in the developed world continue in their denial of their parlous state of affairs. I would also adapt my investment strategy in response to such uncertainty. While it would be interesting to watch how our politicians (of all parties) react to this future upheaval, I won't be waiting for any of them to help me.

Better be prepared than be sorry.