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.

Tharman's IMF Appointment

The local mainstream media reported with some fanfare that finance minister Tharman Shanmugaratnam had been appointed to a post in the IMF, in an apparent attempt to whip up national pride.  Without prejudice to the very high regard that I have for the Finance Minister, it would appear to me, to put it most charitably, to have been silliness on the part of the mainstream media on a slow news day.

Objectively, looking at the fact that the previous appointment holder of that IMF office was an Egyptian, one can easily infer that the particular post in question is one that is of little practical importance.  And this is not a knock on Egypt as a country.  The fact is that the IMF is one of the key pillars of the Bretton Wood system set up after World War II to underpin American hegemonic power and the centrality of the US dollar.  As such, it is not likely that the Americans would cede any real power in an institution that is central to their system, especially at a time when they perceive that other rising powers such as China and Russia are trying to undermine it.

My hope is that the IMF appointment will not waste too much of the Finance Minister's precious time, given that I see many important challenges facing Singapore which requires all the brains we can get to anticipate and solve.

IMF: Rising Food Prices May Be Here to Stay

The IMF has warned again that rising food prices may not be a temporary phenomenon.  In an article in the Finance and Development magazine, it has noted that food prices are now close to the highs of 2008.  A summary of the article can be found here.

Unfortunately, the IMF has only attributed the problem to poor harvests, the use of biofuels and higher energy prices. It has ignored the fact that aggressive money printing by the advanced economies have also contributed a large part to the problem.

World Bank Chief Talks About Gold Standard

The financial media has been set abuzz over the weekend because of comments by the World Bank chief Robert Zoellick regarding the include of gold into a future international monetary system. Calling for a more cooperative system which will include the major currencies of the world, he added the following statement, as reported by the Financial Times:

"The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values."

Whether or not this is another one of those 'trial balloons' that senior people like the float before a major policy change I don't know, obviously.

But it is worthwhile considering what impact the inclusion of gold into a future monetary system will have on Singapore. This is particularly so given the low percentage of our foreign reserves that is being stored in gold. Based on IMF data, as reported by Wikipedia, Singapore only has 127.4 tonnes of gold reserves, which is a miserable 2.3% of our total reserves.

In a future system that values gold more than the current one, will Singapore suddenly become poorer relative to other countries that have more gold? How will that affect our CPF savings? Does the government have more gold than what it has reported to the IMF, like China previously? I have not figured it out yet, but like I said, it's something to think about.

Rising global unemployment

According to a joint report by the International Monetary Fund (IMF) and the International Labour Organisation (ILO), 30 million jobs had been lost since the start of the global economic crisis in 2007/08, as reported in this article. Furthermore, with global unemployment reaching 210 million people, long-term unemployment in the richer economies have become very high. Given that consumption is such an important component of GDP in developed countries, one can easily argue that without any meaningful recovery in jobs growth, economic growth in these countries would be tepid at best.

Back home here, we can see this increased concern about economic prospects reflected in the recent debate on immigration after the Prime Minister's National Day Rally speech, which despite attempts by the government to soothe nerves shows no sign of abating. While we have (still) have a relatively strong stock market and a booming property market (not always a good thing!), the middle-class here is increasingly worried about its long-term economic prospects, and this is not helped by what is perceived as unbalanced economic policies. There is, it seems to me, a disconnect between what the markets are saying and what the people are recognising as their reality. Who is right?