Ravi Menon: Monetary Authority of Singapore's Annual Report 2011/12
Opening remarks by Mr Ravi Menon, Managing Director of the Monetary Authority of
Singapore, at the Monetary Authority of Singapore's Annual Report 2011/12 Press
Conference, Singapore, 25 July 2012.
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Good morning. Welcome to MAS' annual report press conference.
I will focus on five key areas today. First, what is happening on the growth and inflation front;
second, what does it mean for MAS' monetary policy; third, how is MAS managing risks to
our economic and financial stability; fourth, what MAS is doing to make our financial sector
stronger; and fifth, how we are positioning Singapore's financial centre for growth.
Let me start with the economy.
Growth and inflation
Singapore economy remains on track to grow at 1-3% this year
Singapore's GDP growth averaged 4.2%1 in the first half of this year. But the growth
momentum is clearly slowing. The average growth in the second half of the year is likely to
be slower than in the first half of the year. This is not unexpected, and has been factored into
whole year growth forecast of 1-3%.
The global economy is slipping into a synchronised slowdown. The latest business surveys in
all major jurisdictions have turned more negative. There is greater uncertainty in the
US economy compared to three months ago, especially with respect to the labour market.
The Eurozone remains mired in recession with no early end in sight. Financial market
stresses have eased somewhat but the underlying vulnerabilities remain. In emerging Asia,
domestic demand is holding up, but growth is vulnerable to developments in America and
Europe. The full extent of weakness in exports, and its effects through regional production
and trade linkages, has probably not filtered through completely.
I must add that our forecast is based on three assumptions: no recession in US, no
significant escalation of the Eurozone crisis, and no "hard landing" in China. If one or more of
these assumptions do not pan out, Singapore's GDP growth could dip below 1% for 2012.
But growth of 1-3% should be seen in perspective. The economy is operating at full
employment and capacity utilisation is high. The Singapore economy has expanded by an
average of 5.8% over the past five years, faster than economy's underlying potential. The
moderation in growth thus brings the economy closer to its sustainable level of output, and
will help relieve cost pressures.
Let me touch on inflation now.
CPI-All Items inflation for 2012 is expected to come in at 4.0- 4.5%, but Core Inflation
will continue to come down and approach 2% by end of the year
MAS is narrowing forecast range for CPI-All Items inflation in 2012 to 4.0-4.5%, but the
forecast for Core Inflation remains unchanged at 2.5-3.0%.
Bringing down inflation remains one of MAS' top priorities. The figure we watch most closely
is Core Inflation, which excludes the costs of accommodation and private road transport. We
were concerned when Core Inflation came in at 3.1% in the first quarter of this year. This
reflected high commodity prices and the pass-through of strong wage growth in 2011. In the
second quarter, Core Inflation moderated to 2.7%. It is likely to ease further and approach
2% by the end of the year. This is not far from the historical average of 1.7%.
There are several factors driving moderation in Core Inflation during the course of the year.
First, oil prices. Global oil prices were at US$103 per barrel in the first quarter of the year.
They are now around US$90. For the rest of the year, they should remain in the
US$90-95 range on average, barring deterioration in the geo-political situation in Middle
East. The easing of global oil prices is already passing through to prices of domestic
oil-related items. Let me give a couple of examples. Electricity tariffs for households came
down by 2.5% in July, the first reduction this year. Likewise, petrol pump prices have fallen
for three consecutive months, by a cumulative 9% from March. Going into the second half of
the year, domestic oil-related prices are expected to keep largely stable.
Second, food prices. Global food commodity prices, as measured by the UN FAO Food Price
Index, were 5.4% lower in June compared to beginning of the year. This has started to feed
through to domestic food inflation, which came down from 3.8% y-o-y in January to 2.3% in
June. Recently, there has been spike in global corn and soya bean prices due to a drought in
US. But we do not expect a broad-based surge in global food prices in coming months, and
so domestic food inflation should remain relatively contained for rest of year.
Third, domestic wages. The 6% increase in domestic wages last year passed through quite
strongly into a variety of services costs earlier this year. We can expect some continued
pass-through of wage costs for the rest of this year, but at a more restrained pace compared
to early this year.
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Like Core Inflation, Headline Inflation or inflation in CPI-All Items is also expected to be
lower on average in the second half of the year compared to the first half. But, unlike Core
Inflation, CPI-All Items inflation will remain elevated at well above the historical average. As
mentioned, MAS is narrowing its forecast for CPI-All Items inflation in 2012 from 3.5-4.5% to
4.0-4.5%. This largely reflects two factors.
First, imputed rentals on owner-occupied homes are expected to remain high compared to a
year ago. This essentially does not involve an actual increase in spending by households.
Imputed rentals on owner-occupied homes are based on actual rentals but, as you know,
only a small segment of the population rents their homes. We expect continued tightness in
the housing rental market, especially in the HDB segment. While measures have been taken
to increase housing supply, it will take some time for this supply to come onstream.
Second, should demand remain resilient, COE premiums are likely to stay high. This could
present upside risks to the 4.0-4.5% forecast for CPI-All Items inflation.
In sum, the costs of imputed rentals on owner-occupied homes and private road transport will
account for about 60% of CPI-All Items inflation this year.
CPI-All Items inflation will also be volatile from month to month. Two factors are significant:
one, the fluctuations in COE premiums; and two, the base effects associated with the timing
of the government's disbursement of service & conservancy charges and rental rebates.2
This factor, for example, accounted almost entirely for temporary rise in inflation from 5.0% in
May to 5.3% in June. We expect inflation in July to fall to around 4%, in part reflecting the
reversal of this base effect.
Let me now move on to MAS' monetary policy.
Monetary policy
Monetary policy has had restraining effect on inflation and current policy stance
remains appropriate
The persistence in Headline Inflation has led to some questions about efficacy of Singapore's
exchange rate-centred monetary policy framework.
MAS has studied this issue very carefully. We are assured that monetary policy framework
remains effective and the current policy stance remains appropriate.
Monetary policy in Singapore has been tight for more than two years now. Since April 2010,
MAS has put in place a modest and gradual appreciation path for the trade-weighted
Singapore dollar policy band. In April this year, MAS tightened monetary policy by increasing
the slope of the policy band further.
This exchange rate policy stance has had a restraining effect on inflation through two
channels: first, by filtering import prices; and second, by moderating economic activity. First,
a stronger exchange rate has helped to filter import prices. Take, for instance, oil prices.
Since April 2010, global oil prices have risen by an average of 15% year-on-year, but
domestic petrol pump prices have only increased by 8%, reflecting the effects of the
exchange rate. Second, the stronger Singapore dollar has had a restraining effect on activity
in the economy, especially through the export-oriented sectors. This has helped to dampen
business cost pressures.
These two effects have been quite significant in helping to dampen inflation. Since April
2010, the trade-weighted Singapore Dollar has appreciated by 3.3% per annum, reflecting
MAS' tighter monetary policy stance. Our simulations show that if this appreciation had not
taken place, CPI-All Items inflation this year would have been 6.5-7.0%, rather than the
4.0-4.5% we have projected.
But there is a limit to how far we can use exchange rate policy to contain inflation. First, while
exchange rate policy is effective against imported inflation and domestic cost pressures
arising from rapid economic growth, it is less so against inflation in housing rentals and car
prices. Even so, housing prices and car prices cannot keep rising rapidly in an environment
of weakening economic growth. The measures taken to address supply-side issues in the
housing market and public transport will also help to ease price pressures in these two areas.
Second, too rapid a rate of appreciation of the Singapore Dollar can significantly hurt our
economic performance, especially in light of heightened uncertainty in the external
environment.
In sum, exchange rate is taking longer than usual to moderate inflation, but it remains our
broadest and most effective anti-inflation tool. MAS will continue to keep a close watch on
developments in the global economy and price pressures in the domestic economy. The next
Monetary Policy Statement will be released as scheduled in mid-October 2012.
MAS remains focused on anchoring inflation expectations as economy undergoes
restructuring to reduce dependence on foreign labour
Looking at medium term, the domestic economic environment will remain challenging for
monetary policy. The Singapore economy is making a transition towards productivity-driven
growth. This will help to reduce our reliance on foreign labour and raise the wages of
low-income Singaporeans. But rising wages must mean rising costs and rising prices, at
least until productivity improvements kick in. We can expect stronger domestic price
pressures over the next few years, and hence slightly higher inflation than we have seen
historically. Slightly higher inflation does not mean runaway inflation. MAS will remain vigilant
and calibrate monetary policy to ensure that this does not happen. We will not allow
inflationary pressures to become entrenched or inflation expectations to build up.
Managing risks to economic and financial stability
MAS is preparing for risks to economic and financial stability posed by escalation of
Eurozone crisis
Besides watching growth and inflation trends, MAS has been focusing on downside risks to
Singapore's economic and financial stability. We monitor the risks closely, take steps to
mitigate these risks where we can, and draw up contingency measures to manage them if
they materialise.
The key risk facing the Singapore economy and financial system is the ongoing crisis in the
Eurozone. While Eurozone governments have taken important steps to deal with crisis, we
must be prepared for a more adverse turn of events.
The escalation of the Eurozone crisis can affect Singapore in three ways: first, the impact on
economic growth; second, stresses on our financial markets; and third, the safety and
soundness of our financial institutions.
Let me begin with economic growth. A deeper recession and credit crunch in Eurozone can
impact our growth through trade and financial channels. The trade channel will be more
direct and impactful. The Eurozone is our largest export market, and Singapore's exports to
the Eurozone have been declining since Q3 last year. For the financial channel, it will be
mainly through a spike in risk aversion and drying up of bank credit, quite similar to 2008.
Already, we have seen some retraction in the Eurozone banks' trade finance activities in
Asia, but the local and global banks have stepped in to fill the void.
Financial market stresses will be felt most keenly in capital flows, currency markets, and
interbank funding. There could be larger and more volatile capital flows. We must be
prepared for both excessive inflows as well as outflows. This could in turn have either
upward pressures or downward pressures on the Singapore Dollar. Interbank funding could
tighten further. We are keeping a close watch on market liquidity conditions, especially in the
availability of US Dollar funding.
Finally, the impact on safety and soundness of financial institutions. Financial institutions
operating in Singapore have limited direct exposure to peripheral Europe. But if the crisis
spreads to core Europe, the contagion could be larger. MAS is closely monitoring banks'
lending exposures and funding profiles. Given our close links to global financial networks, we
will not be unaffected. But our financial system is sound and we should be able to weather
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the storm. Our local banks at the core of the financial system have strong capital and
liquidity positions. They have very good asset quality, with non-performing loans ratio at just
1.3%. We have been carrying out periodic industry-wide stress tests. The tests suggest that
major financial institutions in Singapore would be able to withstand adverse financial and
economic shocks.
MAS will continue to monitor closely developments in the Eurozone and their potential impact
on Singapore's economic and financial stability. The 2008 financial crisis and current crisis in
the Eurozone underscore importance of building a sound financial sector through strong
regulation and supervision.
A sound financial sector
Singapore will continue to meet or exceed international regulatory standards
Let me touch on efforts on the regulatory front in three areas: strengthening our banks' ability
to absorb losses; enhancing our frameworks for consolidated supervision; and extending
scope of regulation to cover all fund management companies.
In the area of loss-absorbency, Singapore will fully implement the Basel III capital standards.
Singapore-incorporated banks will meet Basel III minimum capital adequacy requirements
two years ahead of the Basel Committee's timeline of 1 January 2015. They will then meet,
from 1 January 2015, MAS' capital adequacy requirements that are 2% higher than the
Basel III global capital standards.
Next, we are stepping up consolidated supervision of financial groups. In banking, MAS has
always conducted group wide supervision. We are increasingly focusing on areas such as
mitigating intra-group contagion risk, preventing the multiple use of capital within the group,
and limiting group concentration risk exposures. For insurance groups, we will be enhancing
our supervisory practices. We issued a consultation paper in February this year, with detailed
proposals. We will also introduce a new Financial Holding Companies Act. This will cover
companies incorporated in Singapore, which hold as their subsidiary or subsidiaries, banks,
insurance companies, or both, but does not itself conduct banking or insurance business.
Third, regulation of the fund management industry. All fund management companies will
have to meet the enhanced competency, business conduct, and capital requirements by
August. Those with assets under management greater than S$250m will have to be licensed,
while those below this threshold may operate under the "Registered Fund Management
Company' regime, which will replace the existing "Exempt Fund Manager" regime.
I will now touch on the performance and development of Singapore as a financial centre.
Financial centre: well-positioned for growth
Singapore financial sector activity subdued in weak global environment, but
longer-term prospects remain bright
Singapore's financial sector contracted on a sequential basis for two consecutive quarters in
Q4 2011 and Q1 2012, amidst heightened risk aversion in global financial markets. We
expect financial services activity to remain subdued given uncertainty and weakness in the
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global economic environment. Activities such as trading which are very sensitive to
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sentiment bore the brunt of adjustment. But other activities tied to Asian demand have
remained resilient. They are well-positioned for growth. Asia's demand for financial services
will continue to be driven by rapid urbanisation, the demographics of a growing middle-class,
and the rise of regional multinational companies in need of funding. Let me highlight a few of
these growth areas.
First, asset management. As at end-2011, total assets managed by Singapore-based asset
managers amounted to S$1.34 trillion. This is a slight dip of 1.2% from 2010, but not bad,
considering the weak performance of global equity market and the volatile financial markets
in general. Indeed, we have seen a more diversified base of asset managers offering a
greater variety of investment strategies. The number of investment professionals increased
by 15% last year. And we continue to see strong interest from global fund houses seeking to
set up or expand their Asian presence. 26 of top 30 global asset managers in the world have
a presence in Singapore
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Second, the corporate debt market. The outstanding stock of corporate debt in Singapore
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Dollars and non-Singapore Dollars increased by 9% year-on-year to S$203 billion as at
end 2011. And despite a more difficult market environment, Singapore Dollar bond issuance
remained robust last year, at S$25 billion, compared to S$26 billion in 2010. Non-Singapore
dollar bond issuance volume was also buoyant, growing 110% year-on-year.
Third, the insurance industry. Non-life insurance gross premiums recorded growth of
14.5% in 2011. Almost 60% of total non-life gross premiums written in 2011 were sourced
offshore, demonstrating Singapore's role as an international insurance centre.
Fourth, the Asian Dollar Market. This is the pillar of the Singapore financial sector. Banks in
Singapore draw in foreign currency deposits globally, and deploy these funds to serve the
financing and treasury needs of individuals, corporations and institutions in Singapore and
beyond. Offshore lending expanded last year, with non-bank loans growing by 17%. The
healthy growth has continued into the first quarter of this year, buoyed by regional demand.
MAS will continue to foster sustained growth in our financial sector, underpinned by a
conducive ecosystem and a sound regulatory framework.
Conclusion
Before I conclude, a word on MAS' accounts.
MAS made foreign investment gains of S$12.1 billion but recorded an overall profit of
S$2.8 billion in Singapore dollar terms due to a strong exchange rate
Excluding exchange rate effects, MAS achieved net foreign investment gains totalling
S$12.1 billion during the financial year (FY) ended March 2012, roughly similar to the
previous FY. However, in Singapore Dollar terms, this translated to a net profit of
S$2.8 billion.
Let me sum up. The global economy is slowing, and financial markets remain vulnerable to
renewed stresses. MAS is keeping a close watch. The situation in the Eurozone remains the
most significant risk to global financial stability. MAS is monitoring the various channels of
spillover to Singapore. Bringing down inflation remains one of MAS' top priorities. Core
inflation is likely to moderate to close to our historical average by the end of year. Headline
inflation will also moderate but remain elevated due to high imputed rentals on
owner-occupied homes and COE prices. MAS will continue to ensure that our financial
markets function smoothly and that investors maintain a high level of confidence in our
financial system.
I will now be happy to take questions, together with my two deputy managing directors,
Chong Tee and Swee Lian.