Ravi Menon: Monetary Authority of Singapore's Annual Report
2018/19
Remarks by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at MAS'
Annual Report 2018/19 Media Conference, Singapore, 27 June 2019.
* * *
Good morning. Welcome to MAS' Annual Report media conference.
GLOBAL ECONOMY
The outlook for the global economy has deteriorated in recent months.
In April, the IMF revised downwards its forecast for global GDP growth to from
3.3%, 3.7%
last October.
Last year at this time, at our annual report conference, I said that if the trade conflict between the
US and China escalates into a trade war, all three engines of global growth - manufacturing,
trade, and investment - will stall.
We are now in the throes of a trade (and technology) war, and all three engines have
indeed stalled.
Global manufacturing is in a synchronised downturn.
Last month, the global Purchasing Managers' Index (PMI) for manufacturing fell to 49.8, its
lowest level in more than six years.
In the US, new orders are near their weakest levels in three years.
In the Eurozone, the downturn in manufacturing is even more severe.
In China, the manufacturing PMI is in negative territory.
In Asia, manufacturing output is contracting in about half of the economies, including
Singapore.
Global trade volumes have declined for two quarters in a row - in Q4 2018 and Q1 2019.
This consecutive two quarters of contraction in world trade is rare.
The last time this occurred was ten years ago.
Global investments have suffered from weakening business confidence.
In Q1 this year, G3 investment growth moderated to on a year-on-year basis, from
3.4%
3.7% last year.
In the ASEAN-4 economies, year-on-year growth in fixed investment spending has pulled
back sharply, to 3.1% in Q1 this year. This is half the pace seen in 2018.
There are three factors driving the current weakness in manufacturing, trade, and
investment.
a downturn in the global electronics cycle;
the lagged effects of deleveraging in China; and
the trade conflict between the US and China.
Of the three factors, the trade conflict poses the biggest risk to global growth outcomes.
Cycles in electronics production are a common feature and structural trends in digitalisation
and the Internet-of-Things should support a recovery eventually in chip production in the next
few years.
As for deleveraging in China, there has clearly been an easing of the policy stance in recent
months in response to the slowing economy.
If the trade impasse between the US and China drags on and further tariff measures are
imposed, growth in the second half of 2019 is likely to be weaker than earlier envisaged.
MAS' estimates suggest that the direct impact of the tariffs that have been introduced to-date
would already shave off a cumulative 0.3% points from global GDP growth over 2019-
2020.
The indirect effects on business and consumer sentiments and financial markets are difficult
to estimate. Some analysts believe these indirect effects could be even larger than the
direct effects.
The impact of the trade conflict between the US and China will be felt across Asia -
through three key channels:
disruptions in supply chains;
slowdown in China; and
firms holding back their capex plans.
The tariffs imposed by the US on China are beginning to affect supply chains in Asia.
China's exports of tariff-hit goods to the US have fallen since the first tranche of tariffs
announced last June.
This is having knock-on effects on some firms in Southeast Asia which are deeply
enmeshed in production networks that are linked to China.
These firms are adversely affected as producers switch to alternative suppliers for essential
parts and components.
While there is talk of some Southeast Asian countries gaining from the diversion of US
imports from China, this appears to be the case only for Vietnam.
The other Southeast Asian economies have not seen an increase in exports of tariff-hit
goods to the US.
A slowdown in the Chinese economy is likely to have significant spill-over effects on
Asia.
Economic indicators have weakened across the board in China.
A slower China will mean a slower Asia.
China is Southeast Asia's largest trading partner and a key source of investment and tourism.
Heightened uncertainty over trade could significantly hold back firms' capex plans.
Various surveys of capex intentions point to a significant pullback in corporate investment
this year.
This is probably the biggest risk to Asia, given the region's exposure to the corporate
investment cycle.
Beyond the tariff war, there is a new and unknown risk on the horizon - the broadening
of the trade dispute to the technology front.
With global value chains, production is distributed and technology dispersed over several
countries, industries, and products.
Moves to restrict the supply of critical technologies could potentially lead to significant
disruptions in these value chains.
Some of these technologies are deeply embedded across multiple products and there may
be mutual dependencies across these products.
We do not fully understand the dynamics of these value chains and technology
dependencies.
But it is not difficult to imagine how restrictions on the use of key technologies - like
advanced semiconductors - can potentially disrupt activities ranging from data centres to
communications between network devices.
The disruptions to supply chains and economic activity could potentially be even larger than
from tariffs.
A prolonged technology conflict could lead to a bifurcation of technology infrastructures
globally.
While downside risks have clearly increased, we should not over-react.
The engines of manufacturing, trade, and investment have stalled, but the global
economy is not headed for a crash. Two other engines are providing support:
easier monetary policies in the major economies; and
resilience in services and consumption.
Monetary policy in the US has turned more accommodative against the backdrop of
benign inflation.
The Federal Reserve has shifted to a 'wait-and-see' stance and markets are expecting cuts
in interest rates.
This has significantly loosened financial conditions, and bond yields have fallen across the
board.
US GDP growth for this year, projected at 2.5%, is still the strongest among the G3
economies.
China has eased fiscal and monetary policy significantly since late 2018.
The Chinese government has stepped up support for infrastructure investment.
Efforts are underway to enhance credit flows to small firms and private enterprises.
But the effects of the stimulus will be somewhat restrained.
The high level of indebtedness is likely to constrain the scale of stimulus measures.
Policy stimulus is unlikely to be able to prevent China's GDP growth falling below last year's
6.6% but may be able to avoid a slippage below 6.0%.
Private consumption remains resilient in the major economies as well as in Asia,
underpinned by healthy labour markets.
Unemployment in both the advanced economies and in Asia is at low levels, and wage
growth is picking up gradually.
With strong labour markets, household consumption is providing an important support to
global growth.
In ASEAN, domestic demand has so far proven resilient to the slowdown in trade.
The services sector has continued to be resilient globally.
The global services PMI averaged 53.1 in the first four months of this year, similar to that for
the whole of last year.
However, it fell to 51.6 in May.
This is perhaps an early signal that a prolonged period of erosion in global manufacturing
activity and investment will eventually have some knock-on effects on services.
The bottom line: consumption and services will provide some buffer to global growth but
will not be entirely immune to persistent weakness in trade and corporate investment.
SINGAPORE ECONOMY
The Singapore economy is being clearly affected by the global slowdown in
manufacturing, trade, and investment.
The economy grew by 1.2% in Q1 2019, compared to 3.1% for full-year 2018.
Recent indicators suggest that growth in Q2 could be lower than in Q1.
Non-oil domestic exports have contracted by 9.3% since the beginning of this year.
The manufacturing sector is in a downturn.
GDP growth for the year as a whole is likely to be weaker than earlier envisaged.
MTI and MAS are reviewing the 1.5-2.5% forecast range for this year's GDP growth.
Growth in the first half of the year is looking to be quite weak, particularly in the trade-related
sectors.
Currently, the full-year forecast is premised on the economy stabilising in the third quarter of
2019, with a modest pickup thereafter.
But the strength of this pick-up, given the softer external environment and ongoing trade
conflict, is unlikely to offset the weakness in the first half.
And downside risks have clearly increased.
As with the global economy, it is important to look beyond the headline growth numbers
and assess the composition of growth in the domestic economy.
Last year, Singapore's GDP growth was driven by two engines - the trade-related cluster
and modern services cluster - with domestic industries flat.
The trade-related cluster - manufacturing, wholesale trade, transport and storage - grew
4.3% and contributed 55% to overall GDP growth.
The modern services cluster - financial, information and communications, and professional
services - also grew 4.3% and contributed 40% to overall GDP growth.
Growth in the domestic industries cluster - construction, retail and F&B, health and
education services - was negligible, mostly weighed down by the slump in construction.
This year, the trade-related cluster is decelerating, modern services is holding up, and
the domestic industries cluster is gradually recovering.
The trade-related cluster will continue to face the full brunt of the maturing of the global tech
cycle and growing trade tensions.
The modern services cluster will be the main driver of growth this year, supported by healthy
regional demand and increased investments in digitalisation as the domestic economy
undergoes transformation.
Domestic industries will make a modest, positive contribution to overall growth, as the
construction sector turns around, and retail and F&B benefits from firm labour demand
conditions and efforts to lift productivity.
INFLATION AND MONETARY POLICY
Inflation in Singapore remains subdued and within expectations.
MAS Core Inflation this year is expected to come in near the mid-point of the forecast
range of 1-2%.
While there will be some domestic cost pressures from firm labour market conditions,
underlying inflationary pressures should remain contained.
First, the slower pace of GDP this year is expected to close the positive output gap. In
recent years, GDP was growing faster than potential.
Second, the fall in global oil prices in Q4 2018 and the deregulation of the electricity
distribution market have exerted a dampening effect on inflation.
Third, the two rounds of monetary policy tightening last year by MAS will continue to have a
restraining effect on inflation.
CPI-All Items inflation for the year is projected to be between 0.5 and 1.5%.
Private road transport costs could pick up slightly from 2018 with higher car prices more
than offsetting lower petrol prices.
Accommodation costs are likely to decline, but at a slower pace this year.
Overall inflation in Singapore remains well below the historical average.
MAS' monetary policy stance remains appropriate against the backdrop of subdued
inflation and weakening growth prospects.
Last year, MAS began the process of monetary policy normalisation by exiting from the zero
percent appreciation path of the nominal effective exchange rate (S$NEER) policy band.
MAS increased slightly the slope of the policy band in April 2018 and again in October 2018,
against the backdrop of healthy economic growth and gradually rising inflation.
In April this year, with inflationary pressures stabilising and the output gap beginning to
narrow, MAS kept the policy stance unchanged.
Our current stance of a modest and gradual appreciation path of the S$NEER policy band
will help to keep the economy close to potential and ensure medium-term price stability.
FINANCIAL STABILITY
Globally, risks to financial stability remain elevated, amidst high levels of indebtedness.
In the Eurozone, the large exposure of banks to government securities means the risk of a
sovereign-bank debt crisis remains.
In the US, corporate debt has increased by 30% since the Global Financial Crisis, with a
sizeable allocation of credit to highly-leveraged corporates.
In China, the total leverage in the system is about 300% of GDP, with high levels of
indebtedness among local governments, state-owned enterprises, and households.
In Asia, there has been a surge in the issuance of foreign currency bonds, denominated
mainly in US dollars and concentrated in the real estate sector.
High leverage in itself does not suggest an impending financial crisis but, if coupled with
a sudden shift in investor sentiment, can lead to financial instability.
The potential triggers for such a sudden shift in investor sentiment are not hard to find -
escalation of trade tensions, disorderly Brexit, sharp slowdown in China, or unexpected
tightening of financial conditions.
In Asia, the key risk is an abrupt reversal of portfolio flows and consequent stresses on
indebted corporates with large foreign currency liabilities.
Singapore's financial system, corporate and household fundamentals remain sound.
MAS' most recent stress tests indicate that our financial system is resilient to an adverse
scenario of a severe global downturn as a fallout from rising trade tensions.
That said, continued vigilance is warranted.
Some households and corporates could face pressures on their cash flows and hence debt
servicing ability if the economy slows more than expected.
PROPERTY MARKET AND MACROPRUDENTIAL POLICY
Last July, the government took macroprudential measures to cool a property market that
was showing early signs of potential over-heating.
In less than one year, between Q3 2017 and Q2 2018, private residential prices had surged
by 9%, offsetting most of the gradual decline of 12% over the preceding four years since Q3
2013.
There was a real possibility that property price increases would once again run ahead of
economic fundamentals - as they did in the lead-up to 2013.
If a renewed property bubble were to form, it would risk a destabilising correction later that
would hurt households, businesses, and the banks.
This risk was especially pertinent, given the strong pipeline of private housing supply coming
on stream over the next few years.
This is why, MND, MOF and MAS decided to act early and decisively to restrain the property
market.
We have learnt from experience that preventing a bubble from forming is less painful
than deflating one that has fully formed.
The measures implemented last year have helped to moderate the property market
cycle.
Since end-Q2 last year, private residential price increases have eased significantly and
average transaction volumes have fallen by
30%.
Bids for land tenders, in both the en-bloc sale and Government Land Sale markets, have
become sober.
The government's aim is not to depress property prices but to promote a stable and
sustainable market.
The government does not have a target rate of increase for property prices nor can it
manage the cycle too tightly.
But the government does have a role to help ensure that price movements are broadly
consistent with economic fundamentals.
In an economy that is growing in nominal terms at 3-5%, it is not sustainable to have
property prices increasing at double-digits.
The government will continue to monitor the property market closely and stands ready to
help ensure a healthy and sustainable market.
MAS' FINANCIAL OPERATIONS
Let me now move on to MAS' financial operations. I will start with:
how MAS has been accumulating Official Foreign Reserves (OFR); and
why MAS decided to transfer part of its OFR to the Government; before touching on
MAS' financial performance and return of profit to Government.
MAS has been steadily accumulating OFR, especially since the Global Financial Crisis.
Most of the period since the Global Financial Crisis was characterised by extremely loose
monetary policies in the advanced economies, with interest rates near zero and massive
expansion of central banks' balance sheets.
This led to a surfeit of liquidity in the global financial system and large capital flows to many
emerging market economies.
As an economy with very sound fundamentals, Singapore naturally attracted quite a large
portion of these capital flows, which exerted sustained and large appreciating pressures on
our exchange rate.
To keep the S$NEER within its policy band, MAS had to intervene in the foreign exchange
markets to mop up these large and persistent capital inflows.
In the process, MAS accumulated a large stock of OFR.
MAS' foreign exchange intervention operations are essentially how we conduct
monetary policy - which is solely directed at securing price stability.
This is what we explained in our response to the US Treasury's Report last month.
Singapore's monetary policy is centred on the exchange rate because it is the best way to
secure price stability in a small, highly open economy.
MAS manages the exchange rate as its monetary policy tool in the same way that other
central banks conduct monetary policy by managing interest rates.
Other central banks buy and sell government securities to affect liquidity and attain their
interest rate targets.
MAS buys and sells foreign currency against the Singapore Dollar to keep the S$NEER
within its policy band.
Just as other central banks' monetary policy operations cannot be construed as interest rate
manipulation, MAS' foreign exchange operations cannot be described as currency
manipulation.
MAS has been in active dialogue with the US Treasury to ensure that our monetary
policy framework and the role of foreign exchange intervention operations are well
understood.
The criteria the US Treasury uses is part of a generic framework that it has developed to
assess the policies of its major trading partners.
While the assessment is unable to incorporate the unique characteristics of individual
countries, the US Treasury has indeed acknowledged in its Report the uniqueness of
Singapore's exchange-rate based monetary policy system.
Singapore's inclusion in the US Treasury Report has no direct consequences for the
economy or the conduct of MAS' monetary policy.
MAS will continue to manage the S$NEER as we assess to be appropriate, for price
stability.
We will also continue to engage in constructive dialogue with the US Treasury to explain the
underlying structural factors which impinge on our current account and MAS' FX
interventions.
The sustained accumulation of OFR over the years meant that MAS' stock of OFR was in
excess of what was needed to conduct our exchange rate-centred monetary policy.
MAS has assessed that OFR equivalent to at least 65% of GDP would provide a sufficiently
strong buffer against stresses in the global economy and financial markets.
Our OFR, at the end of Q1 2019, was more than 80% of GDP.
We therefore decided to transfer S$45 billion from OFR to the Government for investment
on a longer-term basis with expected higher returns.
In return, the Government will reduce its deposits with MAS by the same amount.
This means that MAS' balance sheet will show a reduction in foreign assets of S$45 billion and
an equivalent reduction in its domestic liabilities to the Government.
MAS made a net profit of S$19.2 billion in FY2018/19.
The investment return from the OFR was S$26.2 billion.
This comprised foreign investment gains of and a small positive currency
S$25.2 billion,
translation effect of S$1.0 billion.
After factoring in expenses of S$3.1 billion from domestic and other operations, MAS made
an operating profit of
S$23.1 billion.
From that, MAS recorded a net profit of S$19.2 billion, after contributing S$3.9 billion to the
Government's Consolidated Fund.
The investment return of S$26.2 billion in FY2018/19 is relatively high and reflects mainly
the effects of an increasingly larger OFR base.
First, the income from investing a larger stock of assets would be higher.
Second, realised gains would also be higher, as a larger OFR base means a higher turnover
of securities for rebalancing and other portfolio transactions.
We do not expect investment returns to be sustained at these high levels as the OFR
base will now be smaller after the transfer of S$45 billion to the Government.
Income from a smaller portfolio will be less, and portfolio transactions are also likely be
fewer.
MAS returned to Government the full net profit of S$19.2 billion and another S$16.0
billion from its general reserve fund, making a total of S$35.2 billion.
MAS decided to return this amount to Government as a smaller OFR base would mean that
we need less capital and general reserves as buffer.
This does not mean that the Government is getting S$45 billion and another S$35.2
billion.
The return to Government increased its deposits with MAS by
S$35.2 billion.
As explained earlier, the transfer of S$45 billion of OFR to the Government will reduce its
deposits with MAS by S$45 billion.
FINANCIAL SECTOR
Let me conclude with a quick update on the financial sector.
MAS' various regulatory and developmental initiatives are detailed in the annual report, so I
will provide just a high level overview of the sector's performance.
1
In 2018, the financial services sector did very well, growing at 6.1%.
This brings the three-year average growth rate of financial services to 4.1%, which is within
striking distance of the Industry Transformation Map (ITM) target of 4.3% per annum over
2016-20.
In 2019, financial services is expected to grow slower but should continue to outpace the
overall economy.
Prospects for financial intermediation are mixed, with credit demand weighed down by a
slowing Chinese economy, though loans to Southeast Asia are showing a bit more
resilience.
The picture for insurance is more promising, on the back of growing demand for insurance
products catering to high net worth and mass affluent customers in the Asia-Pacific.
Growth in asset management will be lacklustre, weighed down by falling market valuations
and fee compression.
The payments services space should continue to thrive in line with continued expansion of
e-commerce activities, both locally and in the region.
FinTech-related activities should also continue to grow handsomely, boosted by ongoing
digital transformation across the financial sector.
Even more heartening than the growth numbers are the jobs numbers for financial
services.
There was a net increase of about 6,900 jobs in financial services and FinTech in 2018,
2
driven mainly by the banking and insurance industries.
Over the last three years (2016-18), we saw an average of 4,900 financial services and
FinTech jobs created on a net basis per year.
This is above our ITM target of 4,000 net jobs growth in financial services and FinTech.
Hiring in the financial sector remains healthy so far this year and job growth is on track to
meet the ITM target of 4,000.
Sustaining this rate of job growth will not be easy in the face of technological change
unless efforts are continually stepped up to upskill the workforce.
As digitalisation and automation become more pervasive in the financial industry, jobs will be
transformed. Some will inevitably be displaced.
MAS, the financial industry, and our tripartite partners are taking this very seriously and
undertaking a variety of measures to help prepare the financial sector workforce for a
digital future.
Last year, more than 20,000 individuals - or about one out of eight workers in the industry -
went through MAS/IBF-supported upskilling programmes.
Nineteen financial institutions have stepped forward and committed to re-skill close to 4,000
finance professionals and redeploy them in new or expanded roles over the next two years.
Some 1,700 of them have already started this journey, and 800 have successfully transited
into new roles.
CONCLUSION
Let me wrap up.
The global economy has weakened and this is already affecting Singapore.
Downside risks have grown, and some of these risks may have prolonged effects.
We need to be alert but there is no need to be alarmed.
There are pockets of resilience that should provide a degree of support to the global
economy.
The Singapore economy is in for a rougher ride but is well placed.
Our economic fundamentals are robust and policy buffers are healthy.
Asia's growth, digital transformation, and the resilience in modern innovative services play to
Singapore's strengths.
While external headwinds will slow Singapore's pace of growth in the short term, domestic
economic restructuring is proceeding well and will enable the economy to emerge stronger.
The financial sector is a good example.
Growth will be slower than last year given the sector's exposure to the external
environment.
But the relentless effort by financial institutions to promote innovation, harness technology,
transform jobs, and upskill the workforce, will position the sector well for the future.
MAS will continue to closely partner the industry to make Singapore the leading global
financial centre in Asia, supporting the region's growth and creating good jobs for
Singaporeans.
Let me stop here and we will be happy to take your questions.
This refers to growth in the finance and insurance industry, excluding holding companies. The unadjusted
growth rate for the sector, published by DOS, was 5.8%.
2
The net job creation figure of 6,900 includes FinTech jobs in the overall economy, but excludes jobs in holding
companies. The employment increase of 7,600 for the financial and insurance sector in 2018, published by
MOM, includes holding companies.