Tuesday, April 28, 2009

S'pore pay hikes to be among region's lowest

Business Times - 28 Apr 2009

Poll shows employers trimming budgets for 2009 increments to median 3% here.

Pay hikes across the Asia-Pacific region, especially for employees of multinational corporations, are set to fall to a five-year low, with increases in Singapore likely to be among the region's lowest, according to HRBS Asia.

A poll taken here by the human resource consultancy in January-February indicated that employers in Singapore have trimmed their budgets for 2009 salary increments to a median 3 per cent, down from 4.3 per cent last November.

Salaries in Asia-Pacific as a whole are tipped to grow by a median 5 per cent, inflated though by employers in Vietnam and India who allocated for 10 per cent raises. This compares with the region-wide 5.8 per cent pay hike in 2003, when the Sars epidemic sank most economies across Asia.

Among companies that have already handed out the pay raise for 2009, the actual increases were far lower than what were budgeted, according to Elaine Ng, managing principal and director of HRBS Asia. The median pay hike in nine of the 19 countries is zero.

'In most cases, the actual increase implemented in the first two months of 2009 is far below the pay increase during the Sars time,' she says.

While the projected median salary hike in Singapore is 3 per cent, the average salary increase is expected to be only 2.3 per cent, says Ms Ng.

The average actual (those already made) and budgeted pay increases combined is even lower: 1.3 per cent.

'One reason behind this phenomenon is that companies are worried about their business in the months ahead as the economic environment is uncertain and can worsen,' Ms Ng says.

'Companies tend to adjust their actual pay increase figures downwards rather than stick to the budgeted.'

As more and more companies finalise their pay increases in the coming months, a lower pay rise or even pay freeze is likely.

An average 31 per cent of the nearly 1,020 companies polled in 19 Asian countries - most of which were MNCs - plan to freeze pay in 2009. In Singapore, where 89 companies were polled, the proportion is 36 per cent.

Salary cuts - in particular, for MNC employees - are likely to be exceptions. 'While MNCs' businesses may be affected by the downturn, nonetheless, Asia is the growth region still for these firms and they are not buffeted by the financial crisis to the extent of the banking industry,' says Ms Ng.

'Given the huge shortage of skilled and specialised people resources faced by employers just before the economic downturn that hit the majority of businesses in the last quarter of 2008, most employers are especially wary of losing their high-skilled, highly- trained professionals and specialists,' she says.

Pay cuts drain morale, Ms Ng says, and employers with excess manpower would rather put in place 'less work, less pay' programmes.

Friday, April 24, 2009

US recovery might be a speedy one

Business Times - 23 Apr 2009


THE best analysts on macroeconomics seem to agree on so little - and disagree about so much. After two years of such argumentation, the global economy definitely still is experiencing worsening of the business cycle.

Is credit tight? Or is it too easy? Paradox: Credit for ultra-safe asset securities is actually now dirt cheap. Just as the Bank of Japan for more than a 'lost decade' had to cut its official interest rate to virtually zero, most central banks everywhere now have to live a frenetic life: Credits are simultaneously both cheap and dear.

'Stagflation' is widespread from New York to Zurich to Iceland and Ireland. This means stagnant Main Street retail sales at the same time that the unemployment rates are still soaring.

I try to maintain a centrist view, consistent with what prevailed during the Great Depression of 1929-1939. Here are the main centrist tenets:

Unregulated macro-economies cannot heal their own wounds. The irrational public deregulation of 1930 by President Herbert Hoover - which University of Chicago economics professor Milton Friedman propounded throughout the 1940-2005 epoch - was predictably a road to disaster.

What then did end the Great Depression? No, it was not primarily a return to some kind of standard Federal Reserve stabilising programmes. Universal (rational) fear of investment loss led early on to hoarding. Hoarding by whom? Both rich and poor families hoarded, rather than spending freely on consumption.

At the time, my father-in-law was president of the First National Bank of Berlin, Wisconsin. After President Roosevelt closed all the banks in the first week after his inauguration, this Berlin bank was the only one allowed to reopen. Did that end hoarding? No. Mr Will Crawford subsequently invested mostly in zero-yielding 1933 Treasury bills. Such caution created essentially no new jobs for the unemployed.

That suggests that the global recession may continue into 2010. But with plentiful Obama deficit spending, stock indices will eventually stop falling in price. Few short-term or long-term Wall Street traders will luck out in their timing decisions. Typically, too, when the final recovery comes, it will be a speedy recovery.

There are few heroes among the speculators. Alan Greenspan began as one. But even he admits his fallibility. New Federal Reserve governor Ben Bernanke deserves our praises for his flexibility and caution.

In my view, the US is doing better than France, Germany, Britain, Japan and 40 other nations. This must not make us proud or overconfident. It was American financial engineers who originated the 2006 global meltdown.

Luckily, the US voters rejected George Bush's policies at the polls. Maybe luck did play a big role in that? We'll never know. -- Tribune Media Services

The writer is considered a founder of modern neo-classical economics and was awarded the Nobel Prize for Economics in 1970

Volcker urges bank basics, cites 'Great Recession'

Business Times - 24 Apr 2009

Former Federal Reserve Chairman Paul Volcker, an Obama administration economic adviser, on Thursday urged banks to stick to basics and suggested possibly barring them from sponsoring hedge funds.

Wading into the intensifying debate on financial regulation reform, he raised concerns about giving the Fed new duties as a regulator of 'systemic risk' and warned against being too clear about government protections for financial institutions.

'A certain degree of ambiguity, in that respect, I would hope, could help temper moral hazard concerns,' he said in remarks at a conference on banking and financial oversight.

At 81, the tall and deep-voiced Mr Volcker is a legend in financial markets. As head of the US central bank during the Carter and Reagan administrations, he pursued an aggressive monetary policy that purged inflation from the US economy.

President Barack Obama early in his administration named Mr Volcker to be chairman of an Economic Recovery Advisory Board.

He was recently tapped to head a panel on US tax reform.

One of few policy-makers in Washington today to have lived through the Great Depression, Mr Volcker said at the conference that the US economy is mired in a 'Great Recession.'

As the administration tries to stabilise the financial system, Mr Volcker warned the government should not be too clear on which institutions deserve taxpayer help, and which don't.

'We should not encourage ... the view that some financial institutions are to be assured of official support, which in the midst of the present turmoil is, of course, the present presumption,' he said.

Focus on customers
Banks 'are and should remain strong and stable providers of financial services,' he said. 'The priority is and should be to respond to the needs of customers' for safe and liquid assets, credit and financial advice and counsel.

'What does not seem to me to be central to the banking mission ... is extensive participation in impersonal, transaction-oriented capital markets,' he said.

Too much market involvement poses risks, distracts management and conflicts with customer relationships, he said.

'The logic calls, for me, to prohibition of banking organisations sponsoring hedge funds or equity funds and strict supervision, with appropriate capital requirements, for proprietary securities and derivatives trading.'

He said reforming bank oversight along these lines would not mean 'a resurrection of Glass-Steagall,' a 1933 federal law that prohibited bank holding companies from diversifying too broadly into other financial activities.

But reforms like those he discussed would mean 'rewriting of some part of Gramm-Leach-Bliley,' Mr Volcker said, referring to a 1999 law that rolled back much of Glass-Steagall, ushering in an era of aggressive bank mergers and diversification.

Vast banking supermarkets such as Citigroup, Bank of America and JPMorgan Chase resulted.

With their balance sheets now weighed down by toxic assets they helped create, these same banks in recent months have received billions of dollars in taxpayer bailout aid.

Lack of focus
Mr Volcker said large financial institutions have suffered in recent years from overreaching. 'I do suspect that the relatively recent participation in capital markets has contributed, for some important institutions, to an unfortunate lack of focus on core banking functions,' he said.

One of many reform proposals making the rounds in Washington is an idea to create a 'systemic risk regulator' to monitor and manage financial risk in the economy.

'If systemic regulator means that somebody - the Federal Reserve or somebody else - is going to supervise in detail big banks, that's not my vision,' Mr Volcker said.

'But somebody ought to be looking at the overall system ... That's the job for the overall overseer, in my view. It's natural to think that the Federal Reserve is in that role.'

Commenting broadly on the crisis, Mr Volcker added: 'I never thought I would live to see the day when the American financial markets were dependent on the degree of government support and intervention that we have today. There is a plain need for making reform.'

China increases gold reserves by 76%

Business Times - 24 Apr 2009
China revealed on Friday that it had quietly raised its gold reserves by three-quarters since 2003, increasing its holdings to 1,054 tonnes and confirming years of speculation it had been buying.

Hu Xiaolian, head of the State Administration of Foreign Exchange (SAFE), told Xinhua news agency in an interview that the country's reserves had risen by 454 tonnes from 600 tonnes since 2003, when China last adjusted its state gold reserves figure.

The world gold market has been buzzing with talk about China buying gold for years as the country's foreign exchange reserves have rocketed, and speculation has picked up since the global economic crisis threatened to weaken the value of those reserves.

Gold prices jumped on the news and were up 1 per cent on the day at US$910.80 an ounce at 0540 GMT. By a Reuters calculation, China's holding of gold would be worth US$30.9 billion at current prices.

China recently reported the change in its gold holdings to the International Monetary Fund and would include the latest change in central bank reports and balance of payment statistics, Mr Hu said.

China's reserves were now the fifth biggest in the world, with only six countries holding more than 1,000 tonnes, she said.

China had increased its stocks by buying on the domestic market and from domestic producers.
Gold market participants said Mr Hu's revelation was good news for the market and signalled likely further buying.

'The comments indicate that China will buy more gold as reserve to improve its foreign reserve portfolio. This is a trend,' said Yao Haiqiao, president of Longgold Asset Management.

Hou Huimin, vice general secretary of the China Gold Association, said China should build its reserves to 5,000 tonnes.

'It's not a matter of a few hundred, or 1,000 tonnes. China should hold more because of its new international status, and because of the financial crisis,' he said.

'The financial crisis means the US dollar value is changing fast, and it may retreat from being the international reserve currency. If that happens, whoever holds gold will be at an advantage.'

The European Central Bank recommends its member banks hold 15 per cent of their reserves in gold, but among Asian nations the percentage is far smaller, said Albert Cheng, World Gold Council managing director for the far east.

Wednesday, April 22, 2009

Fed's quantitative easing, inflation and gold

Business Times - 22 Apr 2009

With West likely to debase currencies to ease debt burden in years ahead, gold and silver are safer bets.

ON March 18, the Fed used its last weapon - quantitative easing (QE), when it announced its plan to buy US$300 billion in long- term Treasuries and US$750 billion of mortgage-backed securities. On the back of this news the equity and bond markets surged, the dollar sold off but commodities rallied. Why is it a big deal? Although the Fed regularly buys and sells short-term Treasury bills to set the overnight federal funds rate, it generally does not intervene in long-term Treasuries, allowing the market to set long-term rates.

The Fed has not bought long-term Treasuries since 1952, mainly because 'it's as inflationary as hell', says Howard Simons, a strategist with Bianco Research. Gold, often seen as a hedge against inflation, surged on the news, from US$916 per ounce on March 17 to US$958 on March 19.

The Treasury is not allowed to print money because governments can tend to go a little crazy and print too much, resulting in hyperinflation and often, economic collapse. John Taylor, a Stanford University economics professor says the Fed's move 'raises huge questions about inflation and the independence of the Fed. This is unprecedented'.

I am of the view that inflation will not be a problem as long as the United States remains in a recession. The real problem would start once the economy starts to revive. That's when the banking system will start to expand the money supply. History shows, it's very, very hard for the central bank to raise interest rates rapidly enough to offset the increase in credit. That's when we are going to get the inflation.

In my opinion, QE gimmick is not going to work any better than any of the previous efforts. The question begs the answer is - how are these bailout plans going to stimulate aggregate demand of the US consumers?

As I see it, government stimulus plans are not reaching the consumer and therefore, this is not going to stimulate demand. Fed chairman Ben Bernanke himself admits that we are in uncharted waters, with no map or compass, just simply a hope that more dollars are the answer. What it is doing is saving the greedy bankers that made the bad loans. Printing money out of thin air (quantitative easing) will not fix the problem. Buying up your own debt is no more useful than swapping one credit card for another. It is the last act of desperation when there is nothing else left to do.

It is worth noting, that the Federal Reserve has already dropped the Fed funds rate to a historically low range of 0-0.25 per cent and now it is desperately trying to use other unconventional methods (quantitative easing) to stimulate the economy. This latest development of the Federal Reserve monetising debt is inflationary and confirmation that the Federal Reserve wants to debase the US dollar. It is my firm belief that over the years ahead, the US and all other debt-laden nations in the West will engage in massive money-creation in order to debase their currencies and dilute the purchasing power of paper money. Remember, monetary inflation is a debtor's best friend as it makes the debt easier to service and repay. On the other hand, monetary inflation goes against the interests of savers and creditors. Given the fact that most of the 'developed' nations are up to their eyeballs in debt, you don't have to be a genius to figure out that monetary inflation is our future. So, I don't expect deflation to take hold; rather, I anticipate accelerating inflation which has always led to rising asset and consumer prices.

If monetary inflation is our future, then we should examine which currencies and assets will maintain their purchasing power. If history is any guide, nations which engage in monetary inflation always diminish the purchasing power of their currency. So, in the years ahead, we can expect currencies in the West to depreciate in terms of purchasing power but the trouble is that none of the fundamentally sound nations want a strong currency either! As the world engages in competitive currency devaluations, I expect all the currencies in the world to lose significant purchasing power against hard assets.

Therefore, in the years ahead, precious metals and other commodities with intrinsic value should appreciate considerably. With the world in turmoil and the global financial system on the brink, there has been one relatively steady asset in the storm: gold. The gold price ended up 5.5 per cent for 2008 as stock markets plunged around the world and is currently up over 6 per cent in 2009.

The S&P 500 finished down 38.5 per cent last year and is down over 15 per cent in 2009. The US dollar has also been a safe haven asset recently, but the longer-term fundamentals of the dollar are no match for gold.

Beyond gold's value as a safe haven, the basic supply and demand fundamentals are strong as well. As gold has consistently risen in price since 2001, global gold production has actually fallen. Annual gold production is now 4 per cent less than in 2001, when the price was under US$300 per ounce. Global gold reserves in the ground are also shrinking despite concerted efforts and hundreds of millions of dollars in exploration expenditures. Finding gold is not an easy chore. It is by nature a very scarce mineral, and explorers have been scouring the earth for it for thousands of years. In addition, the rising costs of labour, equipment and energy have made mining a more difficult enterprise to get off the ground.

Contrast those hurdles to the ease with which central banks can create vast mountains of paper money at the blink of a mouse click. Is it any wonder that gold has lasted as a store of wealth for thousands of years? On the other hand, currencies rise, fall and disappear with regularity throughout history. Scarcity and intrinsic value will continue to drive gold prices higher over time relative to paper currencies. As the dollar and other currencies race to debase themselves during this financial crisis, the only remaining yardsticks of value remain gold and silver.

Since August 1971 when the US took the dollar off the gold standard, that spending discipline has disappeared as the Fed has printed money at the government's whim. Over the last 38 years US levels of debt have mushroomed, while the US$ purchasing power has declined.

It's clear that prolonged periods of excessive money creation lead to excessive speculation, debt and finally economic turmoil. It has occurred throughout the ages and is occurring today. Without the disciplining system of a gold standard, it falls on central banks to control money supply. History has shown central banks as independent in name only. They are de facto pawns of government and create whatever amount of currency that government demands.

The simplest and easiest way to buy gold is to purchase gold ETF (ticker - GLD); investors wishing to have exposure to gold mining stocks can buy ETF (ticker - GDX). Gold is the primary beneficiary of investors' fear and uncertainty, while silver often performs like an industrial metal and therefore more volatile than gold. Investors willing to buy silver can purchase silver ETF (ticker - SLV).

Tuesday, April 14, 2009

Seven Deadly Sins of Banking

  1. Greedy loan growth.
  2. Glutony for real estate.
  3. Lust for high yields.
  4. Sloth-like risk management.
  5. Pride of low capital.
  6. Envy of exotic fees.
  7. Anger of regulators.

Saturday, April 11, 2009


Independence was thrust upon Singapore. The fundamentals of our foreign policy were forged during those vulnerable early years. They remain relevant because small countries have little power to alter the region, let alone the world. A small country must seek a maximum number of friends, while maintaining the freedom to be itself as a sovereign and independent nation. Both parts of the equation – a maximum number of friends and freedom to be ourselves - are equally important and inter-related.
Friendship, in international relations, is not a function of goodwill or personal affection. We must make ourselves relevant so that other countries have an interest in our continued survival and prosperity as a sovereign and independent nation. Singapore cannot take its relevance for granted. Small countries perform no vital or irreplaceable functions in the international system. Singapore has to continually reconstruct itself and keep its relevance to the world and to create political and economic space. This is the economic imperative for Singapore.
To achieve this, we have to be different from others in our neighbourhood and have a competitive edge. Because we have been able to do so, Singapore has risen over our geographical and resource constraints, and has been accepted as a serious player in regional and international fora. We earn our living by attracting foreign investments and producing goods and services useful to the world. Hence, we must always have the ability to be ourselves and be different from others in the wider region of East and South Asia. Had we disported ourselves like our better endowed neighbours, we would have failed. For Singapore, unlike others in our neighbourhood, is of no intrinsic interest to any developed country when they can invest in our larger neighbours endowed with more land, labour and natural resources.
At the same time, we must never delude ourselves that we are a part of the First World in Southeast Asia, a second and third world group of countries. Our region has its own special features. Singapore’s destiny would be very different if we were sited in Europe or North America. We cannot transplant our island elsewhere. Therefore, a recurrent issue for Singapore is how to differentiate ourselves from our neighbours in order to compete and survive, and also get along with them. This is a perennial foreign policy challenge.
The Changing International Environment
As the world changes, small countries have to swiftly adjust their policies and positions in a pragmatic and clinical manner. We have to live with the world as it is, not as we wish it should be. We must remain nimble to seize opportunities that come with changing circumstances, or to get out of harm’s way.
Let me outline the major changes in the international and regional environment since we became independent.
In 1965, the Cold War was at its height. The world was bipolar, divided into communist and non-communist blocs and a main fault line ran through Southeast Asia. The Vietnam War had been raging on for several years. That year, President Lyndon B Johnson upped the ante by bombing North Vietnam. All the non-communist countries of Southeast Asia faced serious internal threats from communist insurgencies or subversive movements supported by a China that was then in the throes of the launch of the Cultural Revolution.
All the non-communist countries of Southeast Asia were embroiled in disputes of varying intensity with one another. Singapore had just been “separated” from Malaysia and Indonesia was pursuing a policy of “konfrontasi” against Malaysia and Singapore. The Philippines claimed Sabah. Brunei with British help had suppressed an internal rebellion backed by Indonesia. There were also strong irredentist pressures on the borders between West Malaysia and Thailand, and between the Philippines and Indonesia. In these unpropitious circumstances, the Association of Southeast Asian Nations (ASEAN) was formed so that the non-communist states in Southeast Asia could contain and manage their differences to meet the greater threat from the communists.
The world has completely transformed. The Cold War is over after the Berlin Wall fell in 1989 and the Soviet Union imploded in 1991. Vietnam, Laos, Myanmar and Cambodia have joined ASEAN. The threat of mutual nuclear annihilation during the Cold War has gone.
But it is not the “end of history” that an American has written in the euphoria of triumphalism. The Cold War divided the world into two blocs for more than 40 years from the end of the Second World War. Two heavily armed nuclear blocs made it a dangerous world. Once this over-arching strategic discipline of the bipolar Cold War was dissolved, long submerged conflicts broke out in many parts of the world, but fortunately not in Southeast Asia.
With the collapse of the communist ideology of how society and the economy should be organised, all states joined the global wave of the free market.
Singapore has since 1965 plugged into the international economic grid. We welcomed Multi-National Companies (MNCs) to invest and manufacture in Singapore when the conventional wisdom was that MNCs exploit Third World countries. As an open economy, we took full advantage of globalisation.
East Asian countries had been leading the pack in this globalisation wave. They distinguished themselves from other Third World countries by single-minded emphasis on development. Japan was the earliest to plug itself into the global system. The Newly Industrialising Economies of Hong Kong, Republic of Korea, Singapore and Taiwan followed suit from the 1960s; then came the Southeast Asian ‘tigers’: Malaysia, Indonesia and Thailand. Vietnam reformed its economy in the 1990s.
The most dramatic transformations were China and India. China’s re-emergence in the world economy is the single most profound event of the 21st century. Two huge economies in China and India will reshape the world order before the end of the 21st century.
In the 1960s and 1970s, Singapore was berated in the Chinese media as a lackey of the American imperialists. The Malayan Communist Party (MCP) backed by China refused to recognise Singapore’s independence. This changed after Deng Xiaoping visited Singapore in November 1978. It marked a dramatic change in Singapore’s relations with China, and also China’s relations with Southeast Asia. Deng visited Bangkok and Kuala Lumpur before he arrived in Singapore. He personally saw that China had fallen behind these supposedly backward cities. Also, he concluded that China had to stop supporting insurgencies in Southeast Asia if he wanted ASEAN to support the resistance to Vietnam’s invasion of Cambodia.
In 1985, Dr Goh Keng Swee retired as Singapore’s Deputy Prime Minister. He was invited to be Economic Advisor to the State Council on the development of China’s coastal areas and tourism. China, a huge nation with an ancient history, was willing to learn from a tiny city-state.
Deng Xiaoping kept abreast of developments in Singapore and Southeast Asia. During a tour of southern China in February 1992, he said, “there is good social order in Singapore. They govern the place with discipline. We should draw from their experience, and do even better than them.” Vice Minister of Propaganda Xu Weicheng led a delegation to Singapore for 10 days that same year. Since then, exchanges between Singapore and China have grown. Hundreds of Chinese officials continue to be trained in Singapore. Since 1996, we have trained over 16,000 Chinese officials.
Rebalancing the world
The post-Cold War world is in a state of flux. All countries are transiting to a different global order.
The present unprecedented global economic crisis has resulted from a lack of checks on the many financial products called “derivatives”. There was insufficient oversight in international financial markets as layer upon layer of ever more complex financial instruments spun out of control. The world is suffering the consequences.
A mood for more regulations and control prevails in many economies. This could slide into protectionism. Protectionist measures to protect domestic employment will prolong the economic crisis with unpredictable geopolitical complications.
This crisis will hasten China’s growth vis-à-vis the US. It is growing at 8%; the US may suffer negative or low growth. China has proven itself to be pragmatic, resilient and adaptive. The Chinese have survived severe crises – the Great Leap Forward and the Cultural Revolution – few societies have been so stricken. These are reasons not to be pessimistic.
The relationship between the US and China has already become the most important geopolitical issue of this century. Both countries realise that they need to work with the other. Neither wants conflicts. Both have to reckon with internal pressures from serious problems of growing unemployment.
However, American resilience and creativity should never be underestimated.
As the dominant global power, preserving the status quo is in US interests. As a rising power, China will not acquiesce to a status quo status indefinitely. Competition is inevitable, but conflict is not.
The US and China will both come through the present economic crisis. China is closing in on the lead the US enjoys. Their relations will remain stable, provided the world does not slide into protectionism. Each has to accommodate the core interests of the other.
The world, including East Asia, is not yet “decoupled” from the US. Multi-polarity where different poles are approximately equal in strategic weight is unlikely to emerge because the “poles” are not equal. A global economic recovery is not possible unless the US recovers.
After the crisis, the US is most likely to remain at the top of every key index of national power for decades. It will remain the dominant global player for the next few decades. No major issue concerning international peace and stability can be resolved without US leadership, and no country or grouping can yet replace America as the dominant global power.
Europe can become an economic force. Because its members have not submerged their sovereign interests, the EU cannot be a global strategic actor. This crisis has shown how divergent the national interests of EU members are.
China, the EU, Russia, India will be independent players. China has made beachheads in the Middle East, Africa and Latin America. It will be a global player in another three to four decades. China’s present preoccupations are domestic, and its relationships with the countries of North East and South East Asia.
Russia’s capabilities are limited. It wants to consolidate its influence in its “near abroad”. Japan will be distracted by domestic politics. India is an emerging power, but at present lacks a competitive industrial base. However, it is the dominant power in South Asia.
China will pull ahead of Europe, Japan, India and Russia. US-China relations are setting the framework for East Asia. In the latter 21st century, US-China relations will become the most important bilateral relationship in the world, like the US-USSR relationship during the Cold War.
The US needs support from its European, Japanese and other allies to deal with international issues. The West is less cohesive after the Cold War. On international issues, like climate change, conflicts in the Middle East, proliferation, terrorism, food and energy security, pandemics or promoting Third World development, the US is not assured of unanimous support.
The current financial and economic problems require a global rebalancing of consumption and savings: a change in economic relationships between the US and China. Both must change in their cultural habits and mindsets. The American consumers must spend within their means. The Chinese consumers must increase their domestic spending. This will be a difficult transition.
Globalisation cannot be reversed because the technologies that made globalisation inevitable cannot be uninvented. In fact, better and cheaper transportation and communications will further advance the forces of globalisation. Singapore has to embrace this reality and remain open to talent, capital, technology and immigrants to make up for our low birth rate (total fertility rate of 1.29) with around 35,000 babies each year.
Singapore’s Future
Singaporeans must always be prepared to maximise our opportunities and manage the challenges. In an era of increasing rapid and convenient transportation and communications, political leaders frequently meet each other at bilateral and multilateral summits; and they become comfortable to phone each other through secure lines. Ambassadors do not influence foreign policy so significantly. Sound foreign policy requires a prime minister and a foreign minister who are able to discern future trends in the international political, security and economic environment and position ourselves bilaterally or multilaterally to grasp the opportunities ahead of the others. Able foreign ministry officers and diplomats who give insightful recommendations based on dealing with their counterparts and assessments on the ground can greatly assist the Foreign Minister and his cabinet colleagues towards this end. But ultimately, it is the Prime Minister and other key ministers who decide on changes in policies. At face-to-face meetings over long hours they can sense each other’s thinking and leanings before their officials are privy to them. Hence, our foreign policy from 1965 was settled by the PM and his key ministers. A mediocre PM and cabinet will decline our standing with other countries and we will lose opportunities like the lead we enjoy in Free Trade Agreements or Comprehensive Economic Partnership Agreements with the US, Japan, China, India, South Korea, Australia and New Zealand, and our close relations with the oil states of the Gulf.
ASEAN is now more robust than in 1967. It has been an exception among Third World regional organisations. ASEAN has avoided being bogged down in post-colonial rivalries and tensions, and has focused on development.
Several ASEAN countries are in political transitions, working towards more sustainable and durable systems. Political circumstances will determine ASEAN’s pace of progress. Placed between the giants of China and India, ASEAN countries have to combine their markets to compete and be relevant as a region. There is no other choice. ASEAN is also playing a major role in shaping a wider architecture of cooperation in the Asia-Pacific.
Let me return to the complexities of Singapore’s relations with our neighbours. The events that led to our independence are receding into history. These different complexities are not the result of historical baggage, but of basic differences in political and social systems. Baggage is something we can discard. Political and social systems we cannot change so easily.
Singapore is a multi-racial meritocracy. Our neighbours organise their societies on the supremacy of the indigenous peoples, Bumiputras in Malaysia and Pribumis in Indonesia. Though our neighbours have accepted us as a sovereign and independent nation, they have a tendency to externalise towards us their internal anxieties and angst against their own minorities. This is unlikely to go away.
Time has worn down many of the sharper edges in our relations with our immediate neighbours. A habit of working together in ASEAN has also helped. Singapore is now more established, internationally and regionally. Forty years ago, many did not believe Singapore would survive, let alone prosper.
We have a strong economy, accumulated robust reserves, developed a civil service of integrity and ability, a mature and capable foreign policy team, and institutionalised our systems.
We have strategic relationships with the major powers. We have a credible defence capability. The SAF is an insurance in an uncertain world.
Each successor generation of Singaporeans must build on these assets and work out their solutions to new problems, seize new opportunities and avoid impending disasters in an ever changing world. The perennial challenge is to remain competitive. To be competitive, we must remain a cohesive, multi-racial, multi-religious nation based on meritocracy. We have to strengthen our national consciousness at a time when the forces of globalisation are deconstructing the very notion of nationhood.
All countries face this challenge. A country like America has over 200 years of history to bond its citizens. We have only 40 years. But so long as the succeeding generations of Singaporeans do not forget the fundamentals of our vulnerabilities, and not delude themselves that we can behave as if our neighbours are Europeans or North Americans, and remain alert, cohesive and realistic, Singapore will survive and prosper.

Saturday, April 4, 2009

Quantitative easing could boost some currencies

Business Times - 04 Apr 2009

NEW YORK - Major central banks which have recently ventured into 'quantitative easing', or direct expansion of the money supply, as a way to fire up slumping economies, may yet find the strategy strengthens their currencies unless inflation is allowed to get out of control.

With benchmark interest rates near zero, the Federal Reserve, Bank of England, Swiss National Bank, and Bank of Japan have recently flooded their markets with cash, printing money to buy domestic debt as they try to stimulate lending.

Given the right exit strategy, analysts said this widely-used monetary tool could attract investment flows as their economies return to growth, boosting their currencies.

'So long as investors believe excessive inflation is not being risked by central banks' quantitative easing, increased ...growth prospects can support the currency,' said Michael Metcalfe, head of macro-strategy at State Street in London.

Some investors fear the launch of these unconventional measures may pressure currencies such as the US dollar, sterling, Swiss franc, and yen, with some analysts declaring the Fed move as the death knell for the safe-haven dollar.

Investors are concerned quantitative easing could undermine a currency's value through a rise in money supply which could potentially lead to high inflation. The strategy also raises questions about a government's commitment to keep fiscal budgets under control.

But as central banks like the BoE and Fed have started buying domestic debt, the US dollar and sterling have survived.

The British pound has risen 10 per cent from its lows hit in January. Investors have rewarded the currency for the aggressive stimulus measures by the British government.

In the US dollar's case, the greenback has recovered from sharp losses incurred after the Fed's announcement last month that it would buy US Treasuries.

The US dollar tends to rise in response to bad news because investors view it as the safest store of value at a time when economies around the world are contracting.

John Taylor, chairman of the US$12.5-billion hedge fund FX Concepts in New York, said the perpetual shortage of dollars has made the US currency strong. Despite cash injections by the Fed, banks are still cutting back on lending, he added.

'Even if the Fed is supplying an extra US$10-US$14 billion a week to banks, this is not nearly enough to loosen the financial noose on Main Street or in the global loan market.'

Quant easing starting to bear fruitStill, State Street's Metcalfe said quantitative easing is starting to bear fruit and he cited the rise in cross-border flows into US and UK equities, while their respective bond markets have yet to price in a rise in inflation.

Meanwhile, the case of the SNB and BoJ is a little different and analysts said their quantitative policies should more than likely weaken their currencies. The Swiss central bank, for one, is using extra francs to buy overseas bonds precisely to weaken its currency as it tries to avert deflation.

The BoJ, on the other hand, is in the midst of a second quantitative easing period, which some believe may not be enough to pull Japan out of recession. Subsequent yen weakness would no doubt be welcome in export-oriented Japan.

Historically an expansion of the money supply has often been associated with currency strength, particularly in the United States. Ronald Leven, currency strategist, at Morgan Stanley said US broad money growth tends to be correlated with credit demand and economic growth.

'Quantitative easing may eventually prove to be currency-supportive once it succeeds to jump-start the growth of bank credit,' although it could take time before broad money growth boosts a currency.

Central bank debt purchases and the goal of hastening economic recovery could also bolster a currency through higher interest rate expectations, analysts said.

Both the Fed and BoE have identified a specific part of the yield curve in which government purchases could take place.

In the Fed's case, it buys Treasuries with tenors of two years and higher, while the BoE purchases gilts with maturities of between 5-25 years. Central bank purchases should lower long-term yields but they should also stimulate increased economic growth and raise the prospect of inflation.

In any case, analysts suggested it would take time before quantitative easing spills over to enough money supply growth to raise consumer prices.

'It's a very long chain of events before you actually get inflation,' said Robert Blake, currency strategist at State Street in Boston. What is important, he added, is a central bank's credibility in containing inflation and exiting the strategy if and when they need to.

But until then, Mr Blake said the US dollar will continue to draw safe-haven flows as the world's top reserve currency.

Friday, April 3, 2009

Be afraid of black boxes in US bank bailout

Business Times - 02 Apr 2009

The worrying thing is that very few people seem to know exactly how the banking system is being rescued - and by whom.
IF YOU were to visit the US Federal Reserve's website, you'd find that it currently uses the following means to inject cash into the US economy: the Term Auction Facility (TAF, created on Dec 12, 2007); the Term Securities Lending Facility (TSLF, created on March 11, 2008); the Primary Dealer Credit Facility (PDCF, created on March 16, 2008); the Commercial Paper Funding Facility (CPFF, created on Oct 20, 2008); the Money Market Investor Funding Facility (MMIFF, created on Oct 21, 2008); and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (ABCPMMMFLF, created on Sept 19, 2008).

Most readers would find these names and the acronyms bewildering, and quite rightly so. The explanations of what these are, however, are much worse. Under the ABCPMMMFLF (which has been mercifully shortened to AMLF), for instance, this is what the Fed's website says: 'Eligible borrowers may borrow funds from the AMLF in order to fund the purchase of eligible ABCP from a money market mutual fund (MMMF) under certain conditions. The MMMF must be a fund that qualifies as a money market mutual fund under Securities and Exchange Commission Rule 2a-7 (17 CFR 270.2a-7) issued pursuant to the Investment Company Act of 1940 (Rule 2a-7). See 7.A. for further details on eligible ABCP under the program.'

Note that most of these facilities were created over the past 15 months in response to the collapse in the US banking system to complement the Fed's traditional means of liquidity injections, which was through repurchase agreements, or repos. And, to be honest, an extraordinary crisis probably justified extraordinary measures.

However, maverick but nonetheless respected music-cum-current affairs publication Rolling Stone (RS) believes otherwise. In its April 2 issue, its National Affairs correspondent points out that, at the start of the credit crunch in summer 2007, the Fed started buying repos at an alarming rate - US$33 billion in August, followed by US$48 billion in November. This escalated to US$77 billion during the Bear-Stearns rescue in early 2008 and US$115 billion in May 2008. These figures were readily available from the Fed's weekly reports but, oddly, at the start of 2009 the figure dropped to zero.

The reason, according to RS, is that the Fed has stopped using the transparent repo method and instead has invented the earlier-named instruments like the TAF, TSLF, MMIFF and so forth, all of which no one understands, to deliberately avoid accountability. And the reason it can do so without Congressional oversight is the Auditing and Accounting Act of 1950, which says no one can audit the Fed when it comes to monetary policy matters.

In other words, no one knows how much has been pumped into the US banking system so far and neither does anyone know who has been getting the money. The article mentions a possible US$3 trillion in loans and US$5.7 trillion in guarantees of private investments - and this is on top of the US$700 billion TARP (Toxic Assets Relief Program).

Extraordinary opaqueness

Granted, an extraordinary crisis calls for extraordinary measures. But why extraordinary opaqueness?

If this is a worry even to the most neutral of observers, more disconcerting is the assertion that questions about where the money is going are being actively discouraged by the incumbent administration - the attitude being a condescending 'it's too difficult for you to understand, best to leave it to the experts'.

Here's the clincher: those 'experts' are all ex-investment bankers with close ties to Wall Street - the very people who caused the collapse in the first place and who may be using the present crisis to further enrich themselves.

If these allegations are accurate, it confirms what we have said before in previous columns - namely, that there seems to be an unhealthy urgency within US officialdom to keep Wall Street happy at all costs by avoiding hard measures such as bank nationalisation, and to get credit flowing again as quickly as possible so that people will start borrowing again.

Critics of this approach have pointed out that instead of recognising that a hugely flawed banking system was the source of all the world's problems and therefore needs a complete overhaul, present efforts seek a quick return to that failed system by arguing that it only needs more regulation in order to operate successfully.

RS's revelations suggest otherwise. It alleges that Wall Street insiders have intentionally infiltrated the uppermost ranks of US officialdom and have turned the Fed and Treasury into their own 'black boxes' - opaque and unaccountable to no one for their actions because they and only they understand the complexity of the problem that they helped create.

The conclusion is that America has unknowingly turned over its political and economic future to the very villains that wreaked havoc on the world in the first place, and that Americans should as a result be very worried.

If this is true, then it isn't just every American who should be worried; it's everyone, everywhere else, too.