Former Ministry of Finance Director Dismisses Forbes Article

A stinging commentary in Forbes about Singapore’s march towards an Iceland-like economic meltdown is making the rounds online. Here, academic Donald Low digs into the article dismissing its main thesis but saying there are some valid points that the government should not ignore.

You have dismissed the Forbes piece in your Facebook post. Why so?

It’s far too sweeping and alarmist. If we look at the usual triggers of financial crises, they are mostly non-existent in Singapore. We don’t have a large current account deficit – on the contrary, we have a huge current account surplus. We don’t have a large fiscal deficit – we run structural surpluses. And we don’t have a highly leveraged or indebted household or corporate sector.

On the point about a housing bubble in Singapore fuelled by low interest rates, the Forbes commentary is partially correct – house prices have indeed risen partly because of historically low interest rates. But to claim that we are on the verge of financial collapse on account of that is utter nonsense. Our leverage ratios are still healthy and I suspect a large part of the run-up in housing prices in recent years is inadequate supply – a problem which has now been largely corrected.

Will we see house prices fall this year? Yes, quite possibly. My guess is by 10 per cent but even if house prices were to fall by 20 per cent, I don’t think it will impact the health of our banks or our households. Some households will have negative equity, but as long as they have the cash flow to service their mortgages, it will not precipitate a financial crash.

Are there any points in the Forbes comment you agree with?

There is one argument from the article that is worth highlighting and which I mostly agree with. And that is booms which are led by real estate development and the financial sector are mostly illusory. They create the impression of economic dynamism without creating any real productive capacity in the economy (think back to Bangkok, KL and Jakarta just before the Asian crisis). They also distort and re-direct resources away from productive activities. Real estate and finance are inherently distributive, not creative, activities – they move money and wealth around, but they don’t lead to any productive capacity and technological capabilities for the economy.

I have argued that the Singapore government should look not just at the quantity of growth, but also the quality of growth. I have in mind not just equity and distributional considerations, but also the composition of growth. Is the growth coming from manufacturing and high value-added services, or is it dominated by real estate and finance? If it’s the latter, we have a structural problem.

What is the likely impact of the government policy that depends on housing and rich foreigners to pump up growth?

I’m quite concerned about the efforts to attract high net worth individuals to Singapore, to make Singapore a wealth management hub for the rich, and to bring in more billionaires even if they increase inequality. Such efforts were building up rapidly just before the 2008 crash. In a sense, the crisis couldn’t have occurred at a better time for Singapore because it corrected a lot of our obsession with growing as fast as we could when the conditions were favorable.

The idea that we should grow as much as we can – never mind the source of that growth or the quality of that growth – is quite misguided and myopic. Relying on inflows of foreign monies to finance real estate domestically is often a recipe for financial disaster. I think our regulators in MAS understand this very well, but sometimes the rhetoric of policy makers in other parts of government create the impression that such a boom is desirable.

Financial crises are always preceded by a period in which people generally subscribe to “stories” that “this time it’s different”. During the bubble, the story was that information technologies have fundamentally transformed the economy and we can expect permanent higher growth rates and asset prices. In the run-up to the US financial crisis, there was a widespread belief that house prices will not fall, that financial innovation has spread risks and reduced the likelihood of financial crises, and that financial liberalisation is an unambiguously good thing. Such stories led to very high levels of leverage, imprudent lending and borrowing, and in some instances, outright fraud and criminality on the part of banks.

So I think the costs to the economy and society of relying on asset price inflation and rich people to raise our growth rates far outweigh their benefits. What productive capacity do property speculators and high net worth individuals who park their monies in Singapore help to create? So yes, we get a wealth management industry that employs a few thousand people and manages several billion dollars. We can do without these benefits.

Meanwhile, their costs in terms of raising property prices, increasing the risks of financial crashes, the competition they create for positional goods, and their ostentatious lifestyles undermine our egalitarian norms and values. They also reduce the trust and mutual regard citizens have for one another, undermining their willingness to contribute to a more equal society. All in, I would say that the efforts to attract rich foreigners (and their monies) to Singapore are quite ill-advised.

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