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Good morning and thank you for joining us in person for the release of the MAS Annual Report. This year, I will focus my remarks on inflation.
I will cover four themes on inflation, both globally and in Singapore.
I will then briefly touch on three issues which MAS will cover in depth in the coming weeks and months:
Before I close, I will briefly report MAS’ financial performance. Let me begin with inflation. It is important to understand the nature of the inflation problem the world is dealing with. INFLATION DRIVEN BY BOTH SUPPLY AND DEMAND FACTORS We are seeing a surge in inflation globally because a robust demand recovery post-COVID has run into supply-side frictions and, more recently, war-related disruptions. Even before Russia attacked Ukraine, inflation was beginning to rise.
The key source of inflation pressures now in most advanced economies is labour market tightness.
Globally, economic growth is slowing but remains intact.
Demand-pull price pressures have been accentuated by a variety of supply-side disruptions, worsening inflation.
The most significant supply shock has, of course, been the Russia-Ukraine war.
The disruption of Russian oil and gas supplies to Europe is pushing up energy prices worldwide.
The disruption of grain exports from Russia and Ukraine is having knock-on price effects across the food production chain.
The disruption of commodity supplies is adding to cost pressures across a range of industrial activities.
In short, the Russia-Ukraine war has sharply worsened the outlook for global inflation.
The inflation story in Singapore is not too different from the global story.
The growth momentum has slowed this year but the economy remains on track to come in within the lower half of the 3-5% GDP growth forecast.
The labour market has tightened and wage growth is running ahead of productivity gains.
Imported inflation reflecting supply disruptions caused by the Russia-Ukraine war has significantly added to price pressures.
The combination of domestic and external factors has led to a significant rise in inflation in Singapore.
Inflation is expected to get worse before it gets better.
This inflation outlook is not without upside risks.
TAMING INFLATION MEANS SLOWER ECONOMIC GROWTH The outlook for a gentle easing of inflationary pressures globally is also premised on strong monetary policy actions by central banks.
The central banks of the major economies have been tightening monetary policy.
Global economic growth in 2023 is likely to be slower.
A good scenario would be what policymakers and analysts call a “soft landing”, where growth slows down sufficiently to reduce inflation but the economy avoids recession.
A bad scenario is a deeper recession in some of the major economies even as inflation is brought down: a so-called “hard landing”.
An ugly scenario would be one where growth stagnates while inflation remains high – stagflation.
Economic growth in Singapore is expected to moderate further in 2023 in tandem with the slowdown in our major trading partners.
MULTI-PRONGED APPROACH TO INFLATION Dealing effectively with inflation requires a multi-pronged approach.
First, monetary policy to directly dampen inflation. Singapore’s monetary policy is centred on managing the exchange rate of the Singapore Dollar.
MAS has been proactive in tightening monetary policy in response to rising inflationary pressures, tightening policy four times in the last nine months.
The appreciation of the exchange rate to-date has begun to restrain inflation.
The effects of MAS’ four monetary policy tightening moves are still working their way through the economy and will continue to dampen inflation over the next 12 months.
But monetary policy should be applied in a balanced and calibrated manner and not seek to completely offset inflation.
This brings us to the second component of Singapore’s approach to inflation: fiscal support to help vulnerable groups cope with price increases. The government has stepped in forcefully to support vulnerable groups who are less able to bear the sharp price increases.
The government has been careful that fiscal support does not add stimulus to the economy that could exacerbate inflationary pressures.
The government has given the assurance that if the inflation situation worsens significantly, it will be prepared to do more. The third component of an integrated approach to inflation control entails sound labour market adjustments to prevent inflation becoming entrenched. These include:
The ongoing expansion in labour supply should provide some relief to labour market tightness.
The risk of a wage-price spiral is contained for now but bears watching.
MANAGING DEBT AMID RISING INTEREST RATES One of the key challenges posed by the combination of rising prices and rising interest rates is the burden imposed on debt servicing.
Interest rates in Singapore have risen, alongside the pick-up in US interest rates.
MAS is closely monitoring any systemic risk to the financial system arising from debt related stresses in the corporate and household sectors.
Corporates in Singapore continue to manage debt-related risks with sufficient liquidity holdings built up on post-COVID earnings recovery.
For households, the measures put in place by MAS over the years have helped to ensure prudent borrowing.
The household debt situation in Singapore remains generally healthy.
But there will be a small segment of households which may be more constrained by rising interest rates. A variety of options are available to such vulnerable borrowers.
As global and domestic interest rates continue to rise, corporates and households should exercise utmost caution in taking on new financial commitments.
DEVELOPMENTS IN THE CRYPTO ECOSYSTEM Let me now say a few words about the implications of the current turmoil and volatility in the global crypto industry. Some crypto players that have come under strain have been reported by the media as being “Singapore-based”. In reality, these so-called “Singapore-based” crypto firms have little to do with crypto-related regulation in Singapore.
MAS and relevant government agencies will take firm enforcement action if any entity is found to be conducting illegal activities or performing regulated activities without a licence. The crypto industry globally is still evolving and regulation is still catching up with industry trends.
But the key lesson from the upheaval in the global crypto industry is clear: investing in cryptocurrencies is highly risky.
Next month, we will organise a dedicated Green Shoots seminar to share our strategies to develop Singapore as digital asset hub.
FINANCIAL SECTOR PERFORMANCE AND STRATEGIES Let me now turn to the financial sector, which continued to perform well in 2021.
The global financial landscape has continued to transform.
MAS has refreshed the Financial Services Industry Transformation Map (ITM) for the period 2021-25, based on this study and extensive consultations with the industry.
POSITIONING THE FINANCIAL SECTOR FOR SUSTAINABILITY MAS will release next week its annual sustainability report detailing the progress made by the Singapore financial sector in the journey towards greater sustainability.
MAS’ FINANCIAL RESULTS Let me now provide an update on MAS’ financial results. MAS recorded an overall loss of S$7.4 billion for FY 2021/22.
Investment gains on the Official Foreign Reserves were S$4.0 billion.
The appreciation of the Singapore Dollar led to a negative foreign exchange translation effect of S$8.7 billion.
Total expenditure increased to S$2.8 billion, due mainly to higher interest expenses on domestic money market operations. CONCLUSION In conclusion, let me return to where I started – inflation. The current bout of inflation will eventually end. Question is: how long will it take and how much will the economy have to slow down. Taming inflation is like trying to slow down a speeding car on a gentle slope. It takes a combination of forcefulness and calibration.
Which is why we are not going to say anything about what we might or might not do in October!