Global economic recovery from pandemic entering critical period

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SINGAPORE – The global economic recovery from the Covid-19 pandemic is heading into a critical period as nations balance the need to prop up consumers and businesses against the threat of unmanageable debt, Singapore’s central bank chief said.

“The world is now entering a phase where the crisis is long, drawn-out, the peak of the crisis is behind us, but we’re not in full recovery,” Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), told Bloomberg.

“In this undefined twilight zone of sorts, what is the appropriate policy mix?” Mr Menon said. “Fiscal policy would have to start unwinding, but gradually,” while monetary policy makers must recognize that extraordinary measures can’t continue indefinitely.

Governments worldwide have pumped trillions of dollars into their economies, with that fiscal support taking the lead in combating the effects of the pandemic and winning the backing of multilateral institutions like the International Monetary Fund that usually are more cautious about debt. Meanwhile, central bankers have kept interest rates near record lows and have tinkered with unconventional tools.

If officials don’t start the process now of fine-tuning their stimulus, they risk seeing a destabilizing “fiscal-cliff effect” later if support has to be withdrawn all at once, Mr Menon said in a separate interview with Bloomberg Television’s Haslinda Amin.

Under pressure

As virus outbreaks worsen, in the US and across Europe, officials are under pressure to pump in more aid, even as some earlier stimulus may still be making its way to the intended targets and as long-term debt worries linger.

“If you unwind too rapidly, that will harm the recovery,” Mr Menon said. “But if you stay on current levels of support – be it monetary or fiscal – that will create its own problems, the most prominent being debt accumulation.”

Monetary policy makers have been playing a “very accommodative and complementary role” to governments, he said, providing ample liquidity and in some cases buying up government debt in addition to keeping rates low.

Mr Menon echoed Prime Minister Lee Hsien Loong’s recent comments on the likely need to maintain Singapore’s fiscal policy support into next year, which could mean a fiscal endures. The policy mix will then need to evolve into areas that enhance growth, Menon said, including digitization and infrastructure.

2022 horizon

“That’s one way to give confidence to the markets, that you’re not just pumping stimulus into the economy and borrowing to fund it. You’re also spending to help restructure the economy,” Mr Menon said.

It could take until 2022 before economies return to their pre-pandemic levels, he added.

Singapore’s economic contraction eased to 5.8 per cent year-on-year in the third quarter after a 13.3 per cent decline in the previous three months. The information and communications and finance and insurance sectors strengthened further, helping to offset some of the pain in aviation, tourism and retail.

The government sees the economy shrinking 6 to 6.5 per cent this year before rebounding to 4 to 6 per cent growth in 2021, according to estimates released on Monday (Nov 23).

Digital bank plan

MAS, which is also Singapore’s financial regulator, will stick with its plans to award digital banking licences by the end of the year, undeterred by tightening scrutiny in China and the US that’s hitting major Chinese applicants.

“Regulatory tightening that’s happening in China will not have an impact on the digital banks here,” said Mr Menon. “It’s not our job to try to guess what the geopolitical situation might be like, what actions might be taken by other countries with respect to some of these entities.”

The permits are much coveted by Chinese firms and others, given the city’s status as a regional financial hub and rapidly growing wealth management center. Billionaire Jack Ma’s Ant Group, among high-profile candidates vying for the permits, shelved its initial public offering after a clampdown and higher capital requirements imposed by Chinese regulators.

Bytedance, whose joint venture is another contender, has been hit by the US government’s order to sell its TikTok video app.

Other Chinese firms vying for the licenses include a consortium led by Zall Smart Commerce Group, and a bid involving mobile phone maker Xiaomi and Hong Kong financial firm AMTD Group.

Singapore has its own requirements for digital bank licences that include the ability to provide good services with appropriate risk management, as well as a smooth exit strategy, Menon said, without confirming the identities of any applicants.

‘Different place’

The MAS is taking a progressive approach in regulating such firms, such as by restricting their ability to take deposits initially, before giving them permission to operate more freely once they prove profitability over time, Mr Menon said.

“China started from a different place – initially it did not regulate many of these fintech entities to the full extent,” he said. “And now the authorities are converging to the same position as most of the rest of the world. I think that’s the right thing to do, and it creates a level playing field.”

Asked whether government relationships would play a role in the regulator’s decision making on digital bank licenses, Mr Menon ruled out any favouritism and said it is “strictly merit-based.”

“We will not penalize banks from any country because of sanctions it might be under,” he said. “We also don’t give favourable treatment to banks from any country on account of good relations.”

Earlier this year, the MAS postponed its plan to award digital-banking permits to non-banks from June due to the global Covid-19 outbreak.

Now, the virus is accelerating the switch to digital banking. Mr Menon said the number of brick-and-mortar bank branches and office space may become smaller over time, with their role changing from one focused on processing daily transactions to things like advisory services on investments.

“The digitalization agenda has been given a real shot in the arm by Covid-19, and some of this change is really permanent,” he said. “Face-to-face interactions will be based on much higher-value activities and transactions.”

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