It's Not a Bubble until it's officially denied, Singapore Edition

There must be an unwritten rule in the shadowy world of central banking that demands that dangerous, society-threatening economic bubbles must be denied and covered up at all costs. I’ve experienced this phenomenon indirectly when I was warning about the U.S. housing and credit bubble in 2005 at the same time that Ben Bernanke denied its existence (which was a few days before he was nominated as Fed Chairman).

In the past few months, I have experienced central bank bubble denials firsthand when the central banks of Malaysia and the Philippines vehemently denied my warnings about economic bubbles that are inflating in their countries. As of this week, I can now add a third central bank bubble denial to my experience repertoire: the Monetary Authority of Singapore or MAS.

This latest central bank bubble denial was a reaction to a detailed report that I published on Monday in which I claimed that Singapore was experiencing an economic bubble that is reminiscent of Iceland’s bubble that led to its financial crisis in 2007 and 2008. This report proceeded to go viral, and received over 650,000 views and 17,000 shares via social media. Though I stated that the two countries’ bubbles were not identical in every technical sense (like snowflakes, no two bubbles are the same), I explained their worrisome parallels: both are or were finance and real estate-driven island economies that are or were widely heralded as safe-havens while an underlying credit bubble inflated and created an illusion of prosperity.

To summarize my argument, I claimed that Singapore is part of a larger bubble that has been inflating in emerging market nations since the Global Financial Crisis. I explained that Singapore is Southeast Asia’s financial center, and that neighboring Indonesia, Malaysia, Thailand and the Philippines are experiencing economic bubbles of their own that are boosting the fortunes of Singapore’s financial sector.

In addition, I showed that Singapore’s benchmark interest rate is tied to the U.S. Fed Funds Rate, which has been held at virtually zero percent since the financial crisis. While this zero interest rate policy, or ZIRP, is intended to boost the depressed U.S. economy, it is far too low for a fast-growing, inflation-prone economy like Singapore’s. As a result of these inappropriately low rates, a classic credit bubble has been ballooning: loans to Singapore’s private sector have soared by 133 percent since 2010, and the country’s household debt to GDP ratio has increased from 45 percent in 2005, to 55 percent in 2010, to approximately 75 percent in 2013. Singapore’s ultra low interest rate has also inflated a property bubble as prices jumped by 60 percent since 2009, making it the world’s third most overvalued property market.

I claimed that Singapore’s construction and financial sectors were growing rapidly due to the country’s low interest rate environment, and I showed that these sectors were the primary drivers of economic growth and job creation in recent years. I saw the same trends unfolding in the U.S. economy during our bubble, which is what spurred me to warn about it.

I will now address the rebuttals that have been put forth by the Monetary Authority of Singapore:

“Serious observers and investors are not in doubt about the country’s financial health.”

Ben Bernanke and the legions of other economists in global central banks and investments firms are considered “serious observers”, and the vast majority of them were also “not in doubt” about the financial health of the U.S., Ireland, Iceland, and similar hard-hit countries during the heyday of the mid-2000s bubble.

The MAS said the government has “taken decisive steps to cool property demand and prevent excessive leverage”.

As I’ve stated in my report, Singapore’s property bubble cooling measures have only slowed the rate of the bubble’s inflation, but do nothing to truly unwind the damage that has already been done, from sky-high property prices to the already-inflated bubble in mortgages and household debt. These cooling measures are ineffective because they simply do not address the primary cause of Singapore’s bubble problems: abnormally low interest rates. Also, my bubble warning did not focus solely on Singapore’s property bubble, as it explored numerous areas of risk and imbalance.

Household balance sheets are on the whole strong and property asset values are significantly higher than the debts incurred.

The MAS explained that “the average loan-to-value ratio of outstanding housing loans stands at a healthy 47 per cent as of Q3 2013, implying a large buffer in asset values”.

After rising by 60 percent since 2009, Singapore’s housing market is now 57 percent overvalued versus its long-term average. With such an inflated property market, homeowners will need every bit of buffer they can get. Also, household balance sheets are typically strongest in a low interest rate and high asset price environment; the time to worry is when interest rates rise and asset prices fall.

The MAS said Singapore’s financial system is robust, citing a recent assessment program by the International Monetary Fund that showed Singapore’s financial system would remain sound even under severe stress scenarios which include a sharp increase in interest rates – together – with a steep decline in property prices.

The MAS said Singapore’s banks are resilient, with strong financial and capital positions.

The MAS said Singapore’s triple-A rating from all the major rating agencies is not an aberration and that it attests to the country’s economic and financial strength, including its sizeable foreign reserves.

The IMF is not factoring in the risk of a bubble-induced bust in the ASEAN region, let alone a crisis that includes China and East Asia. Let’s not forget the fact that the IMF – like the U.S. Federal Reserve – completely missed the warning signs that led up to the Global Financial Crisis as well. The IMF and similar institutions have very little credibility when it comes to spotting and preventing economic bubbles.

In my experience of warning about bubbles in individual countries, I have noticed a common critical thinking error rear its ugly head time and time again: looking at a country’s economy in isolation without considering regional or global risks. In Singapore’s case, bubble deniers and apologists have not addressed the risks posed by the bubbles or frothy conditions in neighboring Indonesia, Malaysia and the Philippines.

To make matters worse, Singapore bubble deniers are not factoring in the severe risks posed by China’s massive bubble economy. Here are a few statisitcs that show how big of a risk China’s bubble has become:

China’s total domestic credit more than doubled to $23 trillion from $9 trillion in 2008, which is equivalent to adding the entire U.S. commercial banking sector.
Borrowing has risen as a share of China’s national income to more than 200 percent, from 135 percent in 2008.
China’s credit growth rate is now faster than Japan’s before its 1990 bust and America’s before 2008, with half of that growth in the shadow-banking sector.

Why do bubbles in the rest of Asia matter to Singapore’s economy? For starters, China, Hong Kong, Malaysia, and Indonesia combined account for nearly two-thirds of Singapore’s export market. In addition, a full 70 percent of assets managed in Singapore were invested in Asia in 2013, which is up from 60 percent in 2012. There are countless other ways that Singapore is exposed to risks in other Asian economies, such as the fact that the country’s new casinos and resorts rely heavily upon the free-spending ways of Chinese high-rollers. It is important to remember that wealthy Japanese – during their 1980s economic bubble – had a similar reputation for free-spending that wealthy Chinese do today.

On another note, I want to re-emphasize that I am not necessarily calling for an immediate popping of Singapore’s bubble. As I stated in my report, the U.S. Federal Reserve may maintain its zero interest rate policy until as late as 2017, which means that Singapore’s interest rate will also stay at virtually zero for the same length of time. While this means that the ultimate popping of Singapore’s bubble may be a few years away, it also means that the city-state’s asset and credit bubbles are likely to grow even larger and more threatening than they currently are, all while they are helping to foster an illusion of prosperity.

The bottom line is that Singapore authorities’ bubble denials do not help the country’s citizens any more than Ben Bernanke’s 2005 bubble denial helped Americans.

Source: Forbes 16th January 2014

PROPERTY LAUNCHES & INVESTMENTS

Property Launches & Investments

It's Not a Bubble until it's officially denied, Singapore Edition

Comments

Leave your comment