Singapore says emerging nations would welcome normal Fed

Emerging economies would benefit from more normal monetary policies globally including rate increases and an end to asset purchases sooner rather than later, given the side effects of the unconventional measures, Singapore’s central bank said.

Most of the city state’s emerging-market counterparts say more normal monetary policy is welcome, if it is done in a “calibrated, clear and orderly fashion,” Monetary Authority of Singapore Managing Director Ravi Menon told Central Banking Journal in an interview published Aug. 10.

“The next big test will be the timeline for the raising of interest rates. The sooner we see a normalization of monetary conditions globally, the better for us here in Asia and in emerging economies,” Menon said. “The spill-over effects of unconventional monetary policies are not insignificant -- volatility in capital flows, pressures in asset markets, a general increase in financial stability risks and a flattening of the yield curve that distorts investment decisions – these are not trivial consequences.”

U.S. policy makers have tapered monthly bond buying to US$25 billion ($31.2 billion) in their sixth consecutive US$10 billion ($12.5 billion) cut, staying on pace to end the purchase program in October. Federal Reserve officials led by Chair Janet Yellen are stepping up a debate over when to raise interest rates for the first time since 2006 as unemployment falls faster than expected and inflation picks up toward their 2% goal.

Potential capital outflows from Indonesia because of the Fed reducing stimulus are expected to be moderate, Bank Indonesia Governor Agus Martowardojo told Bloomberg last month. Malaysia has withstood volatility from Fed policy changes and there was no disruption to credit flows, Bank Negara Malaysia Governor Zeti Akhtar Aziz said in an April interview.

Danamon Deal

When asked about a decision by Singapore’s biggest lender, DBS Group Holdings Ltd., to end a bid to buy PT Bank Danamon Indonesia last year after failing to win regulatory approval for a majority stake, Menon said reciprocal regulatory arrangements between the countries “was an issue.”

“We are fairly liberal in allowing foreign banks to operate in Singapore to carry out offshore and wholesale business, but are more selective in our admission criteria when it comes to taking retail deposits,” he said. “In a small country with many foreign banks operating as branches, we have little protection if something went wrong.”

While there is a perception that financial centers like Singapore, Switzerland, Luxembourg and Hong Kong are likely to gain as anti-money laundering and tax avoidance rules are tightened in the European Union, “that is not true,” said Menon.

“The European share of private banking assets in Singapore has been relatively stable, despite stories you sometimes hear about funds being diverted to Asia,” he said.