Made In Singapore Inflation

“A major reason for inflation is the payback for the factors that drove or were associated with the period of high (population) growth in 2005 to 2010.”

‘The cost of a car here is astronomical compared to that in the United States. And the price of a condo in Singapore might soon be more expensive than a similar one in New York. It is becoming very unaffordable even by global standards.’

‘The Government has responsibility here, because the demand and supply imbalance was caused by planning issues. This was created internally because of our rapid population increase. So in housing, or transport, the pressure is to be expected.’

‘Made in Singapore’ inflation

Source: The Straits Times  Apr 27 2012

THE inflation monster can be a tough one to slay. Fortunately for Singapore, government policies have worked to contain cost increases for much of the city state’s history.

Since 1980, there have been only four years in which prices rose by more than 4 per cent on average.

Three of these peaks – in 1980, 1981 and 2008 – were due largely to imported inflation as oil and food prices soared.

The fourth peak was last year, when inflation hit 5.2 per cent. This time though, experts are of the view that a large part of the problem is made right here in Singapore.

What they mean is that rents, and prices of homes, cars and labour are high and look set to stay that way for a while, because demand has outstripped supply. It is a classic case of ‘too much money chasing too few goods’, as economists are wont to say of inflation.

On the ground, there are accounts of businesses and households struggling to cope.

After rents more than doubled at the Irene Nursing Home, managing director Irene Ong felt she had no other choice but to raise rates for new patients by $100 to $1,400 a month, and charge her existing 50 elderly patients $50 more.

It is a similar story at Asia Medic, a Singapore-listed health screening service provider.

In anticipation of having to pay higher salaries, the company raised its prices for basic services, such as radiology tests, at the start of the year.

By the end of this year, it will raise them one more time, says chief operating officer Jonathan Tan.

As salaries of its 60 nurses and other health-care service staff go up, Mr Tan says the medical centre will have no choice but to keep raising prices to its customers if it wants to remain profitable.

‘We have to increase our prices to keep up with inflation. Inflation is usually 2 to 3 per cent, but now it is looking as though it may even hit 6 per cent, quite astonishing. It is almost like putting in additional GST,’ he says.

The high cost of living also makes Singapore less attractive to those who are thinking of taking up jobs here, and even to overseas Singaporeans thinking of returning.

Trader Leon Tham, 29, who is based in New York and back here for a visit, says: ‘The cost of a car here is astronomical compared to that in the United States. And the price of a condo in Singapore might soon be more expensive than a similar one in New York. It is becoming very unaffordable even by global standards.’

How Singapore got here

FROM 2005 to 2010, Singapore’s population swelled rapidly due to large inflows of foreign labour.

Those were also years of strong economic expansion, which in turn propelled increases in real incomes, not just for those at the top but also households in the middle and at the bottom.

From 2006 to last year, Singaporean workers’ real median incomes rose by 13 per cent, or 2.5 per cent every year.

For those in the bottom 20 per cent, real median incomes rose by 11 per cent, or 2.2 per cent each year.

But it now looks like there is a price to pay for that growth spurt, argues Mr Manu Bhaskaran, chief executive at Centennial Asia Advisers.

‘A major reason for inflation is the payback for the factors that drove or were associated with the period of high growth in 2005 to 2010,’ he says.

‘These are the rapid growth of population and corresponding demands placed on the supply side of the economy such as infrastructure, road space, housing, which then drive up prices; excessive growth of foreign workers which has now necessitated restrictions, which are driving up wages and so driving up prices of labour-intensive services; and the overly rapid growth of the car population, which now forces a clawback in certificates of entitlement (COEs) and so forces prices of cars up,’ he adds.

Small and medium-sized enterprises (SMEs) have also complained of rising rents after JTC Corp began divesting its flatted factory space to real estate investment trusts and private developers in 2005.

Ang Mo Kio GRC MP Inderjit Singh says ‘the Government has responsibility here, because the demand and supply imbalance was caused by planning issues’.

He adds: ‘This was created internally because of our rapid population increase. So in housing, or transport, the pressure is to be expected.’

Typically, Singapore has kept inflation in check through the use of its exchange rate.

As a city state, it imports the bulk of its inflation through higher energy prices, or more expensive food items and raw materials. When prices get too high, the Monetary Authority of Singapore (MAS) makes the Singapore dollar strengthen, therefore making imported products relatively cheaper.

The trade-off is that exports become more expensive, which could hurt businesses and slow economic growth.

So far, the fine balance struck between keeping prices stable, without stemming economic growth, has proven successful. Inflation has averaged below 2 per cent in the previous decade, while economic growth averaged 6 per cent.

But things are changing. Singapore is facing a new reality of slower growth and higher inflation.

Last year, inflation hit 5.2 per cent while the economy expanded by 4.9 per cent. If the crystal ball-gazing experts are right, this year will be the second straight one in which price rises exceed the pace of economic growth.

And the gap could widen this year, with inflation as high as 4.5 per cent while economic growth hovers between 1 per cent and 3 per cent.

In the past 30 years, Singapore’s inflation has exceeded the pace of economic growth only six times. For four of those six times – 1985, 1998, 2001 and 2009 – Singapore was in an economic recession, and inflation was low.

What has caused the change? One factor is monetary policy in Western developed countries. They are keeping interest rates near zero in order to boost their anaemic economies, causing a raft of foreign money to flow to this part of the world and pushing up asset prices, especially in the property market.

This changed environment calls into question the effectiveness of Singapore’s use of the exchange rate as an inflation-fighting tool, going forward. Some economists have pointed out that the exchange rate policy was not designed for the prolonged low interest rate environment that Singapore is in now.

It could be Singapore’s most serious macro-economic stability issue since the 1970s, when inflation was highly volatile, they say.

Singapore moved to an exchange rate monetary policy regime formally in 1981, the last time inflation averaged 8.5 per cent.

What do these changes mean for Singaporeans?

Mr Inderjit Singh is worried about the impact of current high prices and slower growth on middle- and lower-income groups.

Their wages are not increasing by the same amount as prices, he observes, ‘so every year, their purchasing power is declining’.

‘We are going through a very tough time. It is not a good sign. We have to show that when you work hard, you can afford good housing, a better quality of life,’ he adds.

Bank of America Merrill Lynch economist Chua Hak Bin warns that Singapore may be ‘losing its low inflation reputation’.

It is part of the MAS’ mandate to ensure price stability, he notes.

‘With inflation at 5 per cent, there is the danger of inflation expectations becoming persistently high. So workers and unions demand higher wage increases, regardless of productivity increases, and as a result, it compounds a wage-price spiral. That is the kind of vicious circle that central banks try to avoid.’

What can be done

ONE suggestion that has been making the rounds is for Singapore to adopt an interest rate regime for its monetary policy instead of the current exchange rate.

There is merit to that argument.

As Singapore manages its exchange rate, it allows market forces to move interest rates. This has resulted in interest rates here following that of the United States.

The US has kept interest rates at near zero in order to boost liquidity and get its economy out of the current rut. As a result, the Singapore Interbank Offered Rate (Sibor), a commonly used benchmark rate for home loans, has hovered near an all-time low of 0.4 per cent.

Raising interest rates here would effectively cool the property market, as loans would become much more expensive.

Holland-Bukit Timah GRC MP Liang Eng Hwa, who is deputy chairman of the Government Parliamentary Committee for Finance, Trade and Industry, says: ‘A strong Singdollar actually helps to fuel domestic inflation, because it attracts capital, and pushes up asset prices further. I’m not convinced that we can tackle domestic inflation without using interest rates.’

But Citigroup economist Kit Wei Zheng disagrees, saying the interest rate solution sounds better than it really is.

‘Interest rates can be effective in bringing down property price issues, but there are a lot more objectives than just bringing down property prices. CPI and GDP are still much more sensitive to exchange rates. So while the exchange rate may have lost some of its potency, it is still relevant.’

Mr Kit also wonders: ‘Had the exchange rate not been allowed to strengthen, would inflation be even higher now?’

Those in his camp have argued that the current low global interest rate environment will not last indefinitely.

At some stage, the advanced economies will recover and the major central banks will raise interest rates again. Singapore’s interest rates will then also rise, and mortgage loans will become more expensive. The current distortions will then be less of an issue.

Also, the structure of the economy has not changed fundamentally such that interest rate is now more important than the exchange rate when firms and households make their saving, spending, and investment decisions.

Mr Yeoh Lam Keong, vice-president of the Economic Society of Singapore, has a more radical idea.

He says that what Singapore might need is a bout of slow growth to ease the tightness in the labour market. Singapore’s unemployment rate is currently at a 14-year low of 2 per cent.

Mr Yeoh says: ‘Singapore appears to be caught in a classic wage-price spiral. And the classic policy recommendation is to raise the unemployment rate, above the inflationary unemployment rate, and that means a period of sub-par growth and could even mean a slip into recession.’

But it seems unlikely at this stage that the Government will overhaul its monetary policy regime, or take the politically unpalatable option of allowing unemployment to shoot up.

What is more likely is for the Government to ramp up supply where it can, so as to catch up with demand, and use targeted anti-inflationary tools, known as macro-prudential measures, to cool demand in specific sectors.

It is already doing so in housing. Since last year, it has ramped up its public housing building programme.

It has also rolled out several cooling measures, including a 10 per cent additional buyers’ stamp duty for foreigners buying homes.

And it is releasing more land for factory space, with the aim of moderating industrial rents.

However, when it comes to cars and manpower, supply-boosting measures are unlikely.

Singapore is in the midst of restructuring its economy to reduce its reliance on foreign labour. As measures to slow the inflow of foreign workers take effect, wages will go up. But productivity improvements that enable companies to produce more with fewer workers may take time to put in place.

This process will feed inflation but the Government is unlikely to reverse it for that reason.

Similarly for cars. To fight congestion, a decision has been taken to reduce the annual rate of growth of the vehicle population from 1.5 per cent to 0.5 per cent from August.

That could see COE prices – already at a 20-year high – soar past $100,000 in the next few months, warns Dr Chua.

Given current levels of inflation, he believes the Government should consider spreading out the reduction over a longer period.

‘Then at least some of the sharp increases we have seen in private transport hopefully won’t continue to spike upwards,’ he says.

Dr Chua also suggests that the Government consider relaxing its stance on how long an owner must occupy a Housing Board flat before renting it out.

‘Perversely some of the property measures in December may have contributed to foreigners stepping away from buying property, and supporting rental demand. That may mean rents will continue to face upward pressure,’ he says.

Mr Singh suggests that the Government come up with an inflation relief package to help Singaporeans offset the increase in prices.

Nominated MP Tan Su Shan is calling for more inflation-linked bonds in which retail investors can put their savings, to beat inflation without taking on too much risk.

Most experts predict that the rebalance in supply and demand will only come two to three years down the road. In other words, there could be some economic pain ahead before the country sees some relief from rising costs and prices.

‘The Government knows what to do to make things comfortable,’ Mr Singh says, adding: ‘Unfortunately it cannot happen overnight.’

Additional reporting by Matthias Chew


“A major reason for inflation is the payback for the factors that drove or were associated with the period of high growth in 2005 to 2010.”

Mr Manu Bhaskaran, economist and CEO of Centennial Asia Advisers


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