Happy Scribe Logo


Proofread by 0 readers

It's the 16th of July, and you were listening to Coffee Time, a podcast series on markets and economies from DBS Group research here in Singapore, and they were bank chief economist welcoming you to our twenty second episode. Our guest today is Dr Curreri, chief economist of Ambros. If you expand that, that would be ASEAN plus three macro economic research offers a veteran economist and central banker. Dr Kau began his career in 1981 at the IMF. He was there on various capacities all the way until nineteen ninety six, after which he came back to his native Singapore to join him as the monetary authority of Singapore.


There, Doctor Core served as the assistant managing director from 2001 to 2009, and then he went back to the IMF stay till 2016, at which point he returned to Singapore as the current avatar of chief economist Amro dockworker. Welcome to Capitate. Thank you very much for inviting me to this podcast. It's our pleasure. We will begin with the genesis of Ambros. I understand it was set up about a decade or so ago. Walk us through who and for what purposes.


Did anyone get set up? Yeah. So it was set up in 2009 after the global financial crisis. Basically, the finance minister of ASEAN plus three countries, meaning the 10 ASEAN countries, together with China, Japan and Korea, agreed to establish an independent regional surveillance unit to promote objective economic surveillance. So in 2011, it was formally established as a company in Singapore. And then you became an international organisation in 2016. So as I mentioned, the objective of the MRO is basically to conduct macroeconomic surveillance of the countries in the region and also to support the CMM, which is the Jamai initiative on intellectualization.


This is a financing facility that was set up to provide financing support to the countries in the region in case they get hit by liquidity shocks. Very good. On the record in this region, including in Singapore, we have various other multilateral organizations ranging from the IMF to ADB as well as the World Bank, and this season based in Kuala Lumpur, some of them are engaged in providing financing and guarantees. Some of them engage in capacity building, and the others do carry out advice to country authorities.


Help us understand how Amarula is differentiated. Well, let me start with the World Bank and ADB. Those are multilateral development banks. So they basically provide financing for projects. They do research, but they don't really conduct surveillance of countries. Then you have the CSA, which is a training center set up by the regional central bank to provide training for the staff. So, again, it's quite different. They don't do surveillance. The one that's most similar to Amaroo will be the IMF regional office, which they have an office here in Singapore which conduct surveillance on Singapore and Singapore and Malaysia.


But, you know, IMF, the headquarters in D.C. and they are a global organization with 189 member countries. And their mandate is much broader, which is basically to safeguard the stability of the international monetary system here. Our mandate is much more narrow, is more regional. We are supposed to promote financial stability within the region by conducting macroeconomic surveillance. Very good. Makes sense, since stability is the core of your business, so let's start there in terms of our deep dive into the regional outlook, share with us your regional macro economic views.


I would not ask you to go through the slog of every single member country that you have, but perhaps if we could touch on the pandemic response and protecting livelihoods that has been carried out by China, Indonesia, Singapore and Vietnam. Yeah, OK, so let me start with the region as a whole. It's a very diverse group of countries ranging from a bonds economy to emerging markets and then to developing countries. So you can expect that the performance in terms of dealing with a pandemic would vary across the region.


But by and large, the region has been done really well, I think, in containing the epidemic, the infection. So the total number of cases in the region is over 300000 compared with the global total of thirteen point three billion. Right. And the death toll has been quite low also in the region and within the region. Most of the countries have already emerged from the lock down, but some countries are still struggling to threaten the cost and contain the infection rate.


Those two are Indonesia and the Philippines. Like you mentioned, those four countries, the very diverse China, as we all know, is the first one that got hit by the infection. And they have done a spectacular job in containing the infection. There have been outbreaks here and there, but pretty much is under control. And so because of that, they've been able to open up much more fully. You know, and really, I think production has bounced back above the poverty level.


Right. Except for services sector, which is still struggling a bit. But in a good segment, manufacturing particular group has been bounced back up. And just today, I think they announced that GDP growth for China of three point two percent, which is well above expectation Singapore. And because of that, they have not had to enact a pretty large stimulus package to support the economy. Obviously, you know, they recently come up and. Provide support for the Sunni sector, you know, and also they realize the external demand might be a bit weak.


So they have also decided to provide more infrastructure financing to stimulate domestic demand is pretty modest. The economic package that they have come up with, Singapore, as you know, was hit by a second wave. And unfortunately, Singapore is a very large foreign workers population. And because of because of that and and the point, workers live in dormitories and, you know, very close to have fiscal distancing. So once they get the dormitories, gating factor is very hard to contain.


So as a result, the infection rate, you know, is very high for a long time. And Singapore had to lock down the economy a second time and it was very costly, but not the only dormitories to prevent the virus from infecting and spreading beyond the dormitories to infect the rest of the community. And that has been quite successful. So they bring down the infection rate now to the low double digit, usually between 10 to 20 and some days in the single digits.


So Singapore has also started to open up, you know, and but the dormitories would take a little bit more time to open up. But this long period is very costly for Singapore. And they had a stimulus package of almost 20 percent of GDP. But fortunately for Singapore, they have a lot of fiscal savings built up over the years and they are able to draw down the fiscal savings to finance the deficit. Indonesia, I just mentioned, still struggling to bring the infection rate down.


Why is the sprawling archipelago and maybe that's why it's harder to contain the infection, but they are also struggling and yet started opening up. And you saw in Jakarta, they seem to have brought the inflation threat to curb inflation. The infection rate is slowly coming down, but other parts of Indonesia are still quite high. But even so, I think the total number is quite low by group, by, you know, if you compare to other countries in the world.


So we are hopeful that, you know, in a few more weeks, we begin to see the infection rate coming down for Indonesia. But Indonesia has also enacted a relatively large stimulus package to support the economy through this difficult period. And they have had to pass the fiscal rule. As you know, they try to get their fiscal deficit below three percent a year. But because of the pandemic and the need to support, you know, businesses and workers and households, they expect the fiscal deficit this year will increase to over six percent.


But so far, you know, because of the pandemic and a collapse in demand, the current account deficit has been smaller. So that has given them some space that the currency is relatively stable and inflation is low. And so they've been able to finance the fiscal deficit so far without any problem. And Vietnam, I think, is one of the most successful country in terms of containing the infection, the capital just below 370 cases and no deaths. And because they've been so successful, they've hit haven't had to in that very large stimulus package to support the economy.


And it's one of the few economy that we expect will have positive growth this year. In fact, we expect growth this year to be able to be above three percent. So, you know, it's been it's been quite diverse across the region. Indeed, indeed, and I think I have to sort of underscore two points that you made that I share wholeheartedly, but both points, I think that there still not proper appreciation in the markets are also among the analyst community.


Of course, one is that the struggle of Indonesia, Indonesian, Philippines, despite, you know, fairly assertive, proactive measures with authorities, shows that we really don't understand the nature of the infection fully. Anybody who tells you that is being fairly optimistic. On every day, we see new developments and puzzles for epidemiologists and public health officials about the nature of the spread and the nature of the disease for a while. We believe that in hot countries it will not be a big deal.


It's actually a pretty big deal for what we thought that this would only affect the elderly. But it turns out the mortality may be less among the young, but they could be affected quite deeply, even if they don't die by this. And and also the notion of spread where the conventional wisdom is, it's through droplets. But now I see more and more studies showing that even aerosol spray, just the mere act of breathing, could lead to spread, which, of course, makes it very difficult.


And also, Doctor, as you pointed out, that the sprawling countries like Indonesia, Philippines, by geographical design, make it more difficult for some reason may be under control and others are not sure of stopping people from moving from one we get to the other. You can't really control it, which is the same problem that the US has. Brazil has has and India also. And the other point that you mentioned and Singapore case, the migrant worker situation, you know, the last few days reading the stories of the US, looking at the pandemic spreading among the agricultural workers and the migrant workers in Florida and Arizona, I'm sort of reminded of the exact same dynamic that whatever you have worker community living in close quarters, it doesn't really matter whether it's Singapore or the US, the outbreak becomes that difficult to contain.


Great. I want to ask one overarching question about your staff forecast right now. Are you comfortable with your latest public forecasts or do you fear that they're characterized by further downside risks? Well, we revised our latest forecasts about a month ago, and I think our business scenario is pretty realistic. We assume a relatively severe recession in the US and Europe and basically we assume that the US Senate will remain elevated and maybe, you know, get a bit worse on the and we are not seeing any second wave.


And we know that the risk. Right. Because as we just discussed, we don't really understand the virus well enough and we still keep seeing an outbreak of episodic perhaps. But this episode outbreak can develop into a second wave if you don't take care of it. So based on those assumption, we are forecasting that the region will suffer a sharp decline in growth rate, but you will still be a slightly positive, you know, but that's mainly because of China.


And as I mentioned earlier, China has already bounced back up again. The question is how strong the growth will be this year in our forecast for China is that you will grow by two point three percent this year. But eight of our 14 economies will be suffering negative growth. So it's pretty diverse. As I mentioned earlier, Vietnam is one of the few that will also have positive growth in Fabi entry point to is the highest that we have for the region.


But we are concerned about this second wave and also other risks, such as a relapse in the global economy and a further escalation of the US China trade tension, which doesn't seem to be getting any better. And then, of course, the very large, you know, fiscal package will mean that indebtedness will increase in the public sector and there'll be damage to the balance sheet of the corporate sector and businesses. And it's still not clear how quickly they'll be able to repair the balance sheet and emerge out of that.


There could be another drag on growth that's not fully factored into our forecast. But when you have your dialogue with regional country authorities, do you warn them about the perils of debt? Or for the time being, it's OK to go out and run deficits and we'll worry about debt consolidation two or three years down the road. We were actually quite worried when the thing hit and we know that the countries that, you know, have much bigger stimulus package to support the economy, whether they will be able to finance it or not.


And so so far, they have done well. As I mentioned, you know, in the initial stage, there was a big outflow of capital in the region. And, you know, some countries came under pressure. But then, you know, since the market has stabilized, pretty much, you know, the currency appreciate the bond yields have come down. You know, so so far up to now, you know, financing has not been an issue, especially for emerging markets like Indonesia and Philippines and Malaysia.


But I think, you know, provided this signal to the market that once the pandemic is over, they're going to revert back to the form of fiscal discipline and consolidate the budget again. I think that they should be OK. Then on the on the banking side, we know that most of the banks are pretty well kept alive. Right. I mean, there has been this forbearance by the regulators because they realize that many businesses will not be able to repay the debt.


So there's a debt moratorium in many countries. So we know the balance sheet needs to be fixed or some banks may need to be in order. I think that's something that we think is manageable, but we don't really have a good view right now of how big the damage is or how big the promise until probably in the next few months after, you know, we come out of this. I want to stay on this issue for just a little longer, Dr.


for you and I both have spent significant parts of our career in the IMF and at least the days that you and I were there. We always advise country authorities not to monetize debt, keep the central bank's operations separate from the central governments. But in this pandemic, starting with the West, but that seems to be spreading worldwide, is that far deeper coordination between fiscal and monetary authorities to take care of this big issue and says, where do you stand as an economist on this issue?


Um, well, you know, I think the world has changed to some extent, we used to worry also a lot about inflation and inflation has simply disappeared after the Great Moderation. And, you know, countries are struggling to get inflation back up again. You know, I think it's at least for the for the advanced economy, that seems to be the the the default with very low inflation and deflation, the environment. And so because of that, they've been able to increase the balance sheet of the central bank, you know, without, you know, seemingly without any cost.


Right. For the emerging markets, I'm not so sure. I think they are still subject to this budget constraint. I think, as I mentioned earlier, because of the pandemic, the macro situation has changed because there's been a collapse in demand. And so as a result, external position has improved for most of the countries in the region and also inflation has come down. And so that allows them to borrow a lot more than they would otherwise have been able to under normal times.


But in a situation we going to get out of right. We want the economy to recover. We want the demand to go back up. And when that happens, I think, you know, the usual consumer kicking in again and they have to show and demonstrate to the market that they are fiscally prudent. And, you know, the balance sheets are strong. So I think that we are in a transition now to a normalized environment. But even in this rather abnormal, extraordinary circumstances, we saw deep volatility for emerging market assets in the months of February, March, April.


After that, the big fiscal monetary bazooka in the West and followed by fiscal monetary response. In this part of the world, we have seen major return of animal spirits and capital flows have come back to the region in a very big way. No have compressed as much as they have in the West, but it have compressed substantially. Are you worried about financial market instability? That a bit too much money and too much optimism in the financial markets, which is divorced from the economic reality?


Well, not in the region. You know, in the region, I think financial markets have stabilized. They have not fully recovered except for in the case of China in the last few weeks, the markets have really gone through the roof. But the and I think the disconnect between market and the economy is more in the US and in a Western country, Europe, and that's because of liquidity by the central bank is helping to shore up the market here.


You know, I think the financial system is still pretty much a bank base there being some degree. The issues for some countries like Korea and Thailand and the central bank have stepped in to inject liquidity to make sure that the market continue to function in an orderly manner. But I don't see the big disconnect here in the region between the market and the real economy. I mean, my concern is that this capital flow volatility will come back again after, you know, we get out of this pandemic situation and they are going to be looking at the balance sheet and, you know, of the operate and also of the government pretty closely.


And, you know, then you may get the usual volatility shocks again. Absolutely. No, I share your concern wholeheartedly that we can spend much more time talking about the very current conjuncture. But that's not all Amro does. You are looking at important research questions that involve also the medium term. You built a solid research team over the years and I've noticed a number of interesting analytical notes on your websites. Would you like to showcase a couple of things that have come out recently from your research team?


Well, you know, we did a study on the credit contagion risk, right? I think, you know, as I mentioned early on, we are concerned about the financial distress in the corporate sector and in the banking system once we come out of this pandemic and we want to basically highlight the importance that policymakers must take to address the situation. So in this study that we did, you know, we basically look at the risk of contagion, not just from the bank.


To his immediate credit, the other banks in the wholesale market, but also because the banks are all interconnected, that reason one bank can be magnified by the interconnectedness of the system and, you know, and that become a systemic risk. So banks are not just connected to other banks directly, but also indirectly through these other banks and also through. In a matter of perception, and so it is sort of a captured in our study by the of default ratio.


And so we are able to do to to show that, you know, if there is an increase in the default rate for one bank, this risk can be magnified across the system. So it is just to emphasize to the regulators that, you know, we shouldn't take a look at the individual banks, but also look at the system as a whole. Right. Right. And I think countries like China, this is a very big question, although right now the financial sector does not look under considerable stress with the debt overhang issue.


We have a structural slowdown independent of the immediate cycle. And how that plays into credit quality and credit risk is certainly going to be a question that both you and I have to worry about for years to come in the coming back to the region and the crisis response. You have already mentioned that there's probably no free lunch like the way it is maybe for the US because they have the privilege of the U.S. dollars. There's a little tighter budget constraint for the region here.


But still, should you have given the severity of the crisis, should the regional economies spend more? And if they have to, I mean, would you advise them in some specific areas they should spend? And then, of course, the question that immediately leads to, you know, how would they finance those additional spending? Yeah, I think this is a big challenge to many of the policymakers here. Obviously, the capacity to spend varies across the country.


And many, you know, in especially developing and even emerging market economy, they probably couldn't spend more to support the economy if they had the capacity. So really, I think that my instinct was cautious about overspending. But, you know, after when you get now nowaday in a recovery phase and they need to pull back some of the spending especially, but if they do it too precipitously, expressed that it could cause the economy to go into a downturn again.


So, you know, how you manage to exit from this stimulus package. Right. Is quite important because, you know, the economy is recovering very strongly. You can probably pull back much faster by the same time. You also want to be able to support some sectors of the economy, because we know in the new normal that certain sectors are not going to be viable also then companies and firms. And you have to let them go. Right.


And it's going to be very painful. On the other hand, we know that in a new economy, the digital economy, e-commerce are going to be much more important. And you want to be able to spend more money to support those industries. So it's going to be quite challenging for policymakers going forward. You know, I wouldn't say that the issue when I say they need to go back and change the speed with fiscal discipline, they need to also prioritize the way they spend money to support industries which are going to do well in the new normal and at the same time maybe provide some support to those that has to restructure.


And even that, even even in the labor market, is not very clear that a lot of the unemployed workers would be able to get back to work again. So I think it is going to be quite challenging going forward for this policy policymaker. And in terms of the financing. Well, you know, it is tough, right? But I think on balance, I would say that they need to scale back the kind of fiscal deficit that they had this year to one that's more manageable.


And if they signal to the market strongly the commitment to fiscal discipline, I think they should be fine. You know, so they have to try to re prioritize and maybe end up with a somewhat bigger fiscal package than they otherwise would have. Moving from fiscal to external. Back in the days and from the temper tantrum in 2013 14 to going back to the Asian crisis in 97, we've always worried about reserve adequacy in the region, the capital's low volatility when there is a risk of the global market environment.


Do you worry about the external risks and do we have sufficient buffers in the region or do we need Chiangmai plus three to take care of that? No, we always worry about the external risk and the reason why the dollar initially was set up. But, you know, I think the most of the countries in the region have always been worried about the extent of risk and the buildup in the reserve. Right. If you look at the level of reserve held by most of the countries in the region, they are, I think, quite substantial, quite adequate in it, a month of imports.


I think the average for the region, if I remember correctly, is about six, seven months. And then in terms of coverage of short term debt, they are more than a year. Some of them are two, three years in the Philippines. And in terms of the IMF adequacy ratio, they also range between 100 and 120 for some of them and more than 200 for some of the others. So overall, I think the the the reserve that accumulated over the years have been quite impressive for some countries and even for those which are a bit vulnerable by by the IMF metrics is adequate.


But we know that, you know, in the in that they put in a tantrum, the shots can be even quite large, even though you have adequate reserves. So that's why we have a second line defangs the Gemini Initiative, CMI, CMM, which is supposed to provide an additional buffer to those countries which are vulnerable to a shot. Right. So but so far during this pandemic, you know, they've been able to manage this volatility quite well.


But, you know, the facility is still there. And, you know, and and and I think comforting to know that, you know, you can rely on the facility if you need to in the event that you have a really big shot, that heat shield you saw a few months ago when the dollar funding crunch was taking place worldwide, the Federal Reserve came up with that facility, which allowed any central bank that had an account with the Fed in New York could carry out a bit of a reflow operation.


So not exactly a swap. It was more expensive than a typical swap agreement, but the countries did have some access to some cheap funding. So clearly, the need for dollar funding at times of stress has not gone away, although you could argue that the best facility is the one that does not need to be tapped because the mere existence of that is sufficient to L.A. market expectations and concerns. So what's your sense that the impact of CMM has had a galvanizing impact on markets perception on the buffers available in Asia?


Well, you know, the CMM is, as I said, a regional facility, right, the swap line that the Fed provides is a U.S. dollar facility and it is much and because of the nature of the swap and the reform, the FIMA right. Is available without, you know, on request. Basically, as long as you have the Treasury bills to report, you get the liquidity immediately. So that's the advantage that you have with the U.S. in Miami and other facilities because they are swap lines and all that.


There will always be trade and set it up. We always take a bit more time. But, you know, in the case of the initiative is supposed to be a quick disbursing facility that can be arranged within a short time, two weeks, actually, about that. So but as I said, you know, this is an additional line of credit. And I think, you know, I can see the countries in the region becoming much more secular, much more comfortable over time in managing the external vulnerability that they see that the semion really as a second line of defense, you know, and they will only result if the need arises.


You know, it's comforting to have it there, right? I mean, there is nothing wrong with having a wide range of insurance options. Over the last decade, we have seen expansion of CMM. We have seen bilateral swap lines being set up between people and various countries. And of course, we have the Fed twice in the last 12 years taking a fairly strong role in providing dollar liquidity. So, yes, as long as the dollar remains king in the world of currencies, I think the need for dollar funding will remain in dollar assets and liabilities will be issued and traded in our part of the world as much as they have been in the past.


I want to ask you two questions. One is, I think there was this recent announcement about the CMI amendment, which I understand probably made the facility a little more flexible. So if you could touch on that. And after that, I want to ask you a longer term question about regional reliance on trade and tourism. But I'll hold that question first. Just address the issue of the twenty third of June amendment. Yeah, so this is something that we've been working on for some time, you know, as I mentioned earlier, the facility was set up in 2011, right.


When the Jumma initiative, which is a network of bilateral or multilateral allies, and then they increase the size of the facility, 240 billion at a time and in 2014 did it to 20, 40 billion. Right. And they also increased that portion to 30 percent of their time. So much so in the last since then, we've been doing a lot of best-run, you know, to try to make sure that the facility is operating operationally ready so that when you have a country wants to access it, you know, it's immediate because it's a pretty complex arrangement with 14 central banks having bilateral swap.


And we need to basically work out the operational manual, the S.O.P, you know. And so that's what we've been doing over the last several years. There was also a precautionary line that was set up in 2014, and that's similar to the security allowing the IMF, where basically, you know, we a country has to have some macro fundamentals, then they can approach to have a line of credit. And without conditionality, again, you know, the new facility and we need to work out the modus operandi and see how it works and all that.


So all that was done in the last few years. And this amendment that you just mentioned is basically the sweetener that we have completed our basically work. And that facility is not operationally ready in case any any country wants to avail themselves of this facility. Right. OK, so that takes me to the broader question. And I think something that we all have to think deeply about the last two, three decades have been great for Asia. The reliance on trade and tourism and progressive trade integration and capital liberalisation is the time for growth from those measures sort of run its course.


Do we need to rethink the drivers of growth because of all those geopolitical trade, war related headwinds and so on? Or do you still believe in the promise of open markets and trade to carry Asia forward? OK, in our latest report, Chapter two, the chapter, we actually look at the growth strategy for the region and what was before. But still, I think the outside, you know, is quite relevant. And I think that the pandemic has basically revealed vulnerabilities in a system like the globalization, the disruption to the supply.


And so because of the disruption that has been caused for, you know, there may be an excessive dependence on this globalized supply chain and maybe countries need to insource or reassure some of their production. I think, you know, and I think there's nothing wrong with that. It's just that the global value chain has evolved over the years and has become super efficient. Would say it accounts for 50 percent of the trade. Right. In the global system.


And I think that, you know, one can reconfigure the supply chain enough to make it more resilient. So, for instance, I think one of the lessons from this pandemic is that you need to diversify and also that if one of your sources get clobbered by a natural disaster or some kind of shock, that you can then rely on other sources. And so we see that, for instance, in Singapore with the food supply. Right. Singapore is very dependent on Malaysia for food.


But, you know, when there was a shortage of eggs able to buy from Poland and Korea. Right. So, you know, diversification, I think, is a way to address the issue of resilience rather than trying to pull back. I know. And even in the case of medical supply in the face M.P., I mean, I think there was a lot of concern that too much reliance on China for this medical supply. But the reality is that even in China, there was a shortage of this this massive baby.


In the first instance, I thought I didn't know country expected this shop anyway. So it would be a global shortage in any case. But but. I was able to come out of it and then they became the major supplier of all this medical supply to the rest of the world, right. So I think, you know, so I think realistically, I would say that we you know, we should realize that there are some vulnerabilities in the system and try to address it by preferably by building resilience in the system through diversification, building up reserves and all that.


But the system is very efficient and continues to be a driver for growth in the world. And many of the countries in the region, especially the developing ones like Cambodia and Laos and Myanmar, they are still leveraging on this global supply chain to grow and attract investment. So I, I don't agree that we need to move away from trade and tourism as tourism, local tourism, tourism is the next big driver of growth in the region. I think we are seeing the emergence of a huge middle class in Asia and many of them want to travel.


And so this is going to drive the tourist industry in many countries in the region, especially Indonesia, Philippines, you know, which has a lot more potential in terms of growing the industry. Right. The potential is undeniable when we can realize the potential, I suppose, depends No. One, on when this pandemic ends and when we have an effective treatment and after that, how we force the recovery and, of course, how much cost we have to incur to to survive until that moment comes.


Dr. Core, thank you so much for your time. We wish Admiral all the best. We need regional institutions like yours to support financial stability. And I think you're playing an integral part and the same to your researchers coming up with any valuable insights. Very thankful. Thank you, Dana. Thank you for inviting me to this podcast. And I hope that, you know, we get out this soon. I think one of the when you talk about tourism, I think one of the more hopeful development now is the vaccine, which seems to be coming along quite nicely.


So I hope you know that the augur well for the future of the region. Indeed. Fingers crossed for that. Thanks to our listeners also for your time. You can find all of our research publications and multimedia by Googling Tbsp Research Library. The Cubie Time series is available now on all major podcast platforms as well as on YouTube. Have a great day.