For decades, developing countries have relied on outside investments to boost their growth despite trade imbalances. But running a current account deficit has come to be regarded as “a sin,” according to Singapore’s deputy prime minister.
Such a development is just “crazy,” Tharman Shanmugaratnam told CNBC on Friday during the annual meeting of the Institute of International Finance on the Indonesian island of Bali.
Shanmugaratnam was referring to the widely held outlook that nations should seek to avoid current account deficits — which indicate they’re operating on borrowed means because the value of incoming goods, services and investments exceeds the amount leaving the country.
“How did the Singapores and Koreas of the world grow?” he said. “We grew by running current account deficits at an early stage of development so we could invest ahead for growth while our savings were being built up.”
Singapore was able to rely on financing through foreign direct investments and long-term investors during its early years of growth, as the international financial system at that time had capital flowing to developing economies, Shanmugaratnam said.
“Today, it’s a sin to run a current account deficit and that’s crazy,” said the minister, who is also the chairman of the Monetary Authority of Singapore, the country’s central bank and financial regulator. “I mean, it’s bad in economics, it’s bad in policy sense, and the whole world is going to suffer.”
“We’ve got to make it possible once again for countries to run sustainable current account deficits, to have them funded reliably, and for investments to flow into the most productive areas,” Shanmugaratnam said.
The China factor
Beijing has enjoyed close economic ties with the Southeast Asian nation for decades. China is Singapore’s largest trading partner, and the city-state is China’s largest foreign investor.
Asked what impact China’s economic slowdown will have on Singapore, Shanmugaratnam replied: “I think first, we have to accept that the China growth slowdown is a secular story. It’s a long-term story and it’s not actually occasioned by what’s happening in the short term.”
China’s labor force growth will inevitably slow down, and Beijing will increasingly need to move up the value chain and improve productivity, he said. However, “the trade frictions complicate policy making greatly,” said the deputy prime minister.
“China is having to ease up on credit policy, which isn’t necessarily helpful for medium to long-term stability, but that’s what they have to do when faced with very unexpected trade frictions,” he said.
Earlier this month, Beijing said its central bank would cut the amount of reserves that banks are required to hold, resulting in a cash injection of some 750 billion yuan ($109.2 billion) into the banking system. That decision was one of several measures by the government to make it easier for borrowers to access credit and stimulate economic activity.
[“source=cnbc”]
