Don't underprice global risks, MAS's Menon warns

[SINGAPORE] Investors are underestimating risks to the global economy as they drive stock markets to record highs, Singapore's central bank chief warned.

While economic growth across many parts of the world has improved, there's no time for authorities to be complacent, Ravi Menon, managing director of the Monetary Authority of Singapore, said in an interview on Tuesday.

"The markets have been amazingly resilient to episodes of risks," Mr Menon told Bloomberg Television's Haslinda Amin. "There has been hardly a response to some of the risks that have been manifesting, so I do think those risks are being underestimated. Excessive exuberance is always, in and of itself, cause for concern."

Investors have brushed aside concerns ranging from tensions over North Korea to what may be the biggest US profit slowdown in six years, continuing to push stock benchmarks to fresh peaks.

The MSCI All-Country World Index is up 17 per cent this year and touched a record high last week, days after the International Monetary Fund raised its forecast for global growth this year and next.

Echoing comments made by IMF Managing Director Christine Lagarde and others at the fund's annual meeting in Washington, Menon said authorities should use the favorable conditions now to fix underlying vulnerabilities.

The following is an abridged transcript of the interview Menon gave to Bloomberg Television and reporters at Bloomberg News.

Question: How is the state of the global economy?

Answer: "The global economy is in a better position today than it was perhaps at the beginning of the year. The recovery has become more broad based across more countries."

"That cycle, of course, will have to moderate going into next year. But the underlying strength seems quite self sustaining, so we see the current growth momentum continuing into 2018."

"Some of the structural problems and vulnerabilities that have been afflicting the global economy in the last several years, even before the crisis, these have not gone away." "This must not be a time for complacency" and countries should make sure they put in place the necessary reforms because the cycle is conducive and incomes are rising.

Question: Are buoyant markets underestimating risks in the global economy?

Answer: "As a central banker, I would say yes. I think the markets have been amazingly resilient to episodes of risks. There has been hardly a response to some of the risks that have been manifesting. So I do think those risks are being underestimated. Excessive exuberance is always in and of itself cause for concern."

Question: Are interest rate hikes by the US Federal Reserve gradual enough?

Answer: "So far they have been very gradual. They are obviously keeping a close watch on the US economy. If anything, I would say caution has been a byword for the Fed's actions in the last few years. That has been good for the US economy and the global economy, giving everyone ample time to adjust" to the new reality of interest rate normalisation.

"The rate rises - as long as they are not too fast - will be reasonably well absorbed by most economies."

Question: What should the markets understand about Singapore's monetary policy?

Answer: "Our track record shows that we are keenly focused on inflation, keeping inflation under control. As long as inflation remains benign, the current policy stance has been appropriate."

"Like other central banks, however, we do need to look forward if growth continues to gain momentum, then obviously at some point inflation pressures will start to come up and central banks need to be proactive."

"Being proactive has been our track record for the last 40 years, it is not going to be different this time around. Of course, exactly when that is going to happen is hard to tell because in most countries inflation has been surprisingly low, despite the pickup in growth. So that is a key question all central banks are asking themselves. Past relationships seem to have weakened between, say, growth or output gaps, to labour market tightness, to inflation. We just have to look at the data and see how the inflation picture evolves and act accordingly."

Question: Have market participants put too much emphasis on the wording in your statement about the policy stance being appropriate for an "extended period."

Answer: "The policy stance had been appropriate for an extended period because of the prolonged period of very weak inflation we have seen. We are now seeing inflation picking up, but still quite below the normal historical average of about just under 2 per cent. It will be hard to extrapolate from here how long more that extended period will be."

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