MAS’ Ravi Menon sees opportunities in digitalisation, sustainability amid ‘tough’ global outlook
The central bank chief shares his views on fintech growth opportunities, developments amid challenging economic conditions
THE first half of 2023 will be tough globally and in Singapore, with the combination of high inflation and slower growth meaning that the risk of stagflation cannot be discounted, MAS managing director Ravi Menon said.
While inflationary pressures should start to ease in the second half as global central banks take action, “the era of cheap money, cheap labour, and cheap energy is over”.
But there are still bright spots in Singapore’s fintech sector, and Menon noted countries and businesses that adapt to these structural shifts – by investing in digitalisation, sustainability and human capital to capture new growth areas – would thrive.
In an interview with The Business Times, Singapore’s central bank chief shares his views on fintech developments and growth opportunities amid challenging economic conditions:
Q: We have emerged from a period of loose monetary policy – low rates and quantitative easing. That period appears to have ended for now, with rates rising to combat inflation. Do you see this as a temporary blip for a couple of years or something more persistent? What would transitioning to a period of less easy money mean for Singapore, and how can businesses remain resilient to these shifting macroeconomic conditions?
The global economy is facing an unusual combination of high inflation and slowing growth. Inflation is proving to be more persistent and more pervasive than earlier expected. At the same time, as the International Monetary Fund puts it, one-third of the global economy is heading into recession.
The situation is likely to get worse before it gets better. The first half of 2023 will be tough, globally as well as in Singapore. The risk of stagflation cannot be discounted, with stubbornly high inflation and economic growth close to zero. But tighter financial conditions and slowing growth should start easing inflationary pressures going into the second half.
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Monetary and fiscal policies must act in concert.
Central banks must continue to stay resolute in tackling high inflation and restoring price stability. It is good that most central banks have responded swiftly and front-loaded policy tightening. It is better to tighten early in the cycle. The longer high inflation festers, the more costly it will be in terms of lost output to bring down inflation. MAS started tightening monetary policy early, in October last year, when core inflation was still below 2 per cent. We have made a series of tightening moves since then as inflation rose sharply. Monetary policy has dampened some of that increase but it will take time to decisively tame inflation.
Fiscal policy must be focused on providing help to vulnerable segments of the economy affected by high inflation. But it must do so without stimulating inflation or distorting price signals in the market. The Singapore government has rolled out a succession of targeted fiscal support measures. They help lower-income households through direct cash transfers rather than price subsidies which are distortionary and fiscally more expensive. There are also grants to help firms digitalise or adopt more energy-efficient technologies.
While inflation will come down towards the end of next year, it is likely to settle at a level higher than we have seen in the last decade.
Basically, the era of cheap money, cheap labour, and cheap energy is over.
Global interest rates are not going back to the zero lower bound. This is not necessarily bad from a broader perspective. Borrowing costs that are more reflective of time horizons and risk premiums should mean less speculative search for yield that has in recent years led to over-valuation in some asset markets, especially real estate, in many parts of the world.
Labour will become more expensive amid declining labour force growth in many economies. There seems to be a confluence of factors at play: lower participation rates and reduced cross-border labour flows. Some of this is related to the long tail of the pandemic and may recover over time, but demographic slowdown is a structural reality. Higher wages that reflect the scarcity of labour are not necessarily bad, as long as they incentivise a more efficient use of labour and go hand in hand with productivity growth.
Energy costs are likely to stay elevated amid the global drive to switch to cleaner energy. This transition is an imperative, critical to avoiding catastrophic climate change. But in the short to medium term, it will lead to higher costs, at least until technologies mature and supply capacity expands.
Countries and businesses that adapt to these structural shifts will thrive. This means investing in digitalisation, sustainability and human capital to capture new growth areas, raise productivity and sustain healthy wage growth. It is essentially what Singapore’s various Industry Transformation Maps (ITMs) seek to achieve. This year’s Singapore Fintech Festival’s themes of resilience and viability underscores what it takes to succeed in this new environment.
The recently announced Financial Services ITM 2025 plays to these themes. Singapore’s financial services sector has strong foundations. The industry has exceeded the targets set out in our previous ITM, generating strong growth and good jobs.
Our financial and fintech sectors are in a good position to traverse the challenging landscape and enhance our value proposition. Investors will be more discerning and businesses that can sustain profitability in the high inflation-low growth environment will attract more capital. Where money is no longer cheap, businesses with more disciplined strategies and prudent financial management will thrive.
There are opportunities for further digitalisation of the financial ecosystem. This will not only enhance efficiency but also enable more innovative financial services. The future of financial networks is exciting. There is potential for innovations like tokenisation and distributed ledger technologies to increase efficiency, enhance inclusion and create new economic value.
Financial services will be a key pillar in the net-zero transition, with Singapore serving as Asia’s hub for sustainability solutions. There will be growing demand for new sustainable finance services. Financial institutions can catalyse action in key targeted areas, for example, in the energy transition, transportation, construction and the built environment sector. MAS is working closely with multiple stakeholders to promote public-private-philanthropic partnerships to scale up blended finance for Asia’s transition towards net zero. We are engaged in local and regional efforts to develop credible green and transition taxonomies.
The Singapore Fintech Festival provides an effective forum for collaborations across firms, industries and borders, to support the digitalisation and sustainability drives. The festival is part of the “soft” infrastructure to help secure sustainable and inclusive growth for Singapore and Asia.
Q: What areas of the fintech industry do you think are most compelling for growth in Singapore in the current economic climate? Where are the key opportunities or risks for Singapore?
New models of digital finance will remain an area of promise. The digital-only banks that have just started operations are looking to tap wide-ranging alternative data and technology sources to execute innovative credit assessment approaches. These approaches have the potential to meet the needs of underserved segments and generate new revenue streams while keeping non-performing loans contained.
Developing digital banking and insurance solutions to meet underserved needs across the region is an extension of this opportunity. There is a significant segment of the populations in South-east Asia that is digitally literate and has broadband access but is unbanked or financially underserved. Singapore-based financial institutions, payments solution providers and fintech firms can digitally access these customer segments without requiring in-market presence. And we have already seen some of that promise materialise, with the payments services industry emerging as one of the star performers in our financial sector in the last two to three years.
Partnerships among financial institutions, fintech solution providers and technology platforms are another interesting area of opportunity. Financial institutions are looking to expand their reach to broader customer segments by embedding their services on third-party digital platforms that offer a wide variety of financial as well as non-financial services in an integrated fashion. We are beginning to see such embedded finance models. We are also seeing extended finance models where financial institutions are bundling their financial services with ancillary non-financial services on their own digital platforms. MAS is looking to anchor leading fintech connectors as technology enablers to facilitate the adoption of such embedded and extended finance business models.
Q: MAS has a number of initiatives for payment connectivity and the digital asset ecosystem in place. Which areas (asset tokenisation, digital currencies, et cetera) do you see the greatest promise in changing the way things are done in the financial sector?
Promoting the growth of digital assets and digital connectivity is part of MAS’ broader ITM 2025 strategy to shape the future of financial networks. We see a future, or rather want to create a future, characterised by seamless cross-border digital financial networks and decentralised liquidity pools, that can enable cheaper, faster and more secure financial transactions. There are several areas of promise.
First, we are building cross-border payment linkages to connect our businesses and people to key markets, regionally and internationally. MAS is pursuing payment systems linkages with other jurisdictions to enable 24/7, near-instantaneous and secure transfers directly between bank accounts or e-wallets, at a very low cost to the user.
- Last year, Singapore and Thailand linked our respective real-time payments systems, PayNow and PromptPay, in what was the world’s first such connection. It allows customers to send money across borders in real time using just mobile phone numbers.
- We are in the process of establishing similar connectivity with India’s Unified Payments Interface and Malaysia’s DuitNow.
- We are also working with the Bank for International Settlements Innovation Hub (BISIH) in Singapore on a multilateral solution to link real-time payments systems.
Second, we are pursuing digital currency connectivity through wholesale central bank digital currencies (CBDCs). Linking faster payment systems enables instantaneous payments but does not solve the problem of settlement, which can take two to three days. Real-time settlement can be achieved through the direct exchange of digital currencies. The BISIH is exploring a multi-digital currency settlement network where participating commercial banks will be able to transact with foreign counterparties without going through correspondent banks. They do this by directly exchanging with one another the CBDCs that have been issued, thereby reducing settlement time and cost. MAS is actively involved in this project.
Third, we are promoting the application of distributed ledger technology to promising use cases. These include cross-border payment and settlement, trade finance, and pre and post-trade capital market activities. There are some promising developments in Singapore.
- Marketnode, a joint venture between the Singapore Exchange and Temasek, is using distributed ledger technology to reduce the time needed to clear and settle securities transactions, from days to just minutes.
- Partior, a joint venture between DBS, JPMorgan and Temasek, is achieving reductions in payment settlement time from days to mere minutes.
Fourth, we are working with the industry to explore the potential of tokenised real and financial assets. There are already some interesting applications in Singapore.
- UOB has piloted the issuance of a S$600 million digital bond on Marketnode’s servicing platform.
- OCBC has partnered with MetaVerse Green Exchange to develop green financing products using tokenised carbon credits.
- Under MAS’ Project Guardian, an industry pilot led by DBS, JPMorgan, SBI Group and Marketnode will explore the institutional trading of tokenised bonds and deposits to improve efficiency and liquidity in wholesale funding markets.
Q: The impact from less available sources of financing has been most apparent on fast-growth players including fintech or other sustainability-related startups that have not yet reached profitability. How can businesses remain resilient and how does this impact MAS’ strategy to focus on growing these areas?
The global tech startup ecosystem has been facing headwinds amid tighter financial conditions and slower economic growth. Several months back, research firm Preqin noted that venture capital firms were estimated to have amassed over US$570 billion of dry powder for the first half of 2022. But dry powder does not translate to actual investments. In fact, a recent CBInsights and Economist report has noted that the average fintech deal globally has fallen from US$32 million in 2021 to US$20 million in 2022.
In an era of tighter money, profitability and cash flows have become key metrics that investors are focusing on, as opposed to just growth trajectory. In the short term, there may be less attractive exit opportunities. But this makes consolidation more probable and may result in fewer but more resilient fintech firms. That is a plus for longer-term sustainability and growth of the fintech sector as well as the broader tech startup community.
And there are bright spots in Singapore’s fintech sector. According to a recent KPMG report, Singapore’s global market funding share increased from 3.1 per cent of global deals in 2021 to 6.4 per cent in the second quarter of 2022. In the first half of this year, Singapore fintech firms received US$2.14 billion in investments, close to 75 per cent of the investments for 2021 as a whole.
Singapore’s fintech sector’s resilience is helped by three key elements in our ecosystem.
First, technical capabilities and depth. Our early efforts in building these capabilities in the fintech sector stands us in good stead today. For example, the collaborative work between MAS and the financial industry since 2016 to establish practical use cases for blockchain technology through Project Ubin has paid off. Blockchain firms now account for about 26 per cent of fintech investments in Singapore.
Second, a clear regulatory framework that is being continually updated. The early passage of the Payment Services Act incorporating provisions for the regulation of crypto tokens has given Singapore a head start in payments innovation. The Act has been regularly updated to keep up with new innovations and emerging risks. There are now more than 145 payment firms operating in Singapore.
Third, industry platforms that have helped to synergise fintech innovation efforts. Project Guardian facilitates innovations and experiments in digital assets and Web 3.0. For example, it aims to establish a network of regulated decentralised finance liquidity pools. We are looking to digitalise Asia’s bond markets by developing infrastructure, powered by blockchain technology, for end-to-end issuance, listing and settlement for bonds. Yet another example: we are working with the industry on an Embedded Finance Hub to facilitate partnership between non-financial and financial businesses.
Q: As digitalised offerings become more mainstream in the financial sector and replace traditional offerings, how would MAS ensure products continue to meet the needs of less tech-savvy individuals such as the elderly?
The adoption of digital financial services has been increasing in the last five years and has accelerated since the pandemic in 2020. Investments in digital infrastructures have enabled this rapid scaling of digital finance.
- MyInfo helped streamline customer due diligence. Customers did not have to visit bank branches physically during the pandemic.
- PayNow enabled e-payments and government support disbursements to individuals and business swiftly, securely and conveniently. The ratio of ATM cash withdrawals to e-payments has fallen from 47 per cent in 2016 to 12 per cent in 2021.
But Singapore is not aiming to entirely replace existing traditional offerings. Our aim is to be “cash-lite”, not “cash-less”. Cash will continue to be a familiar and convenient way to transact for some groups of people in some settings. Even as we actively promote digital finance for its efficiency, convenience and cost savings, we must cater to a small group of Singaporeans who have difficulty going digital.
Traditional offerings will remain available and accessible. ATMs and merchant cash withdrawal touch points remain widely available. There are now over 2,600 ATMs and about 1,500 cash withdrawal touch points around Singapore, found at MRT stations and bus interchanges, near workplaces or homes, and in post offices and retail stores. MAS is working with the banks to promote awareness of such touch points in non-mature estates where some residents find it difficult to get cash conveniently.
Special assistance is extended to enable our senior citizens to transact digitally. The “Seniors Go Digital” programme trains less digitally savvy individuals, including more than 150,000 seniors, in basic digital skills such as transacting online and making e-payments. Seniors are also taught about cyberrisks and scam threats, and how to keep themselves safe online. There are also ServiceSG Centres islandwide, which offer assistance to access frequently used government services and schemes across 20 agencies.
One of the three key themes at this year’s Singapore FinTech Festival is “inclusive business models”. Key stakeholders will discuss issues such as how the digital divide can be reduced and bridged in an era of pervasive digitalisation.
Q: MAS has very strongly come out against cryptocurrencies for retail over the years. Would banning retail participation be necessary or over-paternalistic? Could an argument be made for allowing retail investors to allocate to crypto according to their own risk tolerance?
Indeed, MAS has maintained a consistent strong message – that trading in cryptocurrencies is highly hazardous for retail consumers. Buying cryptocurrencies is very risky. The crypto market is highly volatile and speculative in nature, with high incidents of fraud and scams. MAS therefore strongly discourages retail participation in cryptocurrency trading. We have been issuing these warnings as far back as 2017.
But banning retail access to cryptocurrencies would be ineffective given the borderless nature of the digital asset market. Investors in Singapore can simply access overseas crypto trading platforms. Instead, our approach has been to continually step up public education and add friction to retail access to cryptocurrencies. Last year, we ran an online campaign to raise awareness of the risks of investment scams involving cryptocurrencies. MAS is one of the very few regulators who has placed restrictions on public advertising by digital payment token service providers.
We recognise that despite repeated warnings, some retail investors will still be enticed by the prospect of sharp price increases in cryptocurrencies. Trading in cryptocurrencies continues to proliferate. This is despite recent sharp dips in the value of cryptocurrencies and high-profile fraud and hacking incidents resulting in large losses to investors.
MAS is therefore consulting on a more comprehensive set of regulatory measures to reduce consumer harm. Compared to securities markets, the basic guard rails against excessive consumer harms are almost entirely absent in crypto exchanges. Our proposed measures seek to empower retail investors to make better-informed decisions. We will require better disclosures and education efforts. We will put in place a baseline for business conduct practices by crypto trading platforms.
But as with any other investment, MAS cannot protect investors from losses they make from speculating in cryptocurrencies. It is not possible for the proposed measures to protect consumers from losses if their cryptocurrency holdings lose value.
Nor can MAS prevent the failure of crypto asset service providers due to their unsustainable business models or excessive risk-taking. No amount of regulation can prevent this.
Q: How do you see the regulation of this space evolving over time as the technology becomes more developed?
Our aim is to develop an innovative and responsible digital asset ecosystem. As elaborated in my speech at the Green Shoots seminar in August, MAS has identified tokenisation and distributed ledger technology as key areas of growth. We will continue to closely monitor advances in this space. Where we see social value or economic potential, we will facilitate. Where we see new risks, we will seek to contain. In reality, we are likely to see a combination of both, so we will have to be simultaneously facilitative and intrusive. This may come across as confusing to some, but it is the only way to deal with new technologies, to harness their benefits while managing their risks.
Regulation goes hand-in-hand with promoting technology innovation. We believe setting out regulations that are clear and proportionate to the risks posed by the activities is critical for fostering confidence and value-adding innovation in digital assets. Given the pace of innovation in this space, it is also important to continually review regulations to ensure they remain relevant.
MAS has always adopted a learning-by-doing approach when it comes to regulating and developing the fintech ecosystem. We try to learn through practical experiments, to have a keen sense of potential benefits as well as the regulatory guard rails that may be needed. Decentralised finance or DeFi is a case in point. Today, regulations are crafted to manage risks in a world of intermediaries. But they cannot be neatly applied in a DeFi world where intermediaries are replaced by self-executing smart contracts. We can regulate entities because we can hold them to account. How does one regulate an algorithm? These are the kinds of issues we are seeking answers to through experimentation. In the case of DeFi, we are collaborating with the industry through Project Guardian to explore potential DeFi applications such as secured borrowing and lending in wholesale funding markets. Through these experiments, we hope to learn where the risks are, how they may be mitigated, where the accountabilities may lie, and how regulations can potentially be applied. With all that is going on in the digital assets and Web 3.0 space, there is never a dull moment in financial regulation!
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