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Tap complementary aspects of fiscal and monetary policies: Ravi Menon

The managing director of the Monetary Authority of Singapore (MAS) has urged policymakers and economists to "look beyond the noise" and towards the underlying trends in the economy.


THE managing director of the Monetary Authority of Singapore (MAS) has urged policymakers and economists to "look beyond the noise" and towards the underlying trends in the economy.

Ravi Menon said: "We need to be able to discern from these changes what the underlying structural and cyclical trends are in order to design policies in response."

He was speaking at a panel discussion at the third Asian Monetary Policy Forum (AMPF) held last week. The event at the Shangri-La Hotel, held to discuss the economic challenges and policy issues confronting Asia, also gathered panel participants such as HSBC managing director Frederic Neumann, academic adviser of the Chinese Academy of Social Sciences Yu Yongding and chief representative of BIS for Asia and the Pacific Eli Remolona.

Mr Menon said that it was important to exploit the complementarities between policies. For example, monetary policy - entailing the changing of the interest rate and influencing the money supply - has a lot of potential to stimulate the economy, but has delivered diminishing returns; fiscal policy, implemented through the changing of tax rates and levels of government spending to influence aggregate demand in the economy, is difficult to sustain.

These policies need to work together, but unfortunately, this is not happening in a sufficiently strong way, he said.

More discussion also needs to take place on how fiscal policy can complement structural policy, he said.

"The question is not the magnitude of fiscal policy, but its composition in terms of specific tax and expenditure measures and how to front-load stimulatory effects for the economy in a sustainable manner."

He said that structural policies and structural reforms involve combining the right expenditure and tax policies, and that countries should now think about getting the right combination of fiscal policy changes that can deliver lasting structural reforms.

China, for instance, has more space for fiscal policy, but needs to decide which policy stimulus will bring about moderate growth rates that would support structural reforms - without adding risk.

"The tension is not between macro policies and structural policies, nor is it between long-term and short-term effects. Rather, it is about how to combine macro policies and structural policies and to make the short term sustainable for the long term."

The trends that are shaping emerging Asia can be seen through three cycles, namely the commodities cycle, the trade cycle and the financial cycle.

In the commodities cycle, the slowdown in investment of infrastructure in China resulted in a fall in demand in commodities, which has had a different impact on the rest of Asia.

"Fundamental structural changes that are occurring in the oil market will also affect emerging Asian countries for a while," added Mr Menon.

He said that, for the first time in decades, there seems to be a retreat in globalisation, to the extent that trade is growing more slowly than income.

For example, China's economy is facing a structural shift away from manufactured goods to services and these trends are noticeable, not only in the commodities trade but in IT and electronics value chains and networks as well.

Financial conditions in Asia continue to tighten, a trend Mr Menon described as "healthy". Emerging Asian countries are releveraging, post-global financial crisis in 2008. Leverage built up during that period would take a considerable amount of time to bring down, creating another challenge for Asia.

BIS representative Mr Remolona said: "Part of the financial cycle and deleveraging in Asia is occurring more in the primary market, as some people are issuing corporate bonds, while others borrow directly from banks in large amounts."

As a result, there are now more than US$10 trillion globally in US dollar-denominated credit.

The panellists were, however, optimistic about Asia's resilience through slowing economic growth; despite the debt build-up in China and Asia, the outlook does not seem as bad as the accumulation of debt that led to the Asian Financial Crisis in 1997.

HSBC economist Mr Neumann said that the region may not head into a financial crisis due to low interest rates, but countries in Asia should focus on improving productivity growth rates through improvements in trade or trade liberalisation policies.