Published Date: 11 June 2020

"The COVID-19 Crisis: Risks and Policy Responses" - Transcript of "The Big Questions" - Central Banker Series Podcast by Mr Ravi Menon, Managing Director, Monetary Authority of Singapore, with Tim Adams, President and CEO, Institute of International Finance, on 28 May 2020

Listen to podcast here .

Tim Adams: Over the past few weeks, we've reached out to some leading central bank chiefs around the world to get a sense from them on their policy response to the COVID-19 pandemic.

We have with us tonight Ravi Menon, the Managing Director of the Monetary Authority of Singapore, who is not only a friend, but one of the most recognisable thought leaders of central banking and finance in the 21st century. And that's a lofty title I give you, but I can't think of anyone else who's been really more forward-leaning and thoughtful about what central banking and finance and banking is going to be like, not only today, but over the next several decades.

So, Mr Managing Director, if I may call you Ravi—We're really happy to have you here on your morning and my evening, and we appreciate you taking the time with us.

Ravi Menon: Well, good evening, Tim. And oh, yes, please call me Ravi, as you always do. Good to hear from you, and good to connect and all the best to everyone at the IIF. Thanks very much for doing this.

Tim Adams: Well, just on the theme that I kicked off with, if you could just give us your thoughts about how you see the impact of the pandemic on Singapore and the region. And then what has the MAS been doing with respect to responding?

I know you've been very active because I've been following you and all the things you've been doing, but I'd very much like to hear your assessment and your articulation of the MAS' response.

Ravi Menon:
Well, Tim, as you know very well, globally, we are facing a health crisis and a consequent economic crisis. And it's important to realise both dimensions to this. So a comprehensive policy response needs to address both challenges jointly.

Singapore's strategy has centred on containing the pandemic, of course, and dealing with the economic slowdown.

On the health care front, and this is very critical, the strategy is based on careful testing, rigorous contact tracing, and quick isolation of confirmed cases. The government has been providing very detailed daily updates to keep the public informed, prepared, and safe. We've had a few waves of infections and since the 7th of April Singapore has been in a partial lockdown. We call it a circuit breaker here, basically all non-critical services have been suspended. Most people are working from home, and can only leave home for very specified purposes. We want to bring down the number of community transmissions to single digits, and we've pretty much achieved that. Community transmission is in single digits.

The reason why I'm emphasising this is because I think whenever we talk about the economics, it is going to be dictated primarily by the trajectory of COVID-19. What everyone is doing on the health front matters a great deal for economic outcomes.

So now, like most others, we're preparing to restart economic and social activity, from the second of June, that's next week [at the time of recording], but we've got to do it very progressively, and in a rather calibrated, gradual manner. The advice is still, if you can work from home, continue to do so. We're going to relax most of the prohibitions on economic activity to get the economy restarted.

Naturally, when you have a situation like this, a severe blow to the economy, you are hit by both a supply and demand shock.

Singapore is facing the most severe recession in our history. GDP growth this year is forecast at minus seven to minus four percent. So, the focus of macroeconomic policy response is not so much to stimulate headline GDP growth per se, that's not going to be possible because both supply and demand are severely impaired globally. Border control restrictions on people movement, it is actually meant to reduce activity until you can reduce the infection rate. So almost by definition, you're not going to get much production or economic activity.

The key focus is not so much the GDP growth rate, but to support businesses, support workers, support households, sustain them through this period, lay the foundations for economic recovery and then emerge stronger from the crisis.

So, quite appropriately, the centrepiece of the response has been fiscal policy, and the government has implemented four packages in as many months. And the slew of fiscal measures which would be familiar to many people, is broadly similar to what many others have been doing: wage subsidy for businesses, cash transfers for households, and also various kinds of training and other support for capability building.

The total fiscal spending has accumulated to about 20 percent of GDP. So that's, I think, one of the highest in the world. Thankfully, we have a healthy stock of reserves which we've been able to use. So that's been helpful.

Then coming to MAS, our role is mostly supportive of fiscal policy in three distinct ways:

First, easing monetary policy in line with the slowdown in the economy. Second, ensuring the smooth functioning of the funding markets. And third, facilitating the flow of credit to the real economy.

On the monetary policy front, as you know, and I think others might be familiar as well, in Singapore monetary policy is centred on managing the exchange rate of the Singapore dollar against a trade-weighted basket of currencies. We eased the rate of appreciation of the Singapore dollar to zero percent, starting at a lower prevailing level of the exchange rate in March. So the exchange rate is at a lower level and has been kept stable. This is an accommodative and supportive policy stance.

Second, for us, ensuring the smooth functioning of the short term funding markets has been a priority.

So far, market functioning has remained intact and been able to provide liquidity. Now, globally, liquidity is fetching a higher price, understandably, but luckily tightness has abated somewhat and the situation is benign in Singapore.

We are deliberately leaving more liquidity in the banking system to moderate higher funding costs. We've taken particularly focused steps to ensure US dollar liquidity funding is available for credit to flow to businesses and individuals in both Singapore and in the region.

I think for those in the US, this would be taken for granted. But for most of the rest of the world, we not only need domestic currency liquidity, we also need US dollar liquidity. In fact, US dollar activity has been growing in the region over the past decade. There's great demand for US dollars, and in March, I think everyone had a scare with dollar funding shortages.

Thankfully, the Fed has stepped in — very decisively, I must say — and in a timely fashion, and helped to stabilise the situation both in the US and indirectly through the swap agreements in much of the rest of the world. As for Singapore, as a regional financial centre, we have a responsibility to ensure dollar funding conditions in the region do not come under significant pressure. So with the support of the swap line with the New York Fed, we set up a US$60 billion facility to support US dollar lending to businesses, both in Singapore and in the region.

The third thing that we've done is to work closely with our financial institutions to ensure credit support to businesses and households. Like most regulators, we don't have powers to direct banks to lend or set conditions, and mere exhortations don't work as you see in some other jurisdictions. So what we did was sit down with the banks and work out a baseline industry support package that all the banks could sign up to. Individual banks, of course, if they want to give more relief, they're free to do so. But as an industry, we agreed on a common baseline of support.

The two areas we've focused on are individuals and small and medium-sized businesses. For individuals, the banks agreed to provide a moratorium until the end of the year for repayment of housing loans, car loans, student loans.

For SMEs, if the security is good, then principal repayment is deferred. Banks also agreed to convert expensive credit card loans to cheaper term loans. We want to make sure that during this period we do not build up excessive debt or if we do build up debt, that the interest cost is kept low so that we don't have a huge debt problem next year.

The government is sharing the risk on loans to SMEs to the tune of 90 percent risk share. MAS has launched a facility to lend to banks at 0.1 percent for a tenure of two years, for them to on-lend to small and medium enterprises.

The formula is simple: Government underwrites most of the risk of lending; the central bank provides zero-cost funding; and the banks decide who to lend to and how much to lend based on their credit assessment. So, each party is doing what it is best at. The package has been in place, and take-up has been quite good.

Tim Adams: Obviously, comprehensive as I would have expected, two follow-up questions:

With respect to the funding markets, were there surprises in terms of stress and corporate bonds or money markets or other short term instruments that you hadn't stressed before?

And two, what about regional cooperation? Your banks there obviously operate regionally. Your economy is integrated regionally. How do you cooperate with your counterparts to the north, south, east and west?

Ravi Menon: The corporate bond markets saw some severe stresses in March across the region. We were taken aback by the degree of stress that we saw globally in financial markets during those two weeks in March, including in the United States.

I remember some of my traders telling me, in their 30 years watching markets, they've never seen the US Treasury market, for instance, seeing this kind of tightness. You just couldn't trade, and that was worrying.

The corporate bond market, especially the US commercial paper market is important for businesses in Singapore and in the region, who use this market quite actively for dollar funding. There was a period when this was under severe stress. This was not something that we saw even during the Global Financial Crisis. The tightness was real. We were dusting off our contingency plans for a financial crisis, but like I said earlier, thankfully, the Fed stepped in strongly and put in place measures that went even beyond what we saw in the Global Financial Crisis. Very creative new facilities, and that helped to stabilise markets. Swap lines were extended to an additional nine countries, of which Singapore is one – this helped to quite quickly restore the situation. At the same time, we were seeing capital outflows from some of the regional economies, but that also abated.

So it was a period of great anxiety and stress for about two to three weeks, but quickly, that came under control in most of the region.

On regional cooperation, how we are working together, we have had a couple of calls among the central banks in the region, mostly sharing experiences - not limited to just the economic outlook - but also our policy responses; asking each other "How do you deal with this kind of issue?" and really trying to learn from one another.

Much of what I described earlier on, in terms of our own responses, benefited just by studying what other countries were doing and linking together what makes sense for us.

There's quite a lot of mutual exchange of ideas on policy measures and also alerting one another to some of the risks that may be building up. Even as we try to fight the crisis, we need to be sure that we do not build up huge problems for the future.

Tim Adams: Well the debt level that you mentioned, and you're taking a responsible approach to debt accumulation, you saw the OECD's headline grabbing statistics that 17 trillion increase in debt, budget deficit in the US is six percent of GDP, so it is an issue that we're all going to be facing, especially in the emerging markets.

As you know, we follow EM debt stresses pretty closely - we have seen in this cycle a big increase in corporate debt among EMs and state-owned enterprises.

So I assume that's something that you're watching in the region as well?

Ravi Menon: Yes, absolutely. In fact, the accumulation of debt is probably going to be the number one aftermath of the COVID-19 pandemic. And we're going to have to deal with it, you know, from 2021 onwards.

The buildup of debt is going to have multiple effects. One of the risks we are quite concerned about is renewed capital outflows from emerging market economies. They remain vulnerable if there is a round of secondary waves of infections, which is why I keep coming back to, you know when you talk about economics, we've got to talk about the pandemic.

I think the market expectation that there's going to be a recovery in the second half of this year and then we'll all gradually get out of this over the course of 2021 is going to be severely tested.

Given how highly infectious COVID-19 is, I think it will be almost inevitable, that there'll be renewed outbreaks and secondary waves of infection. How we deal with these secondary waves is going to matter a great deal. Different countries will respond differently and they have different capacities.

There's a mismatch between market expectations and how the economies are likely to come out of this, because there are going to be setbacks. It's going to be a fits-and-starts kind of recovery.

That could trigger renewed capital outflows from emerging economies, because of a renewed rush into liquid and safe assets. That's never a good scenario for emerging markets - tighter financial conditions and corporate refinancing risks.

Tim, you mentioned the corporate debt issue. We went into the crisis with, one strong card and one weak card.

The strong card is that globally the banks are in great shape. Most of them, US banks, UK banks, Asian banks, generally have very strong capital and liquidity buffers. That's our strong card.

The weak card is that corporate debt was high even before COVID-19, and now corporate debt is building up in many parts of the world. If the COVID-19 situation is not contained, that debt is going to continue to grow and credit risks will start to mount. Once all these loan deferments and forbearance is over, because you only can do so much, then you're going to have more corporate distress. I think that is going to be a big problem we have to deal with.

A third risk - you're going to see increased deterioration in credit quality. There's going to be ratings downgrades. Again for now, there's a little bit of forbearance, I think, but not for long. I think once the rating agencies start to downgrade bonds and corporate loans, you're going to see an exacerbation of existing stresses.

This is especially the case in the US and Europe, where you have many corporate bonds at the borderline between investment grade and below. So all these BBB rated bonds, if they cross that threshold, we could have fire sales, large outflows, and sell offs. This could exacerbate some liquidity risks. So corporate downgrades is something we're looking at carefully, which is why I think it's important that emergency measures that all governments and central banks have taken cannot be carried on for too long. We need an exit strategy before this debt accumulates to a point where we have to deal with it for years after.

Tim Adams: I completely agree. I think it will be one of the great challenges for all of us in the coming years.

You know, as you were talking, I was reminded of a speech you gave at the San Francisco Fed a couple of years ago where you were positioning yourself maybe a decade in the future, and looking back on the crises that were to come.

I don't think you had a pandemic as part of your repertoire of crises, but in some ways, it was really prescient of the kinds of crises we need to think through over the coming months and years - so kudos to you, and now I'll have to go back and reread that excellent speech.

I can't let you get away without obviously talking about technology and innovation. Singapore is an innovation hub, not only for the region, but globally and since we're all working from home and we're learning to function in a decentralised fashion - you have been a leader on data localisation, you've signed a number of MOUs on connectivity with Australia and the US.

How are you thinking about data flows and connectivity given this crisis?

Ravi Menon: Very good point you're making there, Tim. In many ways the crisis is accelerating, quite considerably, trends that are already underway.

One of the trends that was already underway was digital connectivity.

We need to think about connectivity between countries in broader terms than the usual physical transport, logistics kinds of links, to also think about digital connectivity, data connectivity. We're very pleased that Singapore hit the ground running this year with agreements with both the US Treasury - a statement of intent on data connectivity for financial services - and of course the full-fledged digital economy agreement with Australia in March.

This I think will be the name of the game. Not just free trade agreements, but digital economy agreements, which have a range of provisions on how we can make the flow of data seamless across jurisdictions, but also in a safe manner, secure from cyber threats, and also protecting confidentiality.

The agreements with the US and Australia are a good start and we want to build on this momentum. Today everyone is preoccupied with fighting the fire of the crisis, but we want to continue to press on this longer term agenda in other bilateral settings and also in the multilateral setting.

When you have a string of bilateral agreements of this nature, it becomes easier to stitch them together into something that's more plurilateral. Financial institutions especially will find this important because most financial institutions now have cross-border operations, and you need to analyse financial data consolidated across portfolios in different jurisdictions so that you can have effective risk management. Restrictions on data flows across borders is a severe limitation.

COVID-19 has now forced us to work remotely dealing with data across multiple jurisdictions and information flows. I think this is really going to underscore the importance of data connectivity.

It's quite critical for organisations like the G20, the Financial Stability Board, even the WTO - because this is a new dimension of trade – to look at data connectivity, digital connectivity, and how to make our systems interoperable. There are early discussions at the BIS on cross-border payments, for instance, cross-border invoicing, how do you establish identity in a safe manner, in a trusted manner across jurisdictions.

There are lots of stuff we need to think hard about on the data and digital fronts, which COVID-19 has just brought to the fore. I'm quite hopeful that we will make progress on this front once people's minds shift towards the post-COVID world and what we need to do to prepare for it.

Tim Adams: And given the environment that you just described, might that give an advantage to FinTechs, the new entrants, or the platform companies - the Ant Financials - that are more technology savvy or more adept in working in a data driven environment, maybe have a cost structure that's more oriented toward that environment?

Ravi Menon: Yes, I think they do have some inherent advantages. But I don't feel confident making a prediction that they are definitely going to do better in this. I think many of the global banks are also getting their act together on this front.

Several trends coming together: remote working, cross-border payments and invoicing, you are seeing e-commerce taking off in a big way - and all of this requires a certain interoperability of systems across borders and jurisdictions. They also require a certain seamlessness in how these different parts fit together.

The platform companies do have an advantage because they bring together various kinds of services, but I don't think they have a monopoly on this because I think platforms can also be built as a public good, which is one of the things that we're trying to do with respect to trade finance.

There are about 30 different players in a trade transaction - freight forwarders, importers, exporters, insurers, banks, customs, shipping authorities, and so on. It’s a tremendous amount of paperwork, duplication, and yes, some fraud.

There's great hope to digitalise these transactions, put them on a common platform, and private sector players can come in with value adding services that ride on these platforms. I think you're going to see also a democratisation of these platforms - public utilities of sorts, or public-private partnerships at a much lower cost, and then service providers coming in to connect to these platforms and provide solutions that may be bespoke or customised to various users on these platforms.

That's one way the world might evolve, the private platform companies who have kind of had a monopoly may not be able to sustain those advantages.

I think another important development is the idea of data reciprocity. That if you are exploiting data from a source, you should put your own data on the table.

With respect to things like open banking, for instance, that's the position MAS is taking. Non-bank players can come in to provide financial services, but they need to put their own data into the common utility so that banks can also access other non-bank data in order to provide comprehensive solutions.

These are interesting developments. I hesitate to make any strong prediction, but these will be interesting things to watch and try to shape for the better for the future.

Tim Adams: Well, fortunately, Ravi, you have incredibly talented bankers in Singapore and institutions that are technology leaders, but you've also created an environment where you want competition from a variety of different sources so that ultimately consumers benefit from the best technology and the best business model - and I applaud that.

I think that's the way to create the right environment.

You know, unfortunately, I've run out of time. It seems like we just got started.

I want to thank you again for taking your morning and spending it with me. I really look forward to being able to see you again in person. I don't know when that's going to be, but I look forward to that and having an opportunity to speak longer, and in each other's presence, about all these issues.

Again, I want to thank you for spending time with us today.

Ravi Menon: Tim, it was a real pleasure to catch up again, to hear you, and to reconnect. I too look forward to catching up again in future settings, be it in person or channels like these.

All the best to all your members, wish them the best during this period. I think banks can be part of the solution this time, and many of them have been doing good work and I commend all your members for the great work they're doing.

Also to you Tim, and your colleagues, thank you very much.

Tim Adams: Thank you, Ravi. Take care of yourself. Be healthy, be safe, see you soon.