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Covid-19: Tharman warns that decades of global gains could unravel as prolonged low interest rates threaten recovery
By NG JUN SEN
There is also “a very real risk of a submerging world" as decades of global economic growth — led by the growth of emerging economies such as China — could get wiped out by the fallout from the pandemic, he said.
“The strategy of an extended period of very low or negative interest rates, as (far) as a significant payoff in terms of corporate investment goes, just hasn't been very effective or efficient,” said Mr Tharman, who was taking part in a virtual panel organised by DBS Bank as part of its two-day Asian Insights Conference.
The panel consisted of former International Monetary Fund (IMF) chief economist Raghuram G Rajan and was moderated by DBS chief economist Taimur Baig. The one-hour session looked at the economics behind the ongoing health crisis.
In March, the United States Federal Reserve, in response to the mounting Covid-19 crisis that has since sent the US economy into a tailspin, sliced its benchmark interest rate to near zero to buttress its economy and stimulate growth.
Typically, Fed rate cuts have an impact on interest rates elsewhere in the world, including Singapore. The Singapore Interbank Offered Rate (Sibor) — to which interest rates are pegged — is closely linked to global money markets. Since the Fed cut in March, the one-month Sibor has fallen to around 0.25 per cent, down from above 1.5 per cent before the pandemic.
Asked about the likelihood of a persistent low interest rate environment, Mr Tharman said: “We've gone through an extended period — almost uninterrupted since the (2008) global financial crisis — of extremely low interest rates and substantial amounts of liquidity flowing around the system. You don't need to be an economist to say this has contributed to much higher levels of corporate leverage (using borrowed money to invest).”
Low interest rates make it less costly for businesses to borrow money, which, in theory, comes in handy during a crisis to help spur investments and spending. Central banks around the world cut interest rates to historic lows in the wake of the global financial crisis, and rates have stayed at near record lows since then.
Read also: By safeguarding jobs, Covid-19 measures ensure households are supported: Heng Swee Keat
LOW INTEREST RATES LED TO INCREASED RISK
But while “it is the right thing to do in the midst of a crisis”, prolonging such a strategy did not pay off in spurring corporate investment significantly since the global financial crisis in 2008, added Mr Tharman, who is also Monetary Authority of Singapore chairman.
Instead, it led to investors’ money flowing into higher risk investments or “in an indiscriminate fashion” into emerging markets in a bid to search for higher yields amid the low interest rate environment.
Said Mr Tharman: “We entered this crisis with a lot of risk in the system already, and a fair amount of that risk was the consequence of well-meaning central banks suppressing risk premia and encouraging people to go on a search for yield by looking for more and more risks.”
Agreeing, Professor Raghuram noted that when the pandemic erupted, investors started to pull out of emerging markets until the Fed cut its rates in March, and then money flowed back in.
He said: “If we have more blows to come, which is still an area of uncertainty, then perhaps what (the Fed) have done is just to stave off the moment… acting as a palliative rather than a solution.”
Another important impact of low interest rates will be on pension funds and retirement savings around the world, noted Mr Tharman. With long-term returns for retirement and pension funds possibly falling as a result, this could compel people to save more and cut back on consumption, said Mr Tharman, who is also the Coordinating Minister for Social Policies.
“That's the natural reaction. And when you save more, you're consuming less, and that becomes a dampener to growth as well. So that's another reason why one has to be a little sceptical about the effectiveness of this strategy in promoting growth,” he said.
REAL RISK OF A SUBMERGING WORLD
While a low interest rate environment could allow countries to borrow more in the short-term to help mitigate the crisis, which many have done, Mr Tharman said he was concerned about the longer term implications of a pile-up of government debt especially in the emerging economies.
“High levels of debt mean higher levels of fragility,” he said, explaining that when interest rates spike down the line, it could lead to a downward spiral for these debt-laden economies, such as what happened in the Greek government debt crisis.
Mr Tharman, who chairs the National Jobs Council, also noted that Singapore did not have to borrow substantially due to its ability to dip into its reserves.
“When we think about the future of the world economy, it's fundamentally about whether the emerging world is going to continue to emerge, or whether it's going to submerge. There is, today, a very real risk of a submerging world.
“I say this not rhetorically. It is a very real risk that the gains we made over two to three decades are going to unravel,” he cautioned.
Reiterating a point he made during a Lee Kuan Yew School of Public Policy virtual dialogue on Wednesday, Mr Tharman spoke about the need to keep unemployment in check during a crisis and Singapore needs companies to play ball as the Government “aggressively” promotes hiring for permanent jobs and subsidises traineeships and job attachments.
"One role of governments is to work with industry leaders to bring others along. If we work in concert with industries, small firms and big firms, foreign and local, you're more likely to get the small firms coming along," he said.
PREVENTING HUMANITY FROM 'DESCENDING INTO HELL'
He highlighted how, in the past decade, about two-thirds of global growth came from the emerging world — one third was due to China’s growth while the other third came from other developing nations in Africa, South Asia and Latin America.
If the emerging world flounders, however, such a scenario will have a severe impact on the rest of the world beyond economics alone.
“We are going to see consequences which are social, political, and which are going to be geopolitical: Everything from forced migration as well as the export of political extremism, will become a reality if you see limited growth and large numbers of people becoming unemployed, either formally or informally unemployed,” he said.
Unlike in past crises, the response from the world’s multilateral organisations such as the IMF and the World Bank to aid emerging markets has been “relatively timid”, partly because of geopolitical reasons, added Mr Tharman.
Quoting former United Nations secretary-general Dag Hammarskjöld, he said: "The aim of global co-operation and multilateralism is not to take humanity to the heavens. It is to prevent humanity from descending into hell.”
He added: “The natural tendency in global competition is for increasing friction, for rivalries and for a descent into the wrong things. We've got to fight like hell to prevent that from happening.”
By NG JUN SEN
- Mr Tharman said long-term low interest rates used to combat the 2008 global financial crisis did not pay off
- The low rates, designed to spur growth, led to greater risks before the pandemic, he said
- Moves by the world’s central banks to cut interest rates further to tackle Covid-19 crisis could backfire if prolonged
- Mr Tharman warned of a global pile-up of government debt, and the ‘real risk’ emerging nations could flounder
There is also “a very real risk of a submerging world" as decades of global economic growth — led by the growth of emerging economies such as China — could get wiped out by the fallout from the pandemic, he said.
“The strategy of an extended period of very low or negative interest rates, as (far) as a significant payoff in terms of corporate investment goes, just hasn't been very effective or efficient,” said Mr Tharman, who was taking part in a virtual panel organised by DBS Bank as part of its two-day Asian Insights Conference.
The panel consisted of former International Monetary Fund (IMF) chief economist Raghuram G Rajan and was moderated by DBS chief economist Taimur Baig. The one-hour session looked at the economics behind the ongoing health crisis.
In March, the United States Federal Reserve, in response to the mounting Covid-19 crisis that has since sent the US economy into a tailspin, sliced its benchmark interest rate to near zero to buttress its economy and stimulate growth.
Typically, Fed rate cuts have an impact on interest rates elsewhere in the world, including Singapore. The Singapore Interbank Offered Rate (Sibor) — to which interest rates are pegged — is closely linked to global money markets. Since the Fed cut in March, the one-month Sibor has fallen to around 0.25 per cent, down from above 1.5 per cent before the pandemic.
Asked about the likelihood of a persistent low interest rate environment, Mr Tharman said: “We've gone through an extended period — almost uninterrupted since the (2008) global financial crisis — of extremely low interest rates and substantial amounts of liquidity flowing around the system. You don't need to be an economist to say this has contributed to much higher levels of corporate leverage (using borrowed money to invest).”
Low interest rates make it less costly for businesses to borrow money, which, in theory, comes in handy during a crisis to help spur investments and spending. Central banks around the world cut interest rates to historic lows in the wake of the global financial crisis, and rates have stayed at near record lows since then.
Read also: By safeguarding jobs, Covid-19 measures ensure households are supported: Heng Swee Keat
LOW INTEREST RATES LED TO INCREASED RISK
But while “it is the right thing to do in the midst of a crisis”, prolonging such a strategy did not pay off in spurring corporate investment significantly since the global financial crisis in 2008, added Mr Tharman, who is also Monetary Authority of Singapore chairman.
Instead, it led to investors’ money flowing into higher risk investments or “in an indiscriminate fashion” into emerging markets in a bid to search for higher yields amid the low interest rate environment.
Said Mr Tharman: “We entered this crisis with a lot of risk in the system already, and a fair amount of that risk was the consequence of well-meaning central banks suppressing risk premia and encouraging people to go on a search for yield by looking for more and more risks.”
Agreeing, Professor Raghuram noted that when the pandemic erupted, investors started to pull out of emerging markets until the Fed cut its rates in March, and then money flowed back in.
He said: “If we have more blows to come, which is still an area of uncertainty, then perhaps what (the Fed) have done is just to stave off the moment… acting as a palliative rather than a solution.”
Another important impact of low interest rates will be on pension funds and retirement savings around the world, noted Mr Tharman. With long-term returns for retirement and pension funds possibly falling as a result, this could compel people to save more and cut back on consumption, said Mr Tharman, who is also the Coordinating Minister for Social Policies.
“That's the natural reaction. And when you save more, you're consuming less, and that becomes a dampener to growth as well. So that's another reason why one has to be a little sceptical about the effectiveness of this strategy in promoting growth,” he said.
REAL RISK OF A SUBMERGING WORLD
While a low interest rate environment could allow countries to borrow more in the short-term to help mitigate the crisis, which many have done, Mr Tharman said he was concerned about the longer term implications of a pile-up of government debt especially in the emerging economies.
“High levels of debt mean higher levels of fragility,” he said, explaining that when interest rates spike down the line, it could lead to a downward spiral for these debt-laden economies, such as what happened in the Greek government debt crisis.
Mr Tharman, who chairs the National Jobs Council, also noted that Singapore did not have to borrow substantially due to its ability to dip into its reserves.
“When we think about the future of the world economy, it's fundamentally about whether the emerging world is going to continue to emerge, or whether it's going to submerge. There is, today, a very real risk of a submerging world.
“I say this not rhetorically. It is a very real risk that the gains we made over two to three decades are going to unravel,” he cautioned.
Reiterating a point he made during a Lee Kuan Yew School of Public Policy virtual dialogue on Wednesday, Mr Tharman spoke about the need to keep unemployment in check during a crisis and Singapore needs companies to play ball as the Government “aggressively” promotes hiring for permanent jobs and subsidises traineeships and job attachments.
"One role of governments is to work with industry leaders to bring others along. If we work in concert with industries, small firms and big firms, foreign and local, you're more likely to get the small firms coming along," he said.
PREVENTING HUMANITY FROM 'DESCENDING INTO HELL'
He highlighted how, in the past decade, about two-thirds of global growth came from the emerging world — one third was due to China’s growth while the other third came from other developing nations in Africa, South Asia and Latin America.
If the emerging world flounders, however, such a scenario will have a severe impact on the rest of the world beyond economics alone.
“We are going to see consequences which are social, political, and which are going to be geopolitical: Everything from forced migration as well as the export of political extremism, will become a reality if you see limited growth and large numbers of people becoming unemployed, either formally or informally unemployed,” he said.
Unlike in past crises, the response from the world’s multilateral organisations such as the IMF and the World Bank to aid emerging markets has been “relatively timid”, partly because of geopolitical reasons, added Mr Tharman.
Quoting former United Nations secretary-general Dag Hammarskjöld, he said: "The aim of global co-operation and multilateralism is not to take humanity to the heavens. It is to prevent humanity from descending into hell.”
He added: “The natural tendency in global competition is for increasing friction, for rivalries and for a descent into the wrong things. We've got to fight like hell to prevent that from happening.”
