Thursday, 18 July 2013

The Trilemma of Singapore and its property market

There is nothing much the government can do to help Singaporeans under the trilemma of international finance, especially an effective money supply policy.

As far as we maintain free flow of capital and stable (managed float) exchange rate policies, we will be in a difficult position to have an effective money supply to help Singaporeans. 
We will also not be able to maintain low interest rate and have to follow the trend of international finance.

The recent downgrade of our banking system is an example of this trilemma. International buyers of our financial assets, including property, have full right to move their money in and out of Singapore.  Also to maintain our position as a financial centre, we have to allow the free flow of capital.

As regards to exchange rate, a depreciated Singapore dollar will result to higher inflation.  Singaporeans are complaining about price increases of almost everything. Cost of living is a political issue in Singapore but it has nothing to do with international buyers of financial assets and they look for returns. The Moody’s report is pointing to assets inflation and high debt of local people. If the returns are no more attractive, international buyers can move their money away from Singapore with a rather stable S$ exchange rate.  In fact, they lose very little.  They can always come back after assets inflation and weaker S$. Their returns may be even higher considering the huge drop in financial assets and weaker S$ in Singapore.  

To effectively arrest the situation, an effective money supply policy is needed but it is quite impossible to achieve under the trilemmna of international finance. If you recall how Malaysia and Thailand/Indonesia reacted to the financial crisis, you will have a clear picture. Malaysia stopped the free flow of capital so that it can have effective money supply policy.

What is the trilemma of international finance?

source: blog.telegraph.co.uk

It basically tells us you cannot have all the good things in one go. You have to choose two out of three policies and cannot have all the three policies at the same time.

To understand the issue, The New York Times has this easy article to help you understand trilemma. #1 We can draw a simple table to show how different countries based on this article of their trilemma position:


Free flow of capital
Effective
Monetary policy
Stable exchange rate
USA
Yes
Yes
No
China
No
Yes
Yes
Individual European countries
Yes
No
Yes

Singapore’s situation is quite similar to individual Euro-zone country, e.g., Grace or Spain. They cannot have an effective monetary policy of their own.

The reasons for our ineffective monetary policy are different from Grace or Spain or Portugal but the aftermath is the same.  The government, however clever however smart and how many million salary collected, is not able to help Singaporeans under the trilemma of international finance.

Of course, if you are rich enough to act and work like an international buyer of financial assets, you will be benefited from the trilemma system. You can restructure your portfolio you can park your money overseas for future advantages in Singapore.

The Monetary Authority of Singapore is right to point out the risk of higher interest rate and bubble property market but has failed to explain the operations of international finance that is against the small not so rich property buyers.

Individual Singapore property buyers are in fact casino-ing in a closed market called Singapore. They don’t have the luxury and capability to move their money out of Singapore. They have to stick with the assets inflation and deflation in Singapore property casino.

International buyers are operating in the open world market.  They don’t need loan to buy a property and international financial advisors and our professionals, be it lawyers, accountants, financial institutions, are all willing to help them.  Even they sell their property at a loss, they can still come back to buy cheaper properties later. Can our not so rich property buyers do that? Perhaps, bankruptcy is waiting for them.

Ordinary Singapore property buyers are not in equal position as international buyers.  Of course, the government likes to see the blooming in property market so that they can collect more taxes and fees.  And then, when there is a crash, they can use the money to help Singaporeans? High hope!

They are caught in between too. International buyers move their fund out with a stable S$ but the MAS cannot come out with an effective monetary policy under the trilemma.

The most the government can do is to tell you
“Property market stabilising but curbs will stay: Tharman”#2.  DPM Tharman also confirmed international buyers are looking for yield here.   

[Curbs recently imposed on foreign home buyers, such as higher stamp duties, are meant as a disincentive rather than an outright restraint, Mr Tharman said.
"It's not a closed-door policy because Singapore has to remain an open market," he said. "But we've put some sand in the wheels, a fair bit of sand in the wheels, and it's having some effect at the top end."
Mr Tharman added that rich foreigners are picking up properties here to seek higher returns, not to squirrel away money from authorities at home.
"Most of the demand for property in Singapore has been a search for yield rather than a search for a place to keep ill-gotten money," he said. ] #2

What happen if there is no good yield here?  The result is outflow of capital. However, DPM Tharman is less concern about this risk as he claims:

"Both the injection of liquidity that came with quantitative easing and the potential withdrawal are discomforts but are not going to pose fundamental risks." #2

So, are we expecting higher property price before it goes down as there is no or small fundamental risks currently? (Risks are always there as DPM Tharman sees USA and Europe are more ‘domestic’ rather than more “international’ now).  

No matter what, ordinary Singapore property buyers have to recognise the fact that they only have limited funds to play in this property casino.  Just like the 2 casinos in Singapore, just before playing you have already lost S$100 in a closed market environment.  It only looks open and international to international players and buyers.  

Good luck!


#1

#2


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