Finance Minister of the Year 2013: Singapore’s dynamo presses reform


Sid Verma
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Singapore is shifting its growth model from population-driven to productivity-driven expansion, while maintaining its status as an innovative trade and financial-services hub to diversified export markets. Finance minister Tharman Shanmugaratnam has played an overarching role in the city-state’s economy and serves as the region’s statesman on the international stage.

The violent synchronized sell-off across many emerging markets this summer has served as a rude awakening for policymakers in Asia, in particular. The market correction, at its heart, reflects fears that too many governments have relied on fiscal and credit easing to power above-potential growth in recent years, rather than capitalizing on the era of ample global liquidity to push through structural supply-side measures. From India, Indonesia, China to Vietnam, rising financial imbalances or competitiveness challenges – thanks to inertia over supply-side reforms – blight the growth outlook more than the US Federal Reserve’s shift to a less accommodative policy.

Singapore, however, has continued to blaze a reformist trail in recent years through labour and financial reforms in order to boost productivity and competitiveness, ensuring the city-state continues to punch above its weight in the region, despite being the size of the urban corridor of a medium-sized provincial city in China.

The government has reaped the benefits of its highly competitive and diversified economy to ride through the global storm in 2008, while, in recent years, it has focused on restructuring the corporate sector and addressing social-cohesion concerns, rather than deploying a growth-at-all-costs macroeconomic policy.

After notching up growth rates in the region of 5%-plus since 2007, the government is shifting its growth model away from a reliance on expanding a wage-competitive labour force to power economic expansion, aiming instead at boosting productivity.

The winner of Euromoney’s finance minister of the year award, Singapore’s Tharman Shanmugaratnam
The winner of Euromoney’s Finance Minister of the Year award, Singapore’s Tharman Shanmugaratnam
Not content with resting on his laurels and relying on low taxes to attract foreign direct investment and business from Asia and elsewhere, finance minister Tharman Shanmugaratnam has spearheaded this push to find new sources of economic growth, while building a social safety net to address discontent over strained infrastructure and rising living costs, in part driven by a surge of migrant workers in recent years.

There is universal consensus that there is no better policymaker than Shanmugaratnam to push through this domestic agenda, while actively crafting policies to ensure the city-state maintains its relevance amid competition from such rivals as Kuala Lumpur, Shanghai and Dubai. "He is a thoroughly impressive policymaker, who is tremendously knowledgeable about economic affairs, proactive in engaging the market about the impact of the government’s policies, and well respected at the grassroots level in the Singaporean community," says Michael Zink, head of Asean and chief executive officer for Singapore at Citi.

Through fiscal and educational measures to reward industry innovation and the placing of restrictions on cheap foreign labour to coerce companies to embark on reforms to maintain margins, Shanmugaratnam has set his sights on annual labour-productivity growth of 2% to 3% between 2010 and 2020. The restructuring plan, officially in its fourth year, is laudable given the challenges to maintaining the frenetic growth of the foreign labour force of recent years and appreciating pressures on the currency. Although few analysts expect the government will be able to meet its ambitious targets, they are firmly supportive of this policy shift. Official measured productivity has lagged behind targets, but the spirit of the restructuring is, in some senses, already being fulfilled, reckons Irvin Seah, economist at DBS, citing the fact that real median income has grown 3.1% annually over the past four years, in keeping with the aim of increasing income by 30% between 2010 and 2020.

Underscoring the strong demand for the city-state’s goods and services, the minister has been closely involved in a master plan for further development. Announced by prime minister Lee Hsien Loong in August, the plans include doubling capacity at southeast Asia’s busiest airport – beating Dubai for connectivity – building a new waterfront city, and freeing up land for development, entrenching Singapore’s reputation as a pioneering hub.

After spending much of his early professional life at the Monetary Authority of Singapore (MAS), the city-state’s central bank, where he was the chief executive, before entering politics in 2001, Shanmugaratnam is well versed in the art of microeconomics and macroeconomics, but is still capable of fleshing out policies with a human touch, prioritizing spending on healthcare, affordable housing and employment benefits to address widening income disparity. Michael Wan, a Singapore-based economist at Credit Suisse, says: "He has a lot of experience, is a competent economist, boasts a strong policy track record at the MAS and, in recent years especially, has shown a knack for social empathy. It is quite a lot of power invested in one man – but rightly so, as there is strong consensus that he is the best person to lead Singapore on the economic front."

Appointed finance minister in December 2007, Shanmugaratnam has an over-arching role in Singapore’s economy, and serves as deputy prime minister and chairman of the MAS and is a member of the board of the Government of Singapore Investment Corporation. Underscoring confidence invested in the minister among the policymaking community, Shanmugaratnam is routinely offered a seat at the high table of international financial diplomacy. Citi’s Zink says: "It is a reflection of strong confidence invested in him by the international community that he is consistently invited to chair global forums such as the international monetary and financial committee of the IMF." Piyush Gupta, CEO of DBS Bank, Singapore’s largest, adds: "His keen grasp of monetary policies and global economics is well known and respected, not just in Singapore and Asia, but in the international community as a whole. I am particularly a fan of his ability to balance competing sociopolitical and economic agendas, and his tenacity in staying the course."

Shanmugaratnam, who has degrees from LSE, Harvard, and Cambridge, is regarded as one of the region’s smartest finance ministers: market players are known to flock to conferences to hear him talk about issues as diverse as financial regulation, global imbalances, Asia’s growth model, headwinds from Europe and the US, and the international monetary architecture. From the vantage point of a liberalized global financial and trade hub in the world’s most economically vibrant region, the minister has assumed a statesman-like role in Asia. In recent years, for example, he has cogently argued for the need for supply-side reforms to address tightening labour markets in the region and greater cross-border regulatory coordination over systemic banking risks and financial imbalances, citing macro-prudential arbitrage and limited domestic monetary policy tools. It’s no surprise, therefore, that calls snowballed in 2011 for the former MAS policy wonk to challenge Christine Lagarde for IMF leadership.

Underscoring the market confidence in Singapore as an offshore financial hub and as an intermediary for regional trade and investment flows, the city-state now rivals Switzerland in attracting wealth-management products. Mindful of reputational concerns and regulatory arbitrage, Shanmugaratnam has taken an active stance in increasing compliance requirements for banks and introducing measures to curb tax evasion, encouraging other jurisdictions to sign up to OECD-backed international tax cooperation initiatives.

Although Singapore has outperformed in the Asian market sell-off over the summer and the government has raised its 2013 GDP growth target to 2.5% to 3.5% from 1% to 3%, thanks to higher-than-expected growth in the service sector, the economy faces domestic and external headwinds. Moody’s recently downgraded its outlook on Singapore’s banking system, citing cross-border leverage risks, fears of a property bubble and rising indebtedness. Credit growth in Singapore in recent years has substantially outpaced nominal GDP growth, with household borrowing, as a proportion of GDP, at an elevated 77%, compared with 64% in 2007. The credit expansion is in part attributable to domestic exuberance over rising real estate prices and limited tools to control domestic credit conditions as the exchange-rate band effectively imports loose G7 policy. Nevertheless, Shanmugaratnam, who has a stake in monetary policy, has pushed for tighter prudential regulations and seven rounds of property-cooling measures, including steeper stamp duties and lower loan-to-value ratios for mortgages, which, combined with regulatory vigilance, have averted fears that a drop in real estate valuations would pose a systemic financial risk, say analysts.

Nevertheless, the proverbial dragon in the room remains, as ever, the prospect of a hard landing or a disorderly transition to a consumption-driven economy in China. Given that the Asian powerhouse remains one of Singapore’s top export markets, the city-state is chained to China’s growth cycle. Nevertheless, in part thanks to Shanmugaratnam’s tireless push to find diverse sources of growth, Singapore is the region’s most open economy and well placed to capitalize on the US rebound.

Domestic or external events might yet force the minister to flex his crisis-fighting muscles — and few policymakers in Asia would be as capable in navigating the storm.

For an in-depth interview with finance minister Shanmugaratnam, read Euromoney's October issue.