In 2007, Iceland was celebrated for attaining the world’s highest standard of living according to the U.N.’s annual Human Development Index report. In less than a generation, the tiny North Atlantic island had transformed from a traditional fishing and tourism-based economic backwater into a finance and banking powerhouse, rocketing the country’s wealth and living standards to enviable new heights. Sadly, Iceland’s economic boom was an illusion based on a reckless credit and asset bubble that led to a terrifying financial crisis when it popped in 2008.
It has been just five years since the Global Financial Crisis, and the world – in brazen defiance of the lessons of 2008 – is already back to blowing massive bubbles and naively praising the countries that are benefiting from these “fool’s gold” economic booms. The Southeast Asian island nation of Singapore is currently inflating one of the most egregious examples of these post-2009 bubbles, and is displaying parallels to Iceland’s bubble that are causing me to believe that its boom will end in a similar (but not necessarily identical) manner.
Like Iceland in its heyday, Singapore’s economic stability and vitality – on the surface at least – has made it the envy of the world at a time when most Western economies are languishing with feeble growth, and high rates of unemployment and poverty. Singapore’s booming finance and real estate-focused economy has earned it the moniker “The Switzerland of Asia”, and finance professionals from all over the world are flocking to work there to take refuge from the hard-hit financial sectors in their home countries. Singapore’s unemployment rate is a mere 1.8 percent even as the country’s red hot construction sector has been attracting overseas workers, and a growing number of wealthy citizens are hiring domestic helpers from neighboring countries like the Philippines and Indonesia. The ranks of Singapore’s wealthy are growing rapidly thanks to the country’s asset bubbles, which is helping to fuel a luxury consumption boom in everything from high-end apartments to exotic supercars.
Even though Singapore is no longer an emerging market nation, I consider its bubble economy to be part of the overall emerging markets bubble that I have been warning about due to its strategic role and location in Southeast Asia, which is also known as ASEAN (Association of Southeast Asian Nations). My recent reports on Malaysia, Thailand, the Philippines, and Indonesia show that the entire region is caught up in a massive bubble, and Singapore is benefiting from this bubble by acting as ASEAN’s financial center.
The emerging markets bubble began to inflate in 2009 after China launched a $586 billion stimulus plan to boost its economy after the Global Financial Crisis threatened the country’s economic growth. China’s stimulus plan aimed to drive economic growth with an ambitious debt-funded infrastructure and residential real estate construction boom that led to the building of countless empty and unused cities and other wasteful projects. The stimulus plan caused Chinese growth to surge, and sparked a global raw materials boom and eventual bubble that provided an economic windfall to commodities exporters such as Australia and emerging market nations at a time when the rest of the global economy was suffering very heavily. International investors soon took notice and piled into emerging market investments to reduce their exposure to investments in deeply indebted and troubled Western economies.
Extremely low interest rates in the West and Japan, combined with the U.S. Federal Reserve’s multi-trillion dollar quantitative easing or QE programs resulted in a $4 trillion torrent of speculative “hot money” that flowed into emerging market investments from 2009 to 2013. An international carry trade arose in which investors borrowed significant sums of capital at rock-bottom interest rates from the U.S. and Japan, and directed the proceeds into high-yielding emerging markets assets with the intention of profiting from the difference in interest rates or the spread.
The sudden surge of demand for EM investments led to a classic “too much money chasing too few goods” scenario, which inflated bubbles in those countries’ assets, especially in bonds, which led to record low borrowing costs for emerging market governments and corporations. These ultra-low interest rates have helped to finance government-driven infrastructure spending booms while inflating an unprecedented wave of dangerous credit and real estate bubbles in emerging nations across the globe.
Hot money inflows, combined with central bank policies that allow currency appreciation to temper inflation, have contributed to an approximate 22 percent increase in the value of the Singapore dollar against the U.S. dollar since the financial crisis:
Source: XE.com
Foreign direct investment (net inflows, current dollars) into Singapore immediately surged to new highs after the financial crisis:
Source: IndexMundi.com
The stimulative global monetary environment and resultant bond bubble have helped to push 10 year Singapore government bond yields to record lows since the financial crisis, though yields have nearly doubled in the past year after news of the U.S. Federal Reserve’s QE taper plan surfaced:
Source: Tradingeconomics.com
Why Singapore"s Economy Is Heading For An Iceland-Style Meltdown
0 comments:
Post a Comment