The Invisible Hand is About to Give Singapore’s New Breed a Spanking

An adherence to free-market principles and a light touch to regulation have been the reasons behind Singapore’s phenomenal success. The high taxing redistributive policies of the ailing developed nations were rejected in favour of low taxes. Infrastructure spending rather than welfare spending is the guiding logic behind fiscal policy. Monetary policy has been conducted through the exchange rate supported by a mighty foreign reserves position.

Embracing the invisible hand, however, can bring some unwelcome consequences. Property prices have boomed, as one would expect with high incomes, low taxes and limited land supply. Rising property prices are politically sensitive and so the new breed of Singapore’s policy makers (post Lee Kwan Yew) introduced a series of ‘cooling measures’ from 2009 to 2013 in an attempt to fight the market. Not surprisingly, these measures have done little to make property more affordable – instead the effects have been to stifle capital mobility and drive market liquidity to zero.

So now its January 2015 and suddenly the world economy looks a bit wobbly, the European’s have embarked on a QE program, and ‘deflation’ is the new buzz word. Reacting with a sense of urgency, Singapore’s Central Bank decided last week to take steps to weaken the currency further – the SGD has fallen roughly 10% against the Chinese Yuan (see graph) over the last six months and an additional 10% decline now seems on the cards…