The Government need not fear “the power of information” if Singapore’s exchange rate remains consistent with fundamentals, said Member of Parliament (MP) for Sengkang GRC Jamus Lim on Thursday (4 Mar), adding that stabilising speculation is not just a “theoretical concept”.
During Parliament last week, Bishan-Toa Payoh GRC MP Saktiandi Supaat spoke out against revealing the full extent of Singapore’s national financial reserves.
He explained that the country would be vulnerable to “currency speculation and attacks”, as it uses the exchange rate as the main instrument in monetary policy, compared to most other countries which use interest rates.
“As a financial centre, there’s also the risk of capital flows if our currency is attacked for speculative reasons.
“I don’t think we want to add in the element of this risk into the equation for our Singaporean job seekers,” he noted, in response to NCMP Hazel Poa’s call for more transparency on the nation’s reserves.
Assoc Prof Lim, an economics professor and a council member of the Economic Society of Singapore (ESS), countered him and said that if Singapore was off fundamentally determined exchange rates, market participants can be encouraged to “engage in speculative activity” that would get Singapore back on its fundamental exchange rate.
“While it is convenient to argue that we have a distinct system in terms of exchange rate policy, by purchasing power parity, all exchange rate policy is in fact monetary policy.
“So even though it is the case that we target explicitly the exchange rate, it will have implications for inflation,” he said.
In response, Mr Saktiandi reiterated that the impact of the currency attacks “can never be stabilising” and that it would have ramifications on the economy and jobs.
He talked about the Asian financial crisis, saying its impact on some countries in the region was significant to the point that their currencies depreciated, with cascading effects on the economy.
“That’s from my own lived experience in 1998, 1999. The theoretical element that you shared… does not make sense. Unless you’re talking about misalignments in the long run, that eventually correct themselves in time,” said Mr Saktiandi.
Assoc Prof Lim then replied, “I should point out that I am in fact old enough to have also lived through the Asian financial crisis, and I’m aware of the conditions surrounding it. So this is not just in theory, it was also my lived experience.”
The Workers’ Party (WP) member later took to Facebook on Thursday to further explain his point, emphasizing that the idea was not just a “theoretical concept”.
“If we eschew the sort of market manipulation that would throw us off fundamentals, speculation can actually be stabilizing. This isn’t some abstract theoretical concept,” he wrote.
Assoc Prof Lim continued, “Our financial markets hire tens of thousands of professionals dedicated, daily, to trading that keeps markets efficient. The fact that sharp market movements are so infrequent speaks to the inherent reality of stabilizing speculation.
“One could make money (lots of it) on destabilizing speculation, of course (these are mostly momentum or trend-following traders). But those that are most celebrated—think the Soros ‘92 pound bet, or the Paulson CDS trade—were just early, not wrong.”
Assoc Prof Lim had previously worked at the World Bank for seven years, from 2007 to 2014, serving in its Development Prospects Group and specializing in long-term macroeconomic projections.
He was also an economist at the Institute for Southeast Asian Studies and the Abu Dhabi Investment Authority.
“Most long-time observers of markets—academic or practitioner—will concede that markets tend toward efficiency. While few would take the most extreme view that market prices are always and everywhere correct, many shirts have been lost thinking one is smarter than the market,” Assoc Prof Lim asserted.
Assoc Prof Lim noted that if ‘incorrect’ pricing were easy to detect, someone would have made money off that trade already, which explains why prices cannot deviate too far from what fundamentals dictate.
“The best way to demonstrate this point is to put one’s money where one’s mouth is: If one thinks that speculation is usually destabilising, go ahead and take the other end of that trade. As more than 90 per cent of financial market professionals will tell you, it’s harder to beat the market than it looks.
“This is why I actually favour transparency in our reserve holdings. As long as we aren’t tying our exchange rate to a level inconsistent with fundamentals, we need not fear the power of information,” he added.
