The Singaporean government will not introduce capital controls to stem the appreciation of its dollar, although it says such measures are certainly an option for emerging markets policymakers.
“Singapore will rule it [capital controls] out, because for us our life relies on being open”, Tharman Shanmugaratnam, the Singapore minister of finance, said.
“Capital controls have to be part of the menu, but have to be reviewed very cautiously. They are conceptually not something that emerging market countries would want to rule out.”
Instead Tharman suggested that the policymakers consider avenues including exchange rate flexibility, and measures to prevent asset bubbles from forming such as lower loan to value ratios. Governments could also accumulate reserves in the short term, Tharman said.
“This mix of measures is something that has to be on the menu for all emerging countries,” Tharman added.
“It’s a new ballgame altogether,” Tharman said, pointing out that governments had traditionally responded to currency apprecation and strong capital inflows by trying to keep inflation low and markets competitive.
“That traditional playbook isn’t good enough now,” Tharman said. “If you do all those things right, the fact is that you attract even more capital.”
Tharman highlighted the examples of Brazil, which recently raised the tax it imposes on foreigners who buy bonds, and South Korea, which has been one of the countries rumoured to be intervening in markets to stem the rise of its currency.
South Korea has also announced that it will audit banks handling foreign-currency derivatives. The won has surged 9.7% in the past three months.
Governments from Ukraine to South Africa to Thailand have in recent days indicated that they see capital controls as an increasingly viable option to deal with inflows.
“There’s a range of subtle ways of putting a bit of sand under the wheels of capital flows,” Tharman said, warning governments to “be extra cautious about it because there are always unintended side effects.”
Investors’ pursuit of yield has driven billions of dollars into emerging markets in recent months, in part because developed markets such as the UK and US have struggled with large budget deficits and central banks have been forced to cut rates to long-term lows to encourage growth.
Tharman rejected recent reports that bankers had been fleeing London for Asia because of the UK government’s introduction of a bonus levy and a hike in income tax for top rate payers to 50%. “The story is overplayed,” Tharman said.