DPM Heng Swee Keat at The Nomura Investment Forum Asia

Nakajima-san, Deputy President of Nomura Holdings 
Mr Kelvin Ho, CEO of Nomura Singapore 
Colleagues from Nomura

It is interesting that your theme for this conference is “Asia’s Time to Shine”. I fully agree that the economic fundamentals in Asia are sound, and this provides a great opportunity for us. But I am also reminded that just before the Asian Financial Crisis, everybody said this is “Asia's Century”. One could never predict with great certainty how the economy will go, so risk management is important. 
 
I would say that the global economic outlook today is much more uncertain than in other periods. The exit from the COVID-19 restrictions have led to a huge pent-up demand, while the Russia-Ukraine war has pushed inflation to an all-time high. In turn, central banks have been tightening rates successively to combat inflation. We are in a very uncertain situation in the short-term and will have to navigate this carefully. At the same time, there are also several medium-term challenges which we as policymakers, fund managers, companies, will have to take into account. 

First,how supply chains are being disrupted and possibly bifurcated. The US-China trade war pre-dated COVID and has started to result in the bifurcation of supply chains. COVID restrictions all across the world disrupted supply chains even more sharply. This has resulted in a “just in case” approach today, compared to the previous “just in time” approach, which maximises efficiency. Resilience has become a priority for every company – how do I ensure that we will not be so badly affected if COVID or something similar were to happen again? The first thing we have to deal with is the supply chain. 

Second, the US-China trade war has morphed into something more serious. It is now also a tech war – a recognition that technology holds great promise for the future, and therefore has become an area of strategic competition. This strategic competition between the world’s two biggest economies will have very significant effect on everyone else – we have to rethink our supply chain strategy, production strategies and so on. 

Third, globalisation as we knew it, is over. China entered the WTO in the 2001 and for the 20 years following, globalisation had a great run because many developing economies joined the process and benefitted hugely. What will be the new form of globalisation in the coming years? I believe it is going to be a much more fragmented and bifurcated landscape, which will make regional integration even more important. 

Monetary, fiscal, and structural policies

What does all this mean for Asia? Taking inspiration from Nomura’s Japanese roots, let me make use of Abenomics to look at what we should be doing. Under Abenomics, there are three arrows – monetary policy, fiscal policy, and structural policies. I happen to have covered the first two arrows in the last 15 years of my career. In the last seven years, I have been working on the third arrow. I can tell you that every arrow is difficult, but the hardest one is structural policy. 

Let me say a few words about monetary policy. I was running the Monetary Authority of Singapore when the global financial crisis happened. In my first few years as a central banker, I recalled how the central bankers were congratulating ourselves on what a great job we had done. There was good growth and low inflation, so let us stick to a low inflation regime, exercise monetary policy discipline, and manage the economy to avoid sharp fluctuations in inflation. In fact, central banks have been very successful in that. 

But when the global financial crisis happened, big banks and century-old banks failed. It is a lesson that beyond monetary stability, financial stability also mattered. Central banks and regulators then put in place a whole range of macroprudential and micro-prudential policies. In fact, Nomura was a beneficiary of that crisis, because you bought up what was left of Lehman Brothers and built on that. Financial and monetary stability remain very important, because that is the foundation of the global economy. 

Moving onto the second arrow – fiscal policy is slightly different because government has the power of taxation, and it is typically very hard for governments to go bankrupt. That said, my own view is that taxation has its limits because people and businesses are a lot more mobile today. 

Responsible fiscal policy is critical for our wellbeing and for economic stability. As Ravi mentioned earlier, during the COVID crisis when I was the Finance Minister, I had to do an unprecedented five budgets in one year. It was a very stressful time for everyone, but I was personally very glad that despite allocating about S$100 billion of budget, the Singapore government did not have to borrow a single cent because we drew it from the past reserves. My team and I had to see the President and the Council of Presidential Advisers to seek approval to use our past reserves. In the end, we used slightly over $40 billion of our past reserves to save businesses and jobs. I am sure that most of you in the audience from Singapore would have benefitted from those schemes, which enabled our recovery to take place very quickly. So fiscal policy as a stabiliser, and monetary policy to avoid sharp cycles, are important aspects of our policy tool kit. 

The third arrow of Abenomics is structural policy, which is the hardest. What are the structural forces that we need to confront? 

The first is globalisation. Globalisation has uplifted millions of people out of poverty, and in my view, is crucial to maintain if we want to achieve our sustainable development goals. Globalisation brings major structural changes to every economy because if your trading partners move up the value chain while the companies in your economy do not, you will soon be out competed. Globalisation results in structural adjustments that our economic structure, and every company must adapt to. Many of you are investment analysts who scrutinise companies’ balance sheets, so you would be able to identify the companies which are responding well to structural changes, and those which may be lagging behind. In a similar vein, for economies to do well, we must be very aware of what other countries are doing, where we are gaining competitiveness, where we are losing competitiveness, and which areas we ought to move into because we have an advantage. 

The second structural force is science, technology, and innovation. There is a lot of interest now in ChatGPT and robotics. I am certain that digitalisation will be a huge wave. AI has been dubbed as a general purpose technology, and general purpose technologies such as electricity and the steam engine, often set off new revolutions. It was long ago when we were talking about Industry 4.0 in the context of manufacturing. Today, we expect every sector of the economy to be touched by digitalisation. MAS is working very hard to promote fintech, to ensure that financial services are also embracing this digitalisation wave because the scope for improving efficiency and for risk management, is huge. We need to focus on this structural change. 

The third major structural force is climate change and the green transition. Climate change is real, and I am glad that many countries have prioritised it on their agendas. I was speaking to some ministers from the ASEAN region last evening, who were here for another conference. We spoke about countries like Indonesia and Philippines which have a huge number of islands and very long coastlines. Climate change will affect all of us, but especially island states like those in ASEAN. Rising sea levels will not only change the coastline, but also change the entire biosphere, and create knock-on effects on food security. 

The last structural force is demographic changes. In most of the developed world like Europe, Japan, Singapore, and Korea, and even in developing countries like Thailand, we are seeing a rapidly aging population. This contrasts with countries like India, Indonesia, and many parts of Africa, which are seeing youthful populations. 

For countries with youthful populations, a key question in this age of AI and robotics is – what types of jobs will the young people have, and what skills do they need? On the other hand, those with aging populations will need to think about how to keep their people healthier and productive for longer, as life expectancy grows. Managing these major demographic transitions around the world will be an enormous challenge.

Asia

Now let me say a few words about Asia. Many economists predict that Asia will remain a very vibrant region. The theme of Nomura’s Conference this year attests to that. India is projected to be an economy of US$7 trillion by 2030. Similarly, the 10 economies of ASEAN are projected to hit US$10 trillion and 70% can rise up to the middle class. ASEAN’s startup system is developing rapidly. Today, ASEAN has 53 unicorns, compared to just one 10 years ago. It is quite a major change, and the buzz is palpable. Last evening when I met many of the policymakers in our region, they were very optimistic about how we can harness this. 

What to make of these opportunities? I believe that Japanese financial institutions like Nomura can play a very important role. If you look at the previous rounds of financial crisis, be it the Asian financial crisis or the global financial crisis, the mismatch of lending and economy activities, and the misallocation of capital to unproductive users through clever financial engineering do not last. The bubble will burst. It is important that we channel capital to productive uses within the real economy, to uplift the economy and livelihoods. 

Japan has been at the forefront of this. In the earlier decades when Asia was industrialising, we used the analogy of the flying geese formation for development – Japan was leading the flock, which reduces friction and allowed smaller economies to ride on more easily. I envisage a new formation to take place if ASEAN, India and the rest come together with other major economies like Japan, China, US or Europe. Each will contribute and build on certain strengths that they already have, and collectively we will travel further.
 
When I visited Japan about a month ago, I met with many companies and institutions, and also spoke to policymakers. My takeaway was that Japan remains at the forefront of science and technology. I visited AIST and also met with the Japan Science and Technology Agency. We discussed areas where Singapore and Japan could work closely together to pursue opportunities. 

But collaboration must be driven at different levels, not just at the G2G level. Our universities have great partnerships with their counterparts in Japan; there are top-class Japanese researchers in our universities. I hope that that exchange of scientists, researchers and students can continue and intensify. It is also important to ensure that companies are making the best use of this. If we can intermediate capital in a meaningful way to support companies, Japanese or otherwise, that are keen to expand in the region, this will bring benefits to everyone. 

At the start I mentioned the Asian Century, and the hubris that ended up with the financial crisis. Risk and returns are two sides of the same coin; we need to manage risks and returns together. But if we take risk management seriously while adopting a forward-looking view of preparing for the future, this might allow us to see a little better and play an important role in the capital allocation process. 

On this note, I hope that Japan can and will do more, particularly in the ASEAN region. In 2023, we are commemorating 50 years of ASEAN-Japan friendship and cooperation. Let us set our sights for what more we can do together in the next 50 years. 

Thank you very much. 

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