From the pandemic to the Ukraine crisis, the world has entered a period of structural shifts marked by vulnerability and fragility unprecedented in the last 80 years.
Senior minister Tharman Shanmugaratnam calls this a “perfect long storm”. “They’re not cyclical; they’re not random shocks. They’re structural shifts, they’re going to be with us and they are interacting. They make for a new era of fragility.”
Speaking at the IMAS-Bloomberg Investment Conference 2022 on March 9, Tharman pointed to a laundry list of uncertainties; namely, the Russian invasion of Ukraine, the threat of stagflation, the Omicron variant, the climate crisis and food insecurity.
“Investing for the future has become a much more complex game. It’s more complex than it was pre-pandemic. But it’s also more complex than it was two weeks ago,” says Tharman, who is also chairman of the Monetary Authority of Singapore (MAS).
The situation in Ukraine represents a rupture in the system that once governed global stability, says Tharman. “It’s a broader set of rules, never perfect, never totally comfortable to all players, but things were held in place. We now have a rupture with many ramifications.”
While Tharman believes the situation in Ukraine “will likely get worse before it can get better”, none of the outcomes will leave the world in a better place. “Ukraine, of course, is hit the hardest; the human cost is piling up by the day. But the destruction of its economy and infrastructure is going to be a serious matter after the war.”
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Ukraine can expect massive external support from the international community but Russia will be “diminished… under any scenario,” says Tharman.
“Its economy is going to go through a severe slump. It will have diminished stature economically as well as politically, and it will be more isolated,” he adds. “It’s not just the sanctions. It’s the way businesses and citizens around the world are responding. There has been an exodus of investors from Russia. I think it will be a long time before Western investors re-enter trading relationships.”
Tharman also points to an exodus of Russia’s youth. “So, the combination of weaker investments, weaker access to technologies and a brain drain is a powerful combination for any economy. [For] an economy that was already weak … I think the outlook is not good.”
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Impact on Asean
That said, trade links with Russia from our corner of the world are small, note Maybank Research analysts.
Singapore may have drawn the ire of Russia after announcing rare sanctions, but investment ties between Russia and Asean are “minuscule”, with Russia accounting for an “insignificant” 0.04% of total FDI inflows (or US$314 million ($428 million)) between 2016 and 2020.
According to Maybank Research, Russia accounted for just 0.4% of Asean’s total trade in 2021. In value terms, Vietnam (US$3.2 billion), Indonesia (US$1.5 billion) and Thailand (US$1 billion) exported the most to Russia, while Singapore (US$3.3 billion) and Vietnam (US$2.2 billion) imported the most.
Indirectly, however, a broader Europe downturn will impact Asean exports and FDI. Exports to Europe account for a more substantial 9% of Asean exports, says Maybank Research in a March 8 note.
Within Asean; Singapore, Thailand, Philippines and Vietnam face relatively more downside risks than commodity exporters Malaysia (oil, gas, palm oil) and Indonesia (coal, gas, palm oil), writes Maybank Research.
“Thailand, Philippines and Vietnam are net oil and gas importers and will likely face rising energy import costs and worsening current account balances. Asean countries with fuel subsidies — like Malaysia, Indonesia and Thailand — face ballooning fiscal costs and may have to raise fuel prices closer to market rates, resulting in an inflation shock and bringing forward central bank rate hikes,” adds Maybank Research.
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Indonesia, for one, has already signalled that a fuel price hike is likely.
‘Worse stagflation than 1973’
Thus, the current state of affairs complicates an “extremely difficult task” for central banks in balancing growth and inflation, says Tharman. “The timing and pace of normalisation of interest rates [in the US] is now a more complicated matter.”
While the financial sector has already been bracing for the impact of the US Federal Reserve’s rate hikes, the expected fallout could be a lot worse. Tharman believes the shock could exceed the infamous stagflation of the 1970s. “You’re now going to see a shock that goes beyond what we saw in 1973. With the oil price shock [then], it had major ramifications. But we now see something much broader because it’s not just energy prices: it’s food, a range of industrial metals, fertilisers,” he adds.
The coming shock sits across several supply chains and comes at a time of already disrupted supply, worsened by Ukraine and the consequences of global sanctions, says Tharman.
Russia may be a relatively small country in GDP terms (US$1.6 trillion), but it is a major exporter of energy, food and metals.
Russia accounts for 17% of global natural gas, 16% of global coal and 11% of global oil exports. Both Russia and Ukraine are major exporters of wheat and sunflower oil. Russia is also a key supplier of industrial metals like nickel, aluminium and palladium. Russia and Belarus are big exporters of potash, which is used in fertilisers.
“Speaking as someone who has spent a good part of my adult life as an economist working with models, they’re not going to be very useful in this situation … because the models don’t deal very well with supply-side disruptions and have very little precedent for events of this scale,” he adds.
Fossil fuels still crucial for now
Governments cannot afford the scale of investment required to combat climate change, an infrastructure bill of some US$3.5 trillion per year for the next three decades.
“It can’t be left to the private sector or the markets alone, because there are externalities. Neither can you rely on the public sector because the public sector just doesn’t have those resources,” says Tharman.
Tharman names carbon taxes and carbon pricing as some ways governments can incentivise the private sector to go green. “Don’t wait for governments to lead. The markets have to move ahead. But neither can governments think that the markets alone are going to solve this. It requires public sector participation, and clarity of tax and regulatory frameworks.”
The climate crisis is also becoming increasingly entwined with energy security and it is “no longer possible” to solve one without the other, says Tharman. “The Ukraine war has forced that thinking. The unpalatable fact is that in the short term, Europe and the world is going to require more suppliers of oil and gas to substitute for Russian supply.”
He adds: “To prevent the lights from going off, oil, gas and coal are going to be necessary … We can’t be purist about this because without social and political stability, we’re not going to be able to address the longer-term challenge — our foremost challenge — which is tackling climate change. Even as we see the short-term trade-offs — the increased reliance on oil, gas and coal — we redouble our efforts to make the longer-term transition.”
“Global stability is like oxygen for the economic system. You don’t realise you need it when you have it. You realise you need it when you don’t have it and it is now part of the perfect long storm.”
Photo: Bloomberg
