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 younger population. “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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‘Worse stagflation than 1973’
The current state of affairs complicates an “extremely difficult task” for central banks in balancing growth and inflation considerations, says Tharman. “The timing and pace of [the US’] normalisation of interest rates is now a more complicated matter.”
While the financial sector has already been bracing for the impact of US Fed 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.
“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
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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
