The global economic recovery from the Covid-19 pandemic is heading into a critical period as nations balance the need to prop up consumers and businesses against the threat of unmanageable debt, Singapore's central bank chief said.
"The world is now entering a phase where the crisis is long, drawn-out, the peak of the crisis is behind us, but we're not in full recovery," Mr Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), told Bloomberg.
"In this undefined twilight zone of sorts, what is the appropriate policy mix?"
He said fiscal policy would have to start unwinding, but gradually, while monetary policymakers must recognise that extraordinary measures cannot continue indefinitely.
Governments worldwide have pumped trillions of dollars into their economies, with that fiscal support taking the lead in combating the effects of the pandemic and winning the backing of multilateral institutions like the International Monetary Fund that are usually more cautious about debt.
Meanwhile, central bankers have kept interest rates near record lows and tinkered with unconventional tools.
If officials do not start the process now of fine-tuning their stimulus, they risk seeing a destabilising "fiscal-cliff effect" later if support has to be withdrawn all at once, Mr Menon said in a separate interview with Bloomberg Television's Haslinda Amin.
As virus outbreaks worsen, including in the United States and across Europe, officials are under pressure to pump in more aid, even as some earlier stimulus may still be making its way to the intended targets and as long-term debt worries linger.
"If you unwind too rapidly, that will harm the recovery," Mr Menon said. "But if you stay on current levels of support - be it monetary or fiscal - that will create its own problems, the most prominent being debt accumulation."
He said monetary policymakers have been playing a "very accommodative and complementary role" to governments, providing ample liquidity and in some cases buying up government debt in addition to keeping rates low.
He echoed Prime Minister Lee Hsien Loong's recent comments on the likely need to maintain Singapore's fiscal policy support into next year, which could mean a fiscal deficit endures. The policy mix will then need to evolve into areas that enhance growth, including digitisation and infrastructure, Mr Menon said.
"That's one way to give confidence to the markets, that you're not just pumping stimulus into the economy and borrowing to fund it. You're also spending to help restructure the economy."
He said it could take until 2022 before economies return to their pre-pandemic levels.
Singapore's economic contraction eased to 5.8 per cent year on year in the third quarter after a 13.3 per cent decline in the previous three months.
The information and communications as well as finance and insurance sectors strengthened further, offsetting some of the pain in aviation, tourism and retail.
The Government sees the economy shrinking 6 per cent to 6.5 per cent this year before rebounding to 4 per cent to 6 per cent growth next year, according to estimates released on Monday.
DIGITAL BANK PLAN
MAS, which is also Singapore's financial regulator, will stick with its plans to award digital banking licences by the end of this year, undeterred by tightening scrutiny in China and the US that is hitting major Chinese applicants.
"Regulatory tightening that's happening in China will not have an impact on the digital banks here," said Mr Menon. "It's not our job to try to guess what the geopolitical situation might be like, what actions might be taken by other countries with respect to some of these entities."
The permits are coveted by Chinese companies and others, given the Republic's status as a regional financial hub and rapidly growing wealth management centre.
Billionaire Jack Ma's Ant Group, among the high-profile candidates vying for the permits, shelved its initial public offering after a clampdown and higher capital requirements imposed by Chinese regulators.
ByteDance, whose joint venture is another contender, has been hit by the US government's order to sell its TikTok video app.
Other Chinese companies vying for the licences include a consortium led by Zall Smart Commerce Group and another involving mobile phone maker Xiaomi and Hong Kong financial firm AMTD Group.
Singapore has its own requirements for digital bank licences that include the ability to provide good services with appropriate risk management, and a smooth exit strategy, Mr Menon said, without confirming any applicants' identities.
He said the MAS is taking a progressive approach in regulating such companies, such as by restricting their ability to take deposits initially, before giving them permission to operate more freely once they prove profitability over time.
"China started from a different place - initially, it did not regulate many of these fintech entities to the full extent. And now the authorities are converging to the same position as most of the rest of the world. I think that's the right thing to do, and it creates a level playing field."
Asked if government relationships would play a role in the regulator's decision-making on the licences, he ruled out favouritism and said it is "strictly merit-based".
"We will not penalise banks from any country because of sanctions it might be under," he said. "We also don't give favourable treatment to banks from any country on account of good relations."
Earlier this year, the MAS postponed its plan to award digital-banking permits to non-banks from June, owing to the global Covid-19 outbreak.
Now, the virus is accelerating the switch to digital banking. Mr Menon said office space and the number of bricks-and-mortar bank branches may become smaller over time, with their role changing from one focused on processing daily transactions to things like advisory services on investments.
"The digitalisation agenda has been given a real shot in the arm by Covid-19, and some of this change is really permanent," he said. "Face-to-face interactions will be based on much higher-value activities and transactions."