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Economist defends Singapore bubble claims

Singapore, Merlion (symbol of Republic) at dusk.
Kevin Morris | Stone | Getty Images
Singapore, Merlion (symbol of Republic) at dusk.

The Forbes columnist who claimed that the Singaporean economy is at risk of an Icelandic-style economic crash has rebuffed the Monetary Authority of Singapore's denial that the economy is in a bubble.

Economist and Forbes columnist Jesse Colombo's initial argument, published on Monday, claimed that the Singapore economy faces a ballooning credit bubble - in its property and finance sectors and other parts of the economy - fueled by ultra-low interest rates. Much like Iceland, he argued, Singapore is being falsely perceived as a safe-haven economy that will eventually crash.

(Read More: Is Singapore set for an Icelandic-style crash?)

The bubble claims sparked a swift response from the MAS, Singapore's de factor central bank, on Tuesday, which strongly denied any signs of a bubble, arguing that the government's property cooling measures have worked to dampen sky-high property prices and reiterating the strength of the government's finances and a solid banking sector.

But it seems the debate is far from over, as Forbes published Colombo's response on Friday.

"There must be an unwritten rule in the shadowy world of central banking that demands that dangerous, society-threatening economic bubbles must be denied and covered up at all costs," said Colombo.

(Read More: Data sets in motion a strong year for Singapore)

In their statement, the MAS said: "serious observers and investors are not in doubt about the country's financial health."

In his defense, Colombo pointed to Federal Reserve Chairman Ben Bernanke and other high-profile economists who failed to preempt the economic collapse seen in the U.S., Ireland, Iceland and other hard-hit countries during the mid-2000s.

"The bottom line is that Singapore authorities' bubble denials do not help the country's citizens any more than Ben Bernanke's 2005 bubble denial helped Americans," he said.

(Read More: Singapore home sales collapse as cooling measures bite)

He also rebuked the MAS's claim that government cooling measures introduced in recent years have effectively cooled the property market. Instead, Colombo said these measures have only been successful in slowing the rate of the bubble's inflation and had not addressed the primary cause of the overly-inflated prices – abnormally low interest rates.

The MAS went on to argue in their statement that household balance sheets were strong, challenging Colombo's claim that household debt to gross domestic product ratios were dangerously high. But Colombo countered the point by arguing that balance sheets are typically strong in low interest rate environments, and said the time to worry will be when interest rates start to rise and asset prices fall.

Finally, the Forbes columnist attacked the MAS's reference to the International Monetary Fund's economic assessment of Singapore, which said the country's economy would remain safe in severe stress scenarios, including a spike in interest rates and a sharp fall in property prices.

"The IMF is not factoring in the risk of a bubble-induced bust in the ASEAN region, let alone a crisis that includes China and East Asia," said Colombo. "Let's not forget the IMF – like the U.S. Federal Reserve – completely missed the warning signs that led up to the Global Financial Crisis as well," he added.

According to Colombo's observations, in the run up to financial crashes, a common critical thinking error occurs where analysts focus too much on a country's economy in isolation and fail to fully consider the regional risks.

(Read More: In Singapore? Odds are, you're looking for a new job)

"In Singapore's case, bubble deniers and apologists have not addressed the risk posed by the bubbles or frothy conditions in neighboring Indonesia, Malaysia, Thailand and the Philippines," he said.

He also pointed to the severe risks developing in China, which he describes as a bubble economy, due to rapid credit growth in recent years.

(Read More: China's Colossal Credit Bubble Next Big Risk: Faber)

In Colombo's view, Singapore is linked to the risks in these economies because demand from other Asian economies makes up the bulk of its export demand, while the bulk of Singapore's assets are invested in Asia.

The Forbes columnist has made similar warnings about the Malaysian and Philippine economies, which were also met with responses from their corresponding central banks denying the existence of economic bubbles.

By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

Contact Asia Economy

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