Below is the transcript of a First On CNBC interview with Tharman Shanmugaratnam, Deputy Prime Minister of Singapore. The interview was first broadcast on CNBC's Squawk Box Europe on 12 October 2018.
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Interviewed by CNBC's Nancy Hungerford
Nancy Hungerford (Nancy): I'm pleased to say that I am joined by our next guest, who is the Deputy Prime Minister for Singapore, Tharman Shanmugaratnam. Thank you for joining us, Deputy Prime Minister, it's an absolute pleasure to speak to you. Here we are, a decade on from the financial crisis, and you're part of a group that is looking for ways to improve the financial system and making it work for all. That sounds like a wonderful goal in theory. How do you get to that in practice?
Tharman Shanmugaratnam(Tharman): Well, you were just talking about the global financial crisis. That was a crisis where everyone was hurt at the same time. It was a global recession, and the effects of that recession lasted a long time. What we're seeing today is somewhat different. We're having a reduction in growth by stealth: one country at a time, one liquidity squeeze at a time. And countries having to react to those liquidity squeezes by tightening policy much more than is warranted by domestic circumstance. And to avoid this happening again, they have to build up reserves and cut down on current account deficits and if possible run a balance or surplus. And that hurts growth. So if you think back to how countries grew, not so long ago - how did the Singapores and Koreas of the world grow - we grew by running current account deficits at early stages of development so we could invest ahead for growth while our savings were being built up. It was financed reliably by foreign direct investment, by long term investors, and we actually had a situation where the international financial system had capital flowing down hill to developing economies. Today, it's a sin to run a current account deficit and that's crazy. I mean, it's bad in economics, it's bad in policy sense, and the whole world is going to suffer. So we've got to make it possible once again for countries to run sustainable current account deficits, to have them funded reliably, and for investments to flow into the most productive areas.
Nancy: And what you say reminds me exactly of something I spoke to the Philippine's Finance Secretary about just yesterday. He said we are trying everything we can on the domestic front but it feels as though we're being punished because of something that's out of our control. And I think he's alluding to the Federal Reserve. How big of a problem is this for the current account deficit countries you talk about and how do you fix it?
Tharman: Well essentially we have a situation where there's a world that's now connected not just by trade but by capital flows and ideas. And there's a lot of plus in this because there's a lot of capital flows that's about knowledge and ideas. Foreign direct investment being a very good example of it. But there's also a lot of capital flows that's about herd instincts and short term movements in and out of markets. And what we have to do is to try to reduce that amount of volatility in the system, both by thinking about policies in the advanced world but also policies in the emerging world - what we can do to mitigate these volatilities. And that's very important work for the IMF, the IMF working together with national authorities, and we're not in the right place today because today's system is reducing growth. And if you take it episode by episode, country by country and you accumulate it, it's a reduction in growth that everyone's affected from.
Nancy: And we're sitting here in Bali, in Indonesia, a country that's very worried about volatility and the impact on current account deficit countries. Very recently, Singapore has announced a financial agreement with Indonesia. Is this an example of co-operation coming together that can try and help create more stability?
Tharman: Indonesia's a well-run economy. Its fundamentals are sound, we are close partners and that's why we made a decision to partner them and to support them at this time. Fundamentally, the solution for the emerging world and Asia and elsewhere is of having an attractive investment environment. Indonesia's working very hard at it and in fact succeeding in many regards, but we are close partners with them and we like to help our partners and those in the neighborhood especially.
Nancy: And of course, a big part of the emerging market story here in this region is tied to China and the growth story there that's been a boon for the entire region including Singapore - you're at the epicentre of the global trade story - to that extent, how worrisome is the China growth slowdown including the impact that trade tensions will have?
Tharman: I think first we have to accept that the China growth slowdown is a secular story. It's a long-term story and it's not actually occasioned by what's happening in the short term. China has to moderate its growth because it's running out of labor force growth and they're growing increasingly by having to move up the value chain and improve productivity rather than having more and more people coming on to the market each year. So that's inevitable. The trade frictions complicate policy making greatly. China's having to ease up on credit policy, which isn't necessarily helpful for medium to long term stability, but that's what they have to do when faced with very unexpected trade frictions.
Nancy: And when it comes to the report that you've been going through, what needs to take place here in the way of private-public participation? I mean, we've talked about some things that the governments can do. Do you think the many bankers that are right here at the IIF meeting are aware of these risks you've outlined and willing to step up?
Tharman: I think first we have to understand that the scale of private financing required for the developing world in the next decade vastly exceeds what has been the case before. The scale required is vastly more than we've had before, and it means that every source of finance has to increase. Foreign direct investment, first and foremost... investment in local bond markets... but very importantly, getting institutional investors - not just project financiers - but institutional investors: the pension funds, the insurers, sovereign wealth funds and the like. Getting them to invest in developing countries' infrastructure. How does it happen? Risk has to be mitigated. And the ways of mitigating risk - not just project by project - but as a system, by diversifying risk and pooling risk and creating a large scale diversified asset class that can attract institutional investors because institutional investors don't have the expertise or risk appetite for individual project risk in general. But they have the appetite for an asset class: senior tranche, junior tranche, different levels of risk. It's simple, they're able to allocate a part of their portfolio to it, and that scope for portfolio based infrastructure financing is very large, and is largely untapped. Because today's world has only miniscule investments by institutional investors in developing country infrastructure.
Nancy: Very interesting. Just another aspect we will watch here as we continue to talk about the progress still needed to be made 10 years on from the financial crisis. Sir, it's an absolute pleasure speaking to you. Thank you very much for your time today. That's the Singapore Deputy Prime Minister, Tharman Shanmugaratnam, and with that I'll throw it back to you.
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Clarification: This transcript has been updated to reflect Tharman Shanmugaratnam's penultimate response.