<html> <head><style type ="text/css">body { font-family: "Bloomberg Prop Unicode I", Verdana, sans-serif; font-size:125%; letter-spacing: -0.3pt; color: #FF9F0F; background-color: #000000; text-align: left; } p {line-height: 1.25em; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" );} h1, h2, h3 { text-align: left; font-weight: normal; color: #FFFFFF; } h1 { font-size: 130%; } h2 { font-size: 115%; } h3 { font-size: 100%; } #bb-style { font-size: 90%; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" ); } b, strong { font-weight: bold; } i, em { color: #FEC54A; } pre { font-family: "Andale Mono", "Monaco", "Lucida Console"; letter-spacing: -0.3pt; line-height: 1.25em; } table { border: 0; font-size: 90%; width: 100%; margin-left: auto; margin-right: auto; } td, tr { text-align: left; } td.numeric { text-align: right; } a:link { color:#53B2F5; text-decoration: none; } a:visited {color:#53B2F5} a:active {color:#53B2F5} a:hover {color:#53B2F5} </style> </head> <body> <p>By William Pesek</p>&#xD; <p>Tiny Singapore has too much of a good thing on its hands.</p>&#xD; <p>Asia's sole AAA-rated economy is on the receiving end of a sudden wave of foreign capital as investors, central banks, currency reserve managers and sovereign wealth funds clamor for safety. Now that Standard &amp; Poor's has yanked away America's top rating, investors fear downgrades are coming elsewhere, too.</p>&#xD; <p>Singapore's draw is obvious. While it's growing slower than many Asian economies -- 0.9 percent year-over-year versus 6.5 percent in Indonesia and 4 percent in Malaysia -- it affords a high level of political stability.</p>&#xD; <p>The Singapore dollar rose 6 percent versus the greenback this year, Asia&#x2019;s best performance.</p>&#xD; <p>Yet rapid inflows come at a time when inflation is surging much faster than gross domestic product. Consumer prices in Singapore are rising 5.4 percent year-over-year. Waves of fresh cash zooming in heighten the risk of asset bubbles by driving down interest rates and causing currency appreciation.</p>&#xD; <p>That means Singapore's stability is imperiled on two sides. It's a challenge for policy makers trying to clamp down on financial excesses, while putting tourism and exports at risk.</p>&#xD; <p>In an Aug. 18 statement, Singapore's monetary authority said its policy is appropriate and money markets are functioning in an &#x201C;orderly manner.&#x201D; Singapore uses the exchange rate rather than interest rates to conduct policy and has allowed its dollar to rise to combat inflation.</p>&#xD; <p>Yet domestic demand is putting upward pressure on inflation, and hot money flows don't help.</p>&#xD; <p>The last time Asia wrestled with such powerful capital movements was in 1997, when many of the region's economies crashed.</p>&#xD; <p>It has since strengthened financial systems, built more liquid bond markets and amassed trillions of dollars of currency reserves. This bulwark is now being seriously tested as the U.S., Japan and Europe keep rates at or close to zero.</p>&#xD; <p>As the biggest economies slow, credit downgrades abound and markets gyrate, Singapore finds itself in the role of safe haven. It's proving to be a more dubious honor than meets the eye.</p>&#xD; <p>(William Pesek is a Bloomberg View columnist.)</p> </body> </html>