Here's why a current account deficit might actually be good for Singapore

It will give more room for domestic investment.

A current account deficit sounds is almost heresy in a country like Singapore, which runs a huge current account surplus. However, a new report by DBS argued that this is not necessarily a bad thing for an economy suffering from below-normal GDP and productivity growth.

DBS argued that running current deficits in Asia isn’t “heretical”, and would in fact help countries like Singapore by boosting domestic investment.

The report noted that Singapore has been running a current account surplus for the past two decades, which means that funds which could have otherwised been used for domestic investment have been used for overseas lending.

"It’s immediately clear how to raise investment at home: stop lending and start borrowing. Stop running C/A surpluses and start running C/A deficits. Stop investing in US Treasuries and start investing domestically, where the income-lifting capital equipment and infrastructure is needed," said the report.

“Singapore might benefit more than most [from a swing to deficit]. Singapore is a high income country and so ought to be lending abroad. But its current account surplus was 19% of GDP in 2014 and has averaged 20% of GDP since 2010! With productivity growth negative in 2014, it’s hard to argue that some of that 19% of GDP current account surplus couldn’t be spent on domestic investment instead of overseas investment, helping raise domestic productivity and incomes in the process,” said DBS.

Here’s more from DBS:

The reason deficits are anathema to foreign investors, public officials and ratings agencies alike is because too much borrowing led to the Asian financial crisis of 1997/98. But that was 17 years ago and deficits back then were 10% of GDP in some countries for a good many years. It’s time to let go. 

Officials, ratings agencies and fund managers all need to let go of 1997. Everybody wins when capital abundant investors lend to capital scare borrowers.

Everyone loses when the opposite occurs, as it is today. Periodic crises shouldn’t mean you throw the baby out with the bath water. Until the much-needed mindset shift occurs, no amount of funding from an AIIB or other institution will succeed in lifting domestic investment in the region. Some say you can’t squeeze blood from a turnip. It’s just as hard to shovel water into a fire hydrant.