Did the stronger Singdollar worsen the Singapore economy?
Source: Bernard Aw, 2008
7 Feb 2007 – Subprime problems started escalating with HSBC (link)
July 2007 – SG inflation rate at 2.7% (link)
Sep 2007 – Price of wheat double, food commodity prices continue to hike (link)
10 Oct 2007 – MAS tightened monetary policy by increasing the pace of sing$ appreciation (link)
Jan 2008 – SG inflation rate at 6.6% (25-year high) (link)
10 Apr 2008 – MAS raised the currency band of Sing$ (effectively revaluing our currency) (link)
Apr 2008 – SG inflation rate at 7.5% (26-year high) (link)
Jul 2008 – SG inflation rate at 6.5% (link)
11 July 2008 – Oil price hits US$147/barrel (link)
Aug 2008 – Singapore’s non-oil exports fall by 14% (link)
Oct 2008 – SG inflation rate at 6.4% (link)
10 Oct 2008 – Singapore falls into technical recession (link)
Nov 2008 – SG inflation rate at 5.5% (link)
27 Dec 2008 – Oil price is at US$35/barrel (link)
Singapore has an unique monetary policy to control inflation and maintain price stability. The Monetary Authority of Singapore (MAS), Singapore’s central bank, uses a trade-weighted exchange rate index (TWI) as its monetary policy instrument.
The TWI is trade-weighted basket of currencies of Singapore’s major trading partners (Malaysia, U.S., China, Japan, Hong Kong, Indonesia, etc) and maintains the Sing$ within an undisclosed target policy band also known as Singapore dollar nominal effective exchange rate or S$NEER.
Apr-Oct 2008 S$NEER - Source: MAS
On 10 Oct 2007, MAS steepened the slope in the S$NEER to increase the pace of Sing$ appreciation. 6 months later, they re-centred the S$NEER at the prevailing level (which is in the higher region of the original policy band).
The increased appreciation of Sing$ has helped to mitigate the effects of inflation (mostly due to external factors like high commodity prices), however it has also made our exports more expensive.
Exports, especially in electronics, chemicals and financial service, are a major contributor to Singapore’s Gross Domestic Product (GDP). The net export (total exports minus total imports) accounted for 23.3% of Singapore’s GDP in 2006.
With more costly exports and a weakning consumer demand from developed countries, we became the first Asian country to slip into a technical recession in Aug 2008.
Therefore, in a bid to fight inflation by deliberately increasing the pace of currency appreciation, MAS might have contributed to the worsening economic conditions. For a small open economy such as Singapore who depend heavily on exports to grow our economy. Any policies that shock the export rate will no doubt affect the national economy.
It seems that Singapore is exchanging one economic problem for another (inflation for recession). The expected expansionary fiscal policy, to be announced in Jan 2009, is the proposed solution to combat a declining economy.
But is increased government spending a good stimulus for the national economy? Is it the best way to improve the economic conditions?
Greg Mankiw don’t seem to think so. He is more for tax cuts for reviving the economy and is a member of the “Pigou club”. However he is commenting on the U.S. economy and Singapore’s economy is quite different. So the question is: can his and other stimulus sceptics’ suggestions be applied to Singapore’s economy?
Therefore, in a bid to fight inflation by deliberately increasing the pace of currency appreciation, MAS might have contributed to the worsening economic conditions. For a small open economy such as Singapore who depend heavily on exports to grow our economy. Any policies that shock the export rate will no doubt affect the national economy.
Much of Singapore’s so-called export economy do not trade in Singapore Dollars. Many of the manufacturing investment in Singapore don’t rely on Singapore Dollar to gain competitive edge for exports nor do they pay suppliers in Singapore Dollar. The Singapore Dollar is required by such investment primarily to deal with labour and other business cost. Since Labour cost is relative low it would not have impacted much.
A substantial aspects of Singapore “export” economy is also to do with re-exports. This again don’t rely on Singapore Dollars for competitiveness.
The real problem is business cost (electricity, etc) that has escalated and largely self-inflicted — i.e. letting housing price to escalate for the sake of expanding the construction industry.
Ah Kow: According to this news article dated 13 Nov 2008 (http://www.propertyguru.com.sg/news/2008/11/1425/singdollar-will-slip-to-1-80-against-greenback-), Stephen Jen commented that MAS will pursue an aggressive policy to ease off the appreciation of Singdollar to protect the export-oriented Singapore economy.
What I understand from your comment is that, the appreciation of singdollars will lead to more expensive business costs for the investors who then have to increase the nominal price of export goods, leading to lower demand. So the sagging demand for our exports is due to a nominal price increase (pass on higher business costs) and not because of a direct result of a higher exchange rate?
The real problem is business cost (electricity, etc) that has escalated and largely self-inflicted — i.e. letting housing price to escalate for the sake of expanding the construction industry.
I thought the expansion of the construction industry would drive down price (assuming demand did not increase proportionally to supply)?
In my opinion I think many so-called economists in Singapore tends to apply very textbook view of currency as a weapon for exporting countries.
The point I am trying to make out is that the Singapore Dollars is not and has never been in the mind of the MAS people when they switch to a managed exchange rate policy meant to be a competitive instrument. They main function of the Singapore Dollar is to fight inflation.
Firstly, our manufacturing virtually all are foreign owned and at best a subsidiary. In terms of contracts and pricing of goods don’t price it in Singapore Dollar.
Secondly, our second tier manufacturers don’t provide substantial amount of sourcing for these big manufacturers.
Many of these manufacturers source their parts or raw materials from overseas so they are not impacted by the cost of local suppliers, which is small anyway.
Thirdly, we are not in the league of exporting countries like Germany, which you might not believe it, is the much bigger than China, in terms of per capital. That means countries like these depends on not only first but second and third tiers suppliers in their country for “raw” materials. So the strength of the currency vis-a-vis importing ones are important.
Much of Singapore so-call manufacturing are based on re-exporting or counter trading (i.e. take and unbadge item and them relabel it as “made-in-Singapore”. Again the goods themselves are typically denominated in the currency.
Fourthly, the only time these “manufacturing” exporters needs to trade in Singapore Dollar is to pay their workers and any such cost that based in the country (e.g. cost of leasing factories, etc). The strength of the Singapore Dollar don’t really have an impact per se.
It is when electricity cost gets jack up largely by GLCs to maintain profitability and ability to pay dividents. COEs, etc.
As for the expansion of the construction industry, it is more directly impacted by the strength of the Singapore Dollar than other industry. Firstly, all their materials are sourced from overseas. Secondly, their earnings is in Singapore Dollar. So it would make sense to appreciate the Singapore Dollar.
But the problem in Singapore is that too much liquidity is pumped into the market (not the strength of the Dollar) to keep the construction industry going. There are other non-fiscal policies too like En-bloc sale. When you have such a situation, where you stroke up demand based on loose borrowing and low interest rates, you get into a situation where your appreciate of Singapore Dollar supposedly to offset import cost is being eroded by inflation caused by a combination of self inflicted policy — i.e. maintaining the profitability of GLCS so they can give out dividents, etc.
lol. Strong Singapore dollar is supposed to combat inflation, not increase inflation.
Singapore is an export-driven economy, yes. But most of the inputs for our manufactured goods are from overseas. Hence, a strong Singapore dollar will reduce the cost of factors of production, bringing down the cost of manufacturing. The savings in cost, theoretically, can then be reflected in the actual price of the good. Hence, manufactured goods will appear cheaper, quantity demanded will increase and net exports should increase.
In other words, a stronger Singapore dollar helps to combat imported inflation.
Like what the others have mentioned before me, I suspect the increase in inflation is more due to local factors, where changing the strength of the currency cannot help much. Local factors causing increase in inflation abound, such as public transport fare hikes, electricity price hikes, GST hike, etc. All these are price inelastic goods, hence, it’s difficult for the consumer to scrimp on them. As the gahmen squeeze more money out of us, our consumption increases, leading to demand-pull inflation.
Inflation of course is probably caused by a combination of both overseas and local factors. I just want to point out that appreciating the Sing dollar is more effective only in combating imported inflation. Since the Sing dollar has appreciated so much and yet we are still suffering from high inflation, inflation is more likely caused by local factors (read: government’s policies)
Note: I’m not disagreeing with your theory that net exports declined because they are more costly. After all, if the rise in electricity prices(local factor) also constitute part of the cost of manufacturing the good, our exports can also become less competitive overseas because of the reflected higher price.
Humjibeng:
Thanks for your comment.
My post is not focused on inflation. Consider the brief timeline at the start of the post, inflation rate falls by 0.9% (6.4% to 5.5%) in the oct-nov period. I believe this fall is due to the monetary policy of the MAS by accelerating the usual appreciation rate of the SingDollar in Oct 07 and Apr 08.
What my post is suggesting, is that the appreciation of singdollar is causing exports to be more expensive. MAS is trading “fighting inflation” with “recession due to falling exports” with their monetary policy.
Tan Ah Kow commented that much of the export industry in Singapore do not deal in local currency. Assuming raw material prices and selling prices remain the same, the firm will be purchasing raw materials at a cheaper local price (as you have suggested too) and selling them at a lower local price too (when converting foreign currency back to local currency).
If what you suggest is true, the cost savings from lower input prices (due to strong exchange rate) can be pass on to the (lower) selling price of the export and entice foreign economies to buy. We also assume that the firms sell in local currency and not foreign currency.
I believe all this is debatable and warrant more data-gathering.
I need to find out more about the dominant currency that the export industry use in purchasing raw materials and selling their exports. And also, the proportion of labour cost and operating costs (assuming they are paid in sing$) that constitutes the entire cost component. Then I can derive a clearer picture of whether the stronger sing$ worsen the economy by reducing export rate.
Bernie,
One way to really learn about the mechanics of how Singapore affects or not affects the import/export prospects of Singapore is NOT to look at the aggregate figures at the macro economic level. They tell very little. Neither does MAS release figures about the impact of the basket of currencies they use to benchmark the Singapore Dollar value.
A more accurate, but harder to get data, is really to study the supply chain to manufacturing or sectors that engaged in the import/export business. You should also have to be aware of how import and exports (so call trade figures) are defined.
Quite often, our so call exports are nothing more than re-badging something as “made-in-singapore” to take advantage of export quotas. Or in some cases, for foreign companies to ship goods between their international subsidiaries to offset tax liabilities. For example, in Singapore corporate taxation are low and in some cases the Singapore government give tax free status. So a foreign company with high corporate tax in one location might declare loss there and profit at the Singapore subsidiary. These can be done by transfer funding.
Or in some cases, like a Singapore based regional distributor of goods (expensive cars) that has virtually no significant market in Singapore, there is no real point costing the goods in Singapore dollar anyway. Quite possibly some very expensive cars are actually priced this way. Nevertheless, when the goods leave Singapore it is still countered as a Singapore export.
Anyway, hope this helps with your quest to learn more about the impact of Singapore dollar.
Hi,
A little late to the discussion here. ;)
I don’t think that the currency in which the company trades with is the issue here, since ultimately earnings will have to be converted to the local currency.
Shouldn’t what really matter is whether the company manages to find an arbitrage opportunity in the exchanges rates between its trading countries?
Given that SG is mainly a re-export centre, an appreciation in local currency may lower income/GDP either by making the re-exported goods seem more expensive (thus lowering export amt) or by reducing the amount of earning once conversion to local currency (to cover operating costs) is factored in.
On the flip side as Humjibeng notes the appreciation of local currency may lower factor costs allowing the company to pass on savings, however what we need to know is to what extent this is offset by a decrease in export amts.
So an appreciation in the SGD does impact GDP though not necessarily lowering it.
Secondly I think we can all agree that resource scarce SG is definitely an importer for nearly all means of local necessities. Appreciating our currency thus reduces our imported inflation as Humjibeng/ Benard has pointed out.
Then I suppose the main question should be – ‘who is the economy good for if not its citizens?”. Because what really matters is the purchasing power of the individual and this takes into account both the amt of income he earns (directly affected by performance of the economy) and how much that income can buy.
Mike