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

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.

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.

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.