The MAS versus the Singapore dollar bears
23 May 2001
The Monetary Authority of Singapore (MAS) clearly has a credibility problem. It has repeatedly said that it favours a "gradual and modest appreciation" of the trade-weighted Singapore dollar. In an attempt to arrest speculation, it made a public statement on 15 May 2001 to reiterate this stand, even going so far as to say that it had intervened in the foreign exchange market recently to support the Singapore dollar.
And yet, doubts persist on the ability or willingness of the MAS to maintain this tightening bias. On the same day that the MAS reiterated its stand, JP Morgan Chase and Hypovereinsbank predicted that the US dollar could rise to S$1.84 and S$1.90 respectively from about S$1.82 at the time. Standard and Poor's MMS has also stated that a rise past S$1.90 was "conceivable" as the MAS "may want to allow the Singapore dollar to weaken -- for increased competitiveness". Barclays Capital has, according to The Business Times, issued a report suggesting that the Singapore dollar would weaken to S$1.90 to the US dollar.
The reasons given for the Barclays suggestion seem especially curious. In the report, Barclays mentioned that the Singapore economy was experiencing disinflation, a fall-off in export growth, and an overall economic slowdown. "Singapore's business cycle necessitates an easing of monetary policy", Barclays stated. This easing would be reflected in the trade-weighted Singapore dollar index (TWI), adding: "We expect at least a 2-3 per cent TWI depreciation in 2001".
But why? The Singapore dollar exchange rate is a relative rate. It depends not only on economic conditions in Singapore but on economic conditions in other countries. The fact is that most countries are in various degrees of economic slowdown. So are their currencies also expected to depreciate against the Singapore dollar? This obviously does not make sense.
Barclays mentioned the disinflationary trend in Singapore. The consumer price index (CPI) for the first three months of the year rose 0.5 percent over the previous quarter and 1.7 percent compared to the same quarter a year ago. While disinflation implies a weakening economy, it also implies that the purchasing power of the currency is holding up. Compare that against the rise in the CPI of 1 percent quarter-on-quarter and 3.4 percent year-on-year for the US, against which the Singapore dollar is supposed to weaken. The inflation rate in the US is thus twice as high as in Singapore. In other words, the US currency is losing purchasing power twice as fast as the Singapore dollar. Hardly a sound basis for appreciation.
Barclays also mentioned the fall-off in export growth. However, unless the monetary authority actively promotes export growth by letting the currency depreciate, currency movements are more dependent on the net current account balance than on exports alone. And in an interview with Dow Jones Newswires on 19 May 2001, MAS chairman and deputy prime minister Lee Hsien Loong made it clear: "We don't really want to say, here's a downturn and we'll soften the exchange rate. That's a very dangerous approach. It is not our approach."
As far as the current account is concerned, at 23.8 percent of GDP in the first quarter of 2001, Singapore's current account surplus as a proportion of GDP is one of the highest in the world, and contrasts starkly with the US current account deficit of over 4 percent of GDP. Singapore's current account surplus should not decrease substantially even with the weakening economy, as the slowdown in export growth should be offset by a decline in the rate of growth of imports following reduced demand for consumer goods and manufacturing inputs.
So much for the Barclays report.
However, the perception that weaker economic growth would lead to a weaker Singapore dollar remains strong. For example, Kim Eng Securities senior economist Kostas Panagiotou believes that the fair value of the Singapore dollar is at S$1.60 per US dollar. Nevertheless, even he thinks that it is possible for the Singapore dollar to drop to S$1.90 to the US dollar. In a comment to The Business Times, he said that "in a period of weak growth like in the mid-80s and the Asian crisis, the Sing will tend to weaken considerably".
However, Panagiotou's comment downplays two facts. The first is that in the mid-80s and in the Asian crisis of 1997-98, Singapore suffered much more acutely than the developed economies. This time around, the Singapore economy is likely to do relatively better.
The second factor is the MAS. Once again, we come back to the MAS' policy of a "gradual and modest appreciation" of the trade-weighted Singapore dollar. Is the MAS able to support this policy by buying Singapore dollars when necessary? Definitely yes. At the end of the first quarter of 2001, Singapore's foreign exchange reserves was S$140 billion -- more than seven months' worth of imports -- and up 9.5 percent from a year ago in Singapore dollar terms. Even in US dollar terms, it rose by 4.5 percent.
Is the MAS willing to maintain this policy in the face of economic slowdown? Apparently yes, going by the MAS chairman Lee Hsien Loong's comments to Dow Jones Newswires. "It's not the MAS' job to become an economic stabilizer, to push the economy up or down," he said, adding that the government can manage short-term adjustments by a flexible wage and pension structure, for example.
So are currency analysts likely to change their bearish views on the Singapore dollar? Probably not anytime soon. Although the Singapore dollar's exchange rate with the US dollar seems to have stabilised over the past week or so, nothing that the MAS has been saying recently seems to have had much of an impact on the medium term views of analysts. As Lee said: "We've put out very careful statements. Even then the market interprets and sometimes misinterprets. That is one of the penalties of being overly transparent."
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