MAS fails to convince doubters
13 July 2001
Yesterday, the Monetary Authority of Singapore announced that it was shifting its monetary stance from tightening to neutral. There were some interesting reactions in the market. Immediately after the announcement, the US dollar jumped to an eleven-year high of S$1.839. Just as quickly after that, the US dollar dropped back below S$1.835.
The reasons for the sharp moves are quite obvious. The MAS announcement obviously gave some currency traders reason to believe that the MAS would tolerate a weakening of the Singapore dollar against the US dollar. So they sold Singapore dollars and bought US dollars.
But they seemed to have missed something important from the news conference organised by the MAS yesterday. In response to a question from The Business Times, MAS managing director Tharman Shanmugaratnam had said the nominal effective exchange rate (NEER) of the Singapore dollar remains in the lower half of the MAS' policy band after the policy change announced yesterday. So any further decline in the Singapore dollar obviously risked a reaction from the MAS. Which is almost certainly what brought the US dollar back down, finishing the trading day at S$1.8325.
Beyond the immediate future, however, the Singapore dollar appears likely to remain under pressure, not so much due to any inherent weakness of the Singapore currency or economy but due to the perceived strength of the US dollar. According to The Business Times, analysts' estimates of the MAS' lower limit for the Singapore dollar ranged from S$1.86 to S$1.927. Based on what Shanmugaratnam had said on the current NEER relative to its policy band, and its presumed market action yesterday, the Singapore dollar is probably already near its lower limit, so the latter figure is probably too high.
But there are probably some analysts who doubt the long-term willingness -- or even ability -- of the MAS to support the Singapore dollar in the face of continued weakness. IDEAglobal.com's head of Asian research, Bhanu Baweja, suggested to The Business Times that yesterday's MAS move may result in more short-sellers of Singapore dollars. "The wisdom of a weakening Sing was never in doubt. But by coming out and saying it explicitly, it could yet turn out that MAS may have bitten off more than it can or would like to chew," he said.
Such a view, however, possibly underestimates both the determination of the MAS as well as the resources available to it to defend the currency. Back in May, the MAS made a successful foray into the market, stabilising a then-falling Singapore dollar. Yesterday appears to have been another such case. So the recent track record of the MAS looks good. And while it is true that Singapore's foreign reserves have dropped to S$136.01 billion from a high of S$140.33 billion in March, it is still over seven months' worth of imports.
There are other more fundamental reasons to weigh down the Singapore currency. "The crux of the issue is that the economy is faced with the threat of economic deflation as weakening export receipts combine with outward Singaporean investments," said Hypoveriensbank's chief strategist, Jan Lee, to The Business Times. "To offset these deflationary pressures, the MAS has clearly opted for monetary accommodation via a weaker currency." Hypoveriensbank's projection is for the US dollar to end this year at S$1.95, and rise as high as S$2 by the end of Q1 next year, before settling back to S$1.85 in 18 months' time.
But the reasons offered by Lee need to be questioned. As the MAS pointed out: "However, the slowdown reflects a decline in demand, not an erosion in competitiveness. There is no reason for any persistent weakening of the Singapore dollar." And for outward Singaporean investments, the MAS would be mindful of the fact that Singaporean investors get better value for their foreign investments if the Singapore dollar is kept high. In their fixation on trade considerations, this seems to have been overlooked by many currency analysts.
Of course, the MAS' policy band is based on the trade-weighted value of the Singapore dollar, so it is conceivable that the band itself may fall relative to the US dollar if other currencies fall. Ultimately then, the performance of the Singapore dollar will depend on the performance of other currencies. If the US dollar rises against most currencies, then the odds are that the Singapore dollar will decline against it, even as it maintains its overall trade-weighted value. And with the generally bullish perceptions of the US dollar, this may well happen.
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