There has been talks in the market for quite a while about the possibility of PAP government and MAS using S$ devaluation as a monetary tool to keep us competitive while the injection of new money supply boosting local demand.
It is said that a 20% or even 30% devaluation would be a good move at this moment when oil and commodity prices are low. Anyone here has any concrete information on this one?
Goh Meng Seng
Dear GMS,
Talk of SGD depreciation has been circulating around trading floors since 2008. Many of us are wondering why the MAS is still on a NEUTRAL stance with inflation looking very much like last year's war. The general consensus is that MAS will FINALLY move towards an ACCOMMODATIVE stance at their April Policy Review. Some are predicting that MAS will re-center the SGD band. All of us have heard this rumour that the SGD will devalue by 20-30% very soon. If you pull up a current USDSGD chart, you will realise that no serious FX professional actually believes this will happen.
Why is a 20-30% devaluation such a bad idea?
1. It will trigger successive rounds of "beggar thy neighbour" devaluations. This actually happened in the aftermath of the Great Depression because nations believed that one could devalue your way out of trouble. In the end, everyone just became poorer!
2. Singapore's exports have a very high import content (something like 60%). This will negate the initial positive impact of a weaker exchange rate.
3. It will be inflationary even with falling raw material prices. This inflation will cause massive asset destruction (remember your CPF savings denominated in SGD).
4. What is really important for Singapore's trade competitveness over time is the stability of SGD ie. confidence in our currency.
5. Singapore is a major financial centre. Any hint of such a devaluation (from a credible source) will trigger massive capital flight!
6. A steep SGD depreciation will sharply erode the purchasing power of wages. This leads to a wage price spiral as workers push for higher nominal wages in order to compensate this loss in real value.
7. It is for these reasons that MAS doesn't use the exchange rate as an instrument to promote export competitiveness. The SGD is managed in order to maintain low inflation and exchange rate stability.
8. So what about our export competitiveness?
The govt prefers to use direct measures to reduce our real exchange rate ie. supply-side policies. These policies aim to reduce business costs, improve labour productivity and enhance capabilities ie. sounds like the recent budget measures right?
In Conclusion
My belief is that MAS will move to an Accommodative stance in April, which will be in line with lower inflation expectations. This should allow for a gradual and modest depreciation of the SGD.
Alternatively, MAS could re-centre the SGD band (Not by 20-30%!!!) lower and keep the zero appreciation path.
My 2 cents worth
cheers