Hi Johnny333, thanks for your advice. Yeah the ringgit has weakened recently before their election, I intend to get some to invest in Malaysia shares.
I was curious as to why the Sing dollar is so strong & the following articles may explain the phenomena.
http://www.theedgesingapore.com/blo...d-the-sing-dollar-continue-to-appreciate.html
Manu Bhaskaran: Should the Sing dollar continue to appreciate?
SINGAPORE’S CENTRAL BANK, the Monetary Authority of Singapore (MAS) has just announced its twice-yearly monetary policy adjustment. Responding to stronger-thanexpected economic growth in 1Q and persistent inflationary pressures, MAS decided to “continue with the policy of a modest and gradual appreciation” of the Singapore dollar’s trade-weighted exchange rate (what the central bank refers to as the NEER, or nominal effective exchange rate) but with a slightly faster pace of appreciation. The MAS also decided to restore a narrower band of permissible fluctuation around the targeted level.
Why does Singapore use the exchange rate and not interest rates?
Singapore has a fairly unique approach to managing monetary policy. Unlike many other countries, the MAS does not set a publicly stated inflation target and adjust interest rates in order to achieve that inflation target. Instead, it uses movements in the trade-weighted exchange rate as the primary means of managing monetary conditions in the economy. When inflationary risks rise during periods of high economic growth, the MAS will allow the Singapore dollar to appreciate at a certain controlled rate. This helps to bring down import prices and so lowers inflation directly. In addition, by reducing export competitiveness, the appreciation of the local currency slows demand growth when it is excessive and so helps to reduce inflationary pressures as well. In the long run, there is little damage to export competitiveness as the policy of currency appreciation reduces the cost of imported components used in the export sector and by keeping local inflation low, overall cost pressures in Singapore remained contained.
This policy has served Singapore extraordinarily well in the roughly 30 years it has been practised. Over the long term, Singapore’s economic growth and export performance have both been outstanding, while inflation has been relatively low. Inflation has only been high in years when global inflation surged, say, because of a spike in oil prices. This suggests that the exchange ratebased policy has not seriously undermined export competitiveness while delivering good growth performance with acceptable inflation.
Despite this impressive track record, questions continue to be asked about the efficacy of the exchange rate-based policy. These questions fall into two broad areas. The first concerns the appropriateness of each monetary policy adjustment, for example, whether the recent adjustment to a slightly faster appreciation was the right decision. But the second is a more fundamental concern, with some observers questioning whether Singapore should continue with an exchange rate-based monetary policy — these observers seem to want a shift to an interest rate-based policy. Since the exchange rate is the single most important price in an economy like Singapore’s, it is critically important that investors and businesses have a clear appreciation of these questions.
Was a slightly faster rate of Singapore dollar appreciation the right decision?
Central bankers have a tough job. Since their policy actions have a lagged effect, sometimes taking nine to 12 months to be fully felt, they have to make a judgement call on the economic position in nine to 12 months. Moreover, they have to use tools that are not perfect to set monetary conditions that are appropriate in nine to 12 months’ time. This is difficult even in ordinary times. Now, with ongoing financial and economic crises in the largest economies, with key variables such as oil prices almost impossible to predict and with the Singapore economy undergoing structural changes, this becomes ever more difficult.
The key determinants of appropriate monetary policy are quite mixed:
The outlook for economic growth:
The stronger-than-expected economic performance in 1Q means that there is very little slack left in the economy, most resources are fully utilised. However, going forward, our take is a cautious one. We think external demand for Singapore’s exports will weaken significantly as we move into the middle of the year. We see the US economic recovery losing momentum, the eurozone experiencing a deeper recession than the consensus favours and growth in China slowing materially.
Domestic inflationary pressures remain at an uncomfortable level:
Despite a likely slowing in demand growth, upward pressures on wages and other business costs continue to escalate. In particular, the government is tightening the inflows of foreign labour, forcing wages to rise even in the face of slower economic growth. Given that wage costs will push up business costs, which will be passed onto consumers and that rising incomes will boost demand in an economy that is running close to full capacity, the inflationary risk is real.
In this context, the slight tightening of monetary conditions by the MAS is understandable. A signal had to be sent to temper inflationary expectations so that a wage-price spiral does not take root.
However, our concern is that the Singapore economy is heading into a slowdown with a high cost structure and a strong currency. Businesses will have to restructure to overcome these challenges. Labour-intensive activities will be downsized, costs have to be cut and cashflows will be diverted to funding investments to raise productivity and change business processes towards those which economise on labour. Many larger businesses will go to their smaller sub-contractors and suppliers and demand reduced costs of components and services. Note that these are essentially deflationary adjustments and if the economy slows further, the deflationary risks will outweigh the inflationary risks. Thus, while it was understandable that the MAS had to act against the current inflationary pressures, our concern is that these inflationary pressures will give way to deflationary adjustments soon.
Should we shift to an interest rate-based policy regime?
The larger question is whether the exchange rate-based policy regime has outlived its usefulness. If so, does it need to be just modified a little or should it be completely overhauled into an interest rate-based policy regime as some are advocating? There are a number of reasons given by those who advocate a change:
First, while the exchange rate is an important price in the economy that must not be misaligned with economic reality, so is the interest rate. But one consequence of an exchange rate-based policy is that Singapore gives up control over its domestic interest rates. Consequently, we currently inherit the ultra-low interest rates that our main trading partners are setting because of their economic difficulties. Adjusted for inflation, Singaporean savers currently receive a negative real return on their savings, something wholly inappropriate for our economic conditions. This leads to several ill effects. Low interest rates disadvantage savers such as retirees and spur individuals to take excessive risks in order to get a decent yield on their money. Low rates also tend to produce excessive speculation while distorting economic decisions on resource allocation by pricing capital too cheaply.
Second, low rates are clearly a factor behind the overheating in the property sector. As a result, many Singaporeans can only afford their own homes at a much higher cost. Over time, rising property prices seep into the cost structure in Singapore as landlords demand higher rents and individuals demand higher wages so that they can afford to buy homes.
Third, the exchange rate-based regime may not even be delivering the inflationary outcomes we want. After a long period until around 2007, when Singapore’s inflation rate was almost always below the average of our trading partners’ inflation, we are now in a phase where our inflation is almost always above that. If our domestic costs are escalating ahead of our trading partners’, then our competitiveness will be compromised.
Clearly, it is fair to say that there are challenges, which require some form of policy adjustment. The question is how far this adjustment should go. The MAS is already refining its approach, combining the exchange ratebased monetary policy regime with administrative measures to cool asset prices such as property prices if overheating becomes evident. It is reasonable to think that the MAS can intervene even more strongly should asset inflation risks intensify.
But this still does not tackle the worry that Singapore could be stuck in a prolonged period of low or negative real interest rates, which could distort resource allocation in the economy.
However, the optimal solution to this conundrum may not be to ditch the tried and tested exchange rate-based policy that has helped to anchor our economy effectively for a long time. There are some powerful arguments against a shift to an interest rate-based regime:
First, it is not clear if the MAS will be able to target a desired level of interest rates as effectively as it is able to target the exchange rate. As a financial centre with an open capital market, liquidity movements will be substantial, reducing the central bank’s effectiveness in setting interest rates through the economy. Previous attempts to use interest rates in Singapore did not work well.
Second, while the interest rate is an important price in the economy, the exchange rate is still much more important in Singapore’s highly open economy.
Thus, it appears more reasonable at this point for the MAS to further expand the use of administrative policies to target the ill effects of the exchange rate-based policy than to shift to the use of interest rates.
http://www.channelnewsasia.com/stories/singaporebusinessnews/view/1142148/1/.html
MAS records net loss of S$10.9b due to strong Singdollar
By Rachel Kelly | Posted: 21 July 2011 1220 hrs
SINGAPORE: The Monetary Authority of Singapore (MAS) recorded its biggest loss in 40 years on the back of a strong Singapore dollar.
MAS recorded a net loss of S$10.9 billion for its fiscal year ended March 2011. This compared to a record net profit of S$10 billion posted last year.
The central bank said excluding exchange rate effects, it achieved income and net capital gains totalling S$12.3 billion during the financial year ended March 2011.
MAS disclosed these figures in its latest annual report released on Thursday.
The loss comes as the foreign exchange impact from the stronger Singapore dollar exceeded the interest, dividend and valuation gains on foreign assets held.
Most of MAS' assets comprise official foreign reserves.
These are invested in a diversified range of foreign currency assets.
During the year, the Singapore dollar appreciated against most currencies including the US dollar, euro and sterling pound, but weakened against the yen.
The total assets of the central bank, including the Currency Fund, grew by S$13.85 billion to S$299.75 billion in the financial year ended 31 March 2011.
In 2010, MAS tightened its monetary policy as the economy strengthened. It shifted to a modest and gradual appreciation of the exchange rate policy band in April 2010.
Further tightening was undertaken in October 2010 and April 2011 as growth became more entrenched and resource constraints more binding.
However a strong local currency translated into the central bank's largest ever overall loss.
Ravi Menon, managing director of MAS, said: "Translation losses are not new to MAS because in most years the Singapore dollar has been appreciating. So in most years, we would have translation losses.
"But in most years the investment returns more than offset the translation losses, so we show a profit. Only on two occasions in the last 40 years has this not happened. And I think this is largely because of the size of the translation losses, which in turn reflects the strength of the Singapore dollar.
"As I said the Singapore dollar has appreciated against most currencies. The rate of appreciation of the Singapore dollar in the last financial year was the fastest since the Asian financial crisis, so the translation losses were larger. Therefor it tipped the P&L (Profit and Loss) into a loss."
The MAS said despite the large loss it would not be changing its investment strategy.
Mr Menon explained: "The whole purpose of holding foreign reserves is to hold them in foreign currencies to boost your international purchasing power.
"So our investment strategy must remain focused on that to maximise returns in foreign currency on a sustained long-term basis as well as ensure sufficient liquidity.
"Because as a central bank, we also need to make sure that our assets are in fairly liquid form to meet our monetary policy operation needs. So those are the two guiding principles and that will remain so.
"The translation loss is not a factor. It is just a reporting phenomenon where you report in Singdollar, the strength of the Singdollar diminishes the value of the reserves. Like I said, if we had reported our results in foreign currency or US dollar, this is not an issue."
The MAS said that during the year the Singdollar appreciated against most currencies. The Singdollar appreciated 9.9 per cent against the US dollar, some 5.5 per cent against the euro and 4.9 per cent against the sterling pound.
Song Seng Wun, regional economist at CIMB Research, said: "This is the difficulty when we report foreign exchange reserve holding, which is really a holding with a mixture of foreign currencies and assets. You've got US dollars in there, you've got euros, you've got yen, and a number of other currencies as well.
"The problem, as we all know, is that the strong Singdollar has certainly helped for those who do online shopping but for the government who reports reserve currencies in the reporting currency Singdollar, we've got a problem.
"And that is what we have got this time round, in that the US dollar depreciated by over 10 per cent, that is that the Singdollar has strengthened. So when we report any balance sheet in the reporting currency which is stronger, you are going to get exchange losses.
"By our estimate, we probably hold something like 60 per cent of the reserves in US dollar and if that currency depreciates by more than 10 per cent, then you will have an impact. Some of it is in euros as well, and again, many Singaporeans realise that the euro has weakened."
The MAS said that the current monetary policy stance of appreciating the Singdollar nominal effective exchange rate (S$NEER) policy band set in April this year remains appropriate.
The next Monetary Policy Statement is scheduled for October.
Mr Menon added: "In nominal effective exchange rate terms against a basket of currencies, you can continue to see the Singdollar appreciating because that is the policy line, strongly supported by market fundamentals, that you can continue to see for some time more."
MAS said that together with the Ministry of Trade and Industry, it is reviewing Singapore's GDP growth forecast for this year. For now, it said that the 5 to 7 per cent forecast range remains intact.
However, if the pick-up from the second quarter is weaker, than expected growth could come in at the lower half of the range.
In the chairman's message of the annual report, Deputy Prime Minister Tharman Shanmugaratnam said that "the ongoing sovereign debt crisis in the European periphery poses significant risks - both to global economic growth and financial stability."
Mr Tharman added that Singapore faces a changed financial landscape globally following the crisis of 2008-2009, and that the regulatory approach in Singapore will "evolve, whilst retaining the close monitoring and supervision of financial institutions that ensures that our financial system remains resilient and stable."
In the capital markets, MAS implemented several safeguards for investors such as guidelines on the form and content of the Product Highlights Sheet.
The MAS said it will also implement changes to fund management regulation, aimed at raising the quality of players and enhancing regulatory oversight to enable sustained growth of the industry.
Going forward Mr Tharman said MAS will continue to support the development of Singapore as an international financial centre "trusted for its high standards of regulation, integrity and efficiency."
- CNA/cc/ck
