Friday 23 October 2015

Why a strong Sing$ matters

Here's why it is a good move by MAS to catch the bears on the wrong foot and opt for a token easing
By Goh Eng Yeow, Senior Correspondent, The Straits Times, 21 Oct 2015

To investors, the strength of a country's currency often mirrors the virility of its economy.

For a top international financial centre like Singapore, maintaining a strong currency is doubly important. It boosts foreign investors' confidence in the banking system and enhances the city state's bankability as a major financial hub.

It means an investor will enjoy a return simply by keeping their money here because of the gradually appreciating currency. This is a big selling point - not lost on foreign investors - and it helps to enhance our attractiveness as an international financial centre.

And because of the high standing of Singapore as one of the world's top banking centres, the financial sector is also a big employer. An estimated 190,000 people work in the sector, about three-quarters of whom are Singaporeans.

The financial sector is also a big engine of growth for the Singapore economy: While the economy grew only 1.8 per cent from April to June, the finance and insurance sector expanded by 7.1 per cent for the quarter, helping to make up for the slack in other segments of the economy.

Monetary Authority of Singapore (MAS) manages the Singdollar's value through what is known as the nominal effective exchange rate (NEER) as it buys and sells the Singdollar against a basket of other currencies.

While the basket of currencies has never been disclosed, it is likely to include the currencies of Singapore's biggest trading partners - China, Malaysia, the European Union and the US.


Now considering the important role which the strong Singdollar plays in the economy, it was a tad disconcerting to find economists recently making a case to argue for its weakening, if only to make Singapore's exports cheaper and give a boost to the sluggish manufacturing sector.

Their call had also taken place against a backdrop of plummeting regional currencies. Since January, the ringgit had fallen 19.5 per cent, while the Indonesian rupiah was down 8.7 per cent against the US dollar.

Ahead of MAS' latest monetary policy statement last week, 16 of the 25 economists polled by Bloomberg had expected the MAS to ease up on the Singdollar, with most of them anticipating it to adopt a more aggressive easing policy.

One currency strategist - Citigroup's Mr Siddharth Mathur - had even described the Singdollar as "everyone's favourite currency to short in Asia", according to financial magazine Barron's Asia.

Just as well, the MAS caught all these Singdollar bears wrong-footed by opting to choose to only "slightly" flatten the path of the Singdollar's appreciation. That is central bank speak for a token easing measure, if any, one which fell far short of the aggressive weakening stance that the economists were hoping for.

This had the effect of putting a squeeze on traders who were betting against the Singdollar as they scrambled to unwind their "short" positions, propelling it to gain by up to 4 per cent to $1.3781 against the US dollar after falling to a six-year low of $1.4342 a fortnight ago.

Economists, who had been urging for an aggressive weakening of the Singdollar, were quick to put out the spin that the MAS wanted to avoid a large or abrupt currency depreciation because the economy has not yet entered the danger zone.

But then again, the MAS had said that it expects core inflation (stripping out accommodation and private transport costs) to "rise gradually" over the course of next year towards its historic average of close to 2 per cent.

And since containing inflation is a cornerstone of Singapore's monetary policy since we import virtually everything we eat or use, that should negate any argument about weakening the Singdollar for growth reasons.


As it is, having a strong Singdollar during a particularly trying period of turmoil in the international currencies market such as now can be a big source of solace to foreign investors - and Singaporeans.

It leaves in no doubt the MAS' determination to defend the Singdollar against any speculators who may be thinking of attacking the currency. This is in the light of the travails faced by many emerging market countries such as Brazil in trying to stem an outflow of capital from their economies as jitters over a possible interest rate hike by the US central bank - its first in almost a decade - triggers a big flow of money back to the United States.

For all we know, a more aggressive easing move by the MAS may be misconstrued by speculators that its resolve to defend the Singdollar may be wobbling - and that would be disastrous.

Currency speculators do not attack a currency at random. They will attack only if they believe that a country's credibility in defending its currency is in doubt.

We do not have to go far to find an example: Just look at China.

In August, it abruptly ended what had been viewed as a "soft" peg to the US dollar. This step was taken ostensibly to enable China to present the yuan as a market-driven currency worthy of a place alongside the US dollar, yen, euro and sterling as a reserve currency by the IMF.

But the move had taken place against the backdrop of an eye-popping 8 per cent drop in China's July exports - and this spurred attacks on the yuan as speculators interpreted it to mean that the Chinese economy was in a worse shape than previously thought.

This was despite the counter-argument that if China had really been serious about devaluing its currency to help its exporters, it would have opted for a much bigger drop, rather than the 2.9 per cent fall which the yuan had initially registered against the US dollar.

But the damage was done. China's efforts to defend its currency in the wake of the massive attacks mounted on the yuan caused its foreign reserves to plunge by US$180 billion (S$250 billion) in the past two months - a staggering sum which is much bigger than the foreign savings of most nations.

Had China's misfortune befallen a lesser nation, that nation would surely have gone bankrupt. The currency woes which China faced are a reflection of how slippery a valuable asset such as investors' confidence can be. Once it is lost, it is not easily regained.


Even for the sake of argument that a weaker Singdollar may be a boon for exporters, it should be noted that Singapore has never flinched from taking tough decisions to boost competitiveness by cutting costs, rather than going for the easy option in devaluing its currency.

This is because, as a small and open economy, the cost reduction from a depreciation in the Singdollar can be quickly eroded through higher inflation.

One good example is provided by the 1997-1998 Asian financial crisis, which the current turmoil in the international currency markets is often compared with.

At that time, rather than respond with a devaluation of the Singdollar to cope with the spillover effects from its neighbours' economic problems, Singapore unveiled a series of measures such as property tax rebates and a reduction in wage costs through a 10-point reduction in the employers' Central Provident Fund contribution rates to fight the economic slowdown.

This is what makes the Singdollar particularly alluring to investors. They can be assured that the Government will take tough measures to preserve the Singdollar as a store of value for investors.

As one strategist - London-based CLSA strategist Russell Napier - once put it, even if financial Armageddon is near at hand, the Singdollar is one currency to have.

"Investors in the Singdollar can bide their time with full flexibility to invest where and when they want", he observed in a report written four years ago, as investors were grappling with where to put their money in as they fled from the currency turmoil triggered by the euro zone debt crisis.

What he observed then would surely hold just as true today.

Legions of US Treasury secretaries in the US, charged with preserving the value of the greenback, have always proclaimed loud and clear that a strong US dollar is good for the United States.

The same argument applies here too: A strong Singdollar is good for Singapore.

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