Exchange Rate Policy at the Monetary Authority of Singapore International Finance – Case 2

13 November 2012

2 Exchange Rate at the Monetary Authority of Singapore, November 2012

Table of contents

1.  Singapore Economy

2.  Situation & Mission of MAS

3.  Traditional Monetary Policies

4.  Managed Floating System: Watching the BBC !

5.  How BBC worked for Singapore

6.  Conclusion

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Singapore Economy 1

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General Presentation of Singapore’s Economy

»  Currency: –  Singapore Dollar (S$ or SGD)

–  1 USD = 1,2235 SGD

»  One of the highest GDP per capita

»  Large Saving & Trade surplus High historical budget surplus

Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion

Basic Information

»  Remain a worldwide top trading partner

»  Remain a major financial center

Goals

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Situation & Missions of MAS 2

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Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion

Situation & Missions of MAS

Missions

•  Promote sustained, non-inflationary growth •  A sound and progressive financial centre •  Reduce unemployment •  Promote industrialization

Means of Actions

•  Banking regulation •  Fiscal policy •  Advanced econometric monetization •  Savings + Trading surpluses High liquidity reserves available

Monetary Policy

•  Adequate monetary policy to achieve the goals

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Traditional Monetary Policies 3

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Traditional Monetary Policies

Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion

Advantages of both regimes Disadvantages of both regimes

Fixed exchange rate regime

•  Predetermine the exchange rate •  Be in control of exchange rate risks •  Absorb monetary shocks by adjusting

money supplies •  Expect discipline in economic

management

Fixing Singapore’s currency

•  A loss of freedom in terms of internal policy

•  Vulnerability and dependence •  Require large holding of foreign reserves •  Fixed rates can be unstable

Floating exchange rate

•  Change according to market conditions •  Leave monetary authorities free to

influence the domestic supply interest rates and inflation

•  Restore the trade balance

Floating exchange rate

•  Very volatile in a short run •  Promote currency speculation •  Reinstall exchange rate risk

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Managed Floating System 4

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Watching the BBC: Managed Floating System

»  Based on the BBC(Basket Band and Crawl) Singapore self-invented a 3rd way in between fixed and floating regimes: the “dirty float”

Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion

•  Target NEER is calculated against a basket of currencies •  T.W.I : Currencies from major trading partners Basket:

•  Centered around target NEER •  SGD freely floating within the band •  Flexibility tool :

•  Enforcement of bands by MAS enables short term currency stability •  Credibility in the markets (Cf Asian 1997/98 crisis) •  Allows capital flows

Band:

•  Adjustment factor used to reflect long term change in economic fundamentals

•  Historically upward Crawl:

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Managed Floating System: Watching the BBC !

Singapore self-invented a 3rd way in between fixed and floating regimes: the “dirty float”

Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion

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How BBC worked for Singapore 5

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How the BBC worked for Singapore

»  MAS focused on maintaining low inflation levels

»  Currency not used as a competitive tool –  Increasing productivity and innovation through large investments

–  Move up the value chain –  Appreciation of the REER in accordance with improving economic fundamentals

–  Huge Budget surplus & GDP Growth

»  Singapore v.s Hong Kong –  Hong Kong : Fixed Exchange rate

»  High growth

»  High inflation levels

»  Problem during the Asian financial crisis 1997/98: Devaluation of HKD / Deflation

–  Singapore: “Dirty float” »  High growth

»  Low inflation levels

»  High credibility in the markets: widening of trading bands

The effects of this “Managed Float” strategy on the Singaporean Economy

Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion

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Conclusion 6

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Conclusion

»  Singapore is a relatively small economy, highly dependent on: –  International trade

–  Financial Markets

»  Managed exchange rate was highly beneficial to the economic boom –  Record GDP growth –  Sound public finances

–  Low inflation –  Stability maintained even during the Asian crisis

»  Keep current system at least until the Yuan turns floating –  Avoid speculative pressure

–  Benefit from stability

Our recommendation: Keep the current exchange rate policy

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Questions ?