Slight devaluation to keep foreign money in Singapore banks

Slight devaluation to keep foreign money in Singapore banks

Now I am scandalized by the Wall Street Journal just like the Singapore judges had been in the past.

Here I was, saying a silent prayer of thanks to the Monetary Authority of Singapore for not forgetting us poor folk in the hour of economic crisis and devaluing the Singapore dollar only slightly, by about 1.7 percent or so, so we can continue to eat our imported rice and chicken and practise daily hygiene with foreign toothpaste, soap and shampoo. (Almost nothing is made on this island except exports.)

The Wall Street Journal poured a bucket of cold water on this notion of a people-friendly devaluation.

The central bank did not further devalue the Singapore dollar for a different reason, it claims – to prevent foreign money from flowing out of the Singapore banks.

It won't help Singapore exporters compete with the Koreans and the Taiwanese – that requires a "monumental devaluation" of the Singapore dollar, says the article.

But it can help keep foreign money in Singapore banks.

Mark Cranfield writes in the Journal:

The central bank made a point of highlighting its view that there's "no reason for any undue weakening of the Singapore dollar."

In other words, Singapore isn't willing to step onto the slippery slope of competitive currency devaluation. By ceding that it can't control external demand for its goods, it's being as clear as it can that it doesn't want foreigners to lose confidence in the Singapore dollar and take their wealth elsewhere.

Financial services, led by a huge private banking and asset management industry, are crucial to the economy and confidence in the Singapore dollar underpins this structure. Funds under management in Singapore are around $800 billion, according to Monetary Authority data.

On top of the vast deposits lodged in Singapore by wealthy individuals, the island state has also become home to thousands of executives helping to provide those financial services.

The money these temporary residents spend in the local economy has become significant in the past five years, and a driver of the near doubling in residential property prices between 2006 and 2008.

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Singapore dollar devalued after worst ever slump

Singapore dollar devalued after worst ever slump

It's hard to say anything more about where the Singapore economy is headed since the experts keep changing their tune. Even fortunetellers will be embarrassed if they flopped like the Ministry of Trade and Industry's recent economic forecasts.

Meanwhile, the Monetary Authority of Singapore (MAS) devalued the Singapore dollar today but, thank goodness, only by about 1.7 percent, according to Bloomberg.

That's only an estimate since MAS uses a secret currency exchange rate trading band that goes up and down with trade and the economy, or so it is believed.

But thank goodness anyway because a sharper drop would have hurt consumers since everything has to be imported including chicken and rice.

This is the second time MAS has changed tack in six months. It stopped letting the Singapore dollar rise against other currencies in October last year to help Singapore compete in the world market. But with exports continuing to fall, it has now devalued the Singapore dollar.

MAS sees no reason for any further weakening of the Singapore dollar because the economy has "sound fundamentals and a resilient financial system".

That's nonsense as far as the economy is concerned – it's in free fall.

Gross domestic product plunged unexpectedly sharply – by 19.7 percent --in the first three months of this year compared with the previous quarter, the Ministry of Trade and Industry reported today. That's worse than the 16.4 percent slump between October and December.

Never before has the Singapore economy contracted so sharply since the government began compiling such data in 1976, says the Wall Street Journal.

The ministry now forecasts the economy will shrink by six to nine percent this year.

This is the third time it has lowered its forecast in recent months. First it forecast between two percent growth and one percent slump this year. Then on January 21, it said the economy would be shrink by two to five percent this year.

Will it be right this time?

God only knows.

The ministry's powers of economic divination seem to have been rattled by the crisis as the economy gets worse and worse.

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Sell Singapore dollars, advises UBS

Sell Singapore dollars, advises UBS

Investors are being advised to sell Singapore dollars by the Swiss bank UBS, in which the Government of Singapore Investment Corporation (GIC) has a big stake.

Investors should sell both the Singapore dollar and Malaysia’s ringgit against the dollar and the euro to profit from a forecast weakening of Singapore’s currency at a policy meeting next week, according to UBS AG, Bloomberg reported yesterday.

“The ringgit would be dragged along with the Singapore dollar if, as we expect, the Monetary Authority of Singapore eases the Singapore dollar monetary policy at the April 14 meeting,” Ashley Davies, a Singapore-based strategist at the world’s second-biggest currency trader, wrote in a research note. Given the Malaysian central bank’s “apparent guidance to keep the ringgit within a tight range against the Singapore dollar, this is also likely to weaken the ringgit.”

The Bloomberg currency calculator shows Singapore dollar has now fallen to about 1.51 Singapore dollars against the US dollar, down from about 1.50 Singapore dollars yesterday.

GIC invested a massive 11 billion euros in UBS in December 2007, according to the Straits Times.


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Devalue Singapore dollar? It's going to hurt

Devalue Singapore dollar? It's going to hurt

Economists feel the Singapore dollar should be devalued, reports Reuters. Not because the currency is overvalued but because the economy is tanking.

That is what the Reuters report says: "The economy has been hit severely, more by collapsing external demand than an overvalued currency."

Currency devaluation usually means economic failure. It is necessary, nevertheless, says Reuters.

The Monetary Authority of Singapore (MAS) will have to "effectively devalue the currency if it wants to meaningfully achieve lower interest rates", says Reuters.

What's good for business could hurt consumers, though. Food and other necessities could cost more since almost everything has to be imported. And there's no guarantee that lower interest rates will stimulate the economy in the current recession. It hasn't so far in America, Europe or Japan.

And devaluation doesn't really work for long, according to the Economist. Its Economics A-Z explains:

DEVALAUATION
A sudden fall in the value of a currency against other currencies. Strictly, devaluation refers only to sharp falls in a currency within a fixed EXCHANGE RATE system. Also it usually refers to a deliberate act of GOVERNMENT policy, although in recent years reluctant devaluers have blamed financial SPECULATION. Most studies of devaluation suggest that its beneficial effects on COMPETITIVENESS are only temporary; over time they are eroded by higher PRICES.

However, Singapore has no choice, according to Reuters. The Singapore dollar has to fall from its current level of about 1.50 Singapore dollars to 1 US dollar. Reuters says:

Singapore's central bank announces its policy after a six-month hiatus next week, and barely anyone doubts that authorities will have to ease monetary settings to shore up an economy that is already in recession and toying with deflation.

Shifting the Singapore dollar's trade-weighted trading band down in one go, effectively a devaluation, would be the least ambiguous way of easing policy, said Emmanuel Ng, a strategist at OCBC Bank in Singapore.

That seems to be the consensus view, simply because other options could have some undesirable side-effects. The Monetary Authority of Singapore (MAS) could for instance allow the Singapore dollar to trade in a wider band, or gradually steer the centre of the band lower at a pre-determined pace so as to let the currency depreciate over time.

The former throws policy open to the whims of a market that could drive the currency up or down rather quickly, while the latter could push up market yields…

Singapore can fix its currency or its interest rates, not both at the same time.

The report adds:

Singapore has never had a policy encouraging a lasting depreciation of the currency in previous downturns. It widened the band in 2001, after the Sept. 11 attacks, and devalued the currency in 2002 and in 2003, after the technology bubble burst and during the SARS crisis.

This time though, well into the deepest recession on record, Singapore's authorities ought to do far more than merely announce a weakening of the currency, analysts reckon.

Policy was kept tight from April to October, and has been on neutral mode since then despite the severity of the downturn.

That has meant Singapore is one of a handful of countries in Asia where monetary conditions, measured by real exchange and interest rates, are tightening.

Central banks in other countries from America to Japan have lowered interest rates to stimulate the economy.

But that's not how the central bank operates in Singapore.

The Monetary Authority of Singapore says:

Monetary policy in Singapore centres on the management of the exchange rate. There is no independent policy targets for either interest rates or money supply.

Why? Partly because Singapore is an export-oriented economy. MAS says:

Exchange-rate changes have a major influence on inflation, and not insignificant effects on the international competitiveness of the real sector.

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Singapore May Devalue Currency in April

Singapore May Devalue Currency in April, Survey Shows (Update1)

By Patricia Lui

March 30 (Bloomberg) -- The Monetary Authority of Singapore may devalue the city’s currency and allow it to drop 4 percent against the U.S. dollar by June 30 to aid exporters and lift the economy out of the worst recession since independence in 1965.

The central bank will shift the mid-point of the Singapore dollar trading band at a twice-yearly review in April, according to 15 of 17 economists surveyed by Bloomberg News. The currency is “extremely and ridiculously overvalued,” Patrick Bennett, Asia foreign-exchange strategist at Societe Generale SA in Hong Kong, said last week.

Singapore’s exports fell for a 10th month in February as global demand for electronics and drugs tumbled and the government forecasts gross domestic product will shrink as much as 5 percent this year. Exporters are losing out to regional rivals after the currency weakened 6 percent in the past six months, compared with losses of 17 percent in the Indonesian rupiah and 12 percent in South Korea’s won.

“The central bank’s objective is to restore a measure of competitiveness,” said Wei Zheng Kit, a Singapore-based economist at Citigroup Inc., the world’s fourth-biggest currency trader. “A one-off depreciation will achieve this objective.”

Kit said the MAS may not allow much weakness in the currency after the devaluation because it wants to avoid damaging investor confidence. The central bank conducts monetary policy by adjusting the center, slope or width of an undisclosed band in which the Singapore dollar is allowed to fluctuate against a basket of currencies.

‘Sophisticated Mix’

Singapore’s dollar traded at S$1.5187 to the U.S. currency as of 11:04 a.m. local time. The median estimate of 17 economists for the spot rate by the end of the second quarter was S$1.5820 and the forecast range was S$1.65 to S$1.49. The content of the currency basket isn’t disclosed.

“It is time for a more appropriate mix of policy response,” said Bennett at Societe Generale, France’s third- largest bank. “We are looking for a re-centering, a potential band widening and an indication of a more sophisticated mix of interest rates and exchange-rate policies.”

The central bank focuses on currency policy rather than interest rates because trade is so important to the economy. Total exports are equivalent to 191 percent of GDP.

The MAS opted for faster currency appreciation over a six- month period in October 2007. It announced a one-off strengthening in April last year that caused the currency to jump 1.9 percent against the dollar in a single week. It stopped seeking gains in October 2008. It has yet to set a date for this year’s meeting aside from stipulating the month.

No Adjustment

United Overseas Bank Ltd., Singapore’s second-largest lender, said there have been no signals that the MAS plans a policy adjustment in the currency markets.

“Despite the pressure from exports and growth data, there hasn’t been any indication in the price action in the market that the central bank is heading the way of a band re- centering,” said Penn Nee Chow, an economist at UOB.

The Singapore dollar rose 2.6 percent in March, the first monthly gain this year, even as a government report showed non- oil domestic exports dropped 24 percent in February.

The risk of deflation may also spur the central bank to weaken its currency, boosting import prices, said Wai Ho Leong, a Singapore-based economist at Barclays Capital Plc, the world’s third-biggest currency trader.

‘Easing Bias’

“The objective is not to use the exchange rate to save exports as this is likely to be futile in this environment,” said Leong. “Weakening the currency may limit price declines so it doesn’t become self reinforcing or enter a negative wage price spiral.”

Inflation slowed to a 20-month low in February due to the weaker economy. The consumer price index rose 1.9 percent from a year earlier after gaining 2.9 percent in January, the Department of Statistics said on March 23.

The central bank will maintain a neutral stance, in which it seeks neither gains or losses, after the one-off depreciation, said 15 of the 17 economists surveyed.

“There has never been an easing currency policy bias in the history of the MAS,” said Leong at Barclays. “An easing bias will trigger capital flight, importers will suffer and construction costs will go up.”

Singapore’s GDP contracted an annualized 16.9 percent in the fourth quarter compared with the previous three months, when the economy shrank 5.1 percent. The government will release advance first-quarter estimates the same day that the MAS meets.

“Singapore has one of the highest exposures to weakness in external demand,” Enoch Fung, a Hong Kong-based economist at Goldman Sachs Group Inc., wrote in a research note on March 19. “The MAS is likely to weaken the currency by shifting the policy band lower.”

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