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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