Saturday, April 26, 2008

Singapore monetary policy (strengthening SGD) criticized


By Vidya Ranganathan
Reuters (Tuesday, April 15, 2008)


SINGAPORE: When Singapore announced a somewhat unusual monetary tightening measure last week, economists praised a move that they felt tackled soaring inflation and made up for an overdue policy adjustment in one stroke.

But, as the dust settles, market participants are increasingly worried about the side effects of what was effectively a revaluation of the currency and the pitfalls of the peculiar Singaporean policy settings.

Critics argue that by endorsing an appreciating trend in the Singapore dollar, the central bank is opening the door to more capital inflows and more cash in the local market.

The result could be downward pressure on domestic interest rates and so more inflationary pressure.

Others point to the unsuitability of a system whose main policy instrument is the currency and in which inflationary pressures force currency appreciation at a time when slowing economies in the United States and Europe could depress demand for Singaporean exports.

"If you had complete flexibility to move your various policy levers, you'd probably want a weak currency and higher interest rates," said an HSBC strategist, Daniel Hui. "You'd want to be a little more accommodative on the external sector which has a lot of downside risk ahead of it."

Singapore does not have that flexibility. The Monetary Authority of Singapore conducts policy by guiding the currency within a secretive trade-weighted band, rather than by setting interest rates.

Last week, the authority said it was recentering the currency's trade-weighted band around its current levels.

To most economists, that meant the central bank was effectively revaluing the Singapore dollar, to firmer levels that the market had already been trading it at for about six months.

The Singapore dollar hit a record high against the dollar after that announcement. Simultaneously, inter-bank rates fell as traders braced for more speculative inflows into a rising Singapore dollar.

One-month interbank rates hit 1 percent, their lowest in three-and-a-half years. Real interest rates, adjusted for inflation, turned more negative.

The Singaporean central bank keeps all parameters of its policy band secret, but economists estimate the trade-weighted currency band is being shifted up by at least 1 to 2 percent, which by some measures equals a policy tightening of at least 100 basis points.

That would help reduce the heavy cost of the food and fuel that the resource-deficient Singaporean economy must import. But what of the soaring rents within the country, rising transport and education costs and even wages in some sectors?

Singapore has enough grounds to focus on its currency. With exports equivalent to 185 percent of gross domestic product and imports at nearly 170 percent of gross domestic product, it is one of most exposed Asian countries to foreign markets.

"If there is a country in Asia that can use currency appreciation to quash inflation, then Singapore stands out as a leading candidate," said a Lehman Brothers' Asian economist, Rob Subbaraman.

Economic growth has held up well in the past 6 months, despite slowing U.S. demand and volatile credit markets.

The economy expanded 7.7 percent in 2007 and a current account surplus of 24 percent of gross domestic product affords it ample leeway on export earnings.

At the same time, much of the economic growth has been driven by investment and domestic housing demand, more sensitive to interest rates than currency levels.

Inflation, which hit a 26-year high of 6.6 percent in January, is driven in part by the huge amounts of fuel and food that Singapore imports. Yet, economists say local rents and wages drive a larger part of food inflation, while taxi fares and road tolls have pushed transport and communication prices.

Housing inflation is running near 9 percent, while health care costs are also rising at a more than 7 percent annual pace.

"A lot of inflation can be attributed to domestic factors and strong domestic growth and that does suggest that perhaps the current policy regime that Singapore has isn't well-suited to address the current challenges," Hui said.

14 Comments:

Blogger Remote Control said...

Raising wages to address rising costs not a right solution
By S Ramesh, Channel NewsAsia | Posted: 25 April 2008 2026 hrs


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Raising wages to address rising costs not a right solution

SINGAPORE: Raising wages to address the issue of rising costs may be an enticing option but that is not the right solution, said Acting Manpower Minister Gan Kim Yong.

He said adjusting wages upwards to meet rising prices would only result in a "price-wage spiral" and Singaporeans should look at the bigger picture.

"What is more important is for us to have a realistic expectation of wages that reflect the underlying economic strength of our industries and also of our productivity. That will allow us to ensure that our economy will be able to sustain its growth momentum," said Mr Gan.

Since the last two recessions, tripartite partners – the government, unions and employers – have been working hard to encourage companies to restructure their wage systems to make them more flexible. This would allow companies to respond quickly when there is an economic downturn.

One component that has been built into the wage system is the monthly variable component (MVC). Mr Gan said this has worked well, but more needs to be done.

He said: "It is not an easy instrument to introduce because companies have to put in place certain mechanisms, particularly in the small and medium enterprises. Many of them take the position that in any case, their wages are quite flexible because they are small and nimble, and are able to adjust the wages as they go along.

"We do acknowledge that some of these companies already have a flexible wage system in their own structure... but it is also important for us to look at other flexible components of the wage system, including reducing the ratio between minimum and maximum wages."

A major preoccupation of the Manpower Ministry is to finalise Singapore's reemployment legislation which is expected to come into effect by 2012.

Mr Gan said that it would not be a top-down approach – there will be widespread public consultation with both employers and unions before the final legislation is crafted.

The acting manpower minister also said the feedback received so far has indicated that employers welcome the initiative and see the benefit of employing older workers.

In fact, the employment rate of those aged between 55 and 64 years went up by 3 percentage points from 2006 to reach almost 56 percent last year. The tripartite partners hope to achieve a 65 percent target by 2012.

Mr Gan said: "Employers are ready and willing to give it a try, and we are now helping them to introduce this system even ahead of the introduction of the legislation.

"Drafting the legislation is not so difficult. What is difficult is to decide what are the criteria, terms within the legislation, and this is something we have to work with the industry and unions so that we can arrive at some common understanding how reemployment is to be implemented."

A tripartite work group has also been set up and it will visit companies to enhance the consultation process before the final law is introduced.

7:57 PM  
Anonymous JiRo said...

can u explain this part?

"Critics argue that by endorsing an appreciating trend in the Singapore dollar, the central bank is opening the door to more capital inflows and more cash in the local market.

The result could be downward pressure on domestic interest rates and so more inflationary pressure."

11:47 PM  
Anonymous ms aw said...

"Critics argue that by endorsing an appreciating trend in the Singapore dollar, the central bank is opening the door to more capital inflows and more cash in the local market.

Expectations of a higher SGD will cause speculators to want to hold SGD instead of other currencies and this would lead to a rise in flows of short term capital into the country, i.e. capital inflows

The result could be downward pressure on domestic interest rates and so more inflationary pressure."

this rise in money supply due to the short term capital inflow will lead to surplus funds in the banking system and hence banks lowering interest rates to encourage borrowing, which in turn could worsen dd-pull inflation.

nonetheless, it would be useful to read further on what MAS is doing to avoid this effect on interest rates and inflation..


(taken from The Business Times)

"...the market is bracing for more MAS interventions and sterilisations.

'Investors should expect the MAS to continue sterilising aggressively, so as to moderate the fall in domestic interest rates as a result of its forex interventions,' said Mr Kit.

MAS has been sterilising in unprecedented amounts.

In February, data showed that MAS sterilised or removed about US$8 billion from the banking system, the second largest amount since May 2006 when it was over US$9 billion, said Mr Kit.

Sterilisation refers to the Central bank's measures to 'neutralise' monetary consequences of the various currency transactions they carry out in order to minimise their impact on the market. In this case, MAS may remove SGD from the market in response to the money supply increase.

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