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The Singapore economy grew at a respectable rate of 1.8% on a quarterly basis for Q1/2016 which was above analysts’ expectations of 1.6%. Despite the decent growth, the Monetary Authority of Singapore (MAS) surprised the market by announcing a new policy last Thursday to basically stop the appreciation of the Singapore dollar (SGD).
The SGD immediately weakened against the USD and in the first hour alone, weakened 0.85% from S$1.3502 to S$1.3617 to one US dollar. The MAS has not made such a move since the 2008 Global Financial Crisis. This means, in my opinion, that the MAS foresees tougher economic conditions ahead and is preparing the local economy accordingly for it.
A strong SGD helps to curb inflation as Singapore imports almost all its consumer products. On the other hand, a weak SGD helps to make our exports more competitive. Singapore is highly trade dependent and our trade value is at 407.9% of GDP. This heavy dependence is also the reason why the MAS chooses to use exchange rates instead of interest rates to manage our monetary policy effectively. (Countries such as Japan ease monetary policy by cutting interest rates. When interest rates hit zero, the Bank of Japan introduced negative interest rates next to spark more activity and investment in the Japanese economy.)
Now that the MAS has stalled the appreciation of the SGD, the currency is less attractive to investors which causes the currency to weaken. A weaker currency makes exports cheaper for the international markets and demand for our exports would help keep our jobs more secure.
The Ministry of Manpower reported that more workers lost their jobs last year due to the weak economic climate. Redundancies rose by 20% from 12,390 in 2014 to 15,580 in 2015 and only half of those who lost their job last year have found a new job. There were only 700 jobs for Singaporeans and PRs in 2015 compared to 96,000 new jobs in 2014. You know that it is serious when top banks like JP Morgan retrench 20% of its staff in Singapore and Hong Kong on the back of the worst results since 2008.
In order to for local banks to entice investors to retain their SGD deposits, they have to start offering higher bank interest rates. The 3-month SIBOR rose 26% in January while the SGD weakened 0.5% the same month. Now that the currency has weakened further following the MAS move, will the SIBOR rise higher still?
Well, this might not be the case. At the start of last year, there were strong market expectations of a Fed rate hike but the Fed has firmly expressed dovish monetary policy tendencies in March 2016. The Bank of Japan has introduced negative interest rates, the European Central Bank (ECB) is not shying away from easing and even the People’s Bank of China has eased its monetary policy repeatedly. With all the major economies in the world easing their monetary policy and offering lower interest rates, the SIBOR might not have to rise significantly to attract investors.
I read through the MAS news release and found this to be especially revealing:
“While output in the manufacturing sector increased after six quarters of contraction, this largely reflected a temporary ramp-up in pharmaceutical production in January. The performance of the rest of manufacturing and the trade-related services sectors continued to be held down by sluggish external conditions.”
In other words, manufacturing and trade can slump in the next quarter as it is being temporary boosted by pharmaceutical sector. MAS also cited economic weakness in China, Japan and Europe.
There is also the increased risk of Brexit. Latest polls give the ’Leave EU camp’ a slight advantage and the poll is due in ten weeks on June 23. British Prime Minister David Cameron’s reputation was seriously damaged after the release of the Panama Papers and he might be forced to resign over tax avoidance. As a result, he might not be able to campaign effectively for the UK to stay in the EU. A Brexit could throw UK and global markets into turmoil which would seriously hurt Singapore’s economy.
The decision by the MAS to stop the appreciation of the SGD is significant and I have no doubt that it is done after careful deliberation. The MAS is putting up a defensive mechanism to shield Singaporeans against the increased risk of a global recession.
Singaporeans might have to pay the price of higher mortgages and consumer goods but the point is that you can still pay for them as long as you have a job. The MAS might even be betting on weaker global economic growth and lower prices as global demand drops. This might cancel the inflationary effect of the weakening of the SGD.
The fact that the MAS took the rare step of surprising the market means that they have deemed the situation urgent enough to be serious. The MAS is now moving to safeguard our economy and our jobs at the price of possibly higher inflation. We will know that danger has passed when the MAS lifts the restriction and allows the SGD to appreciate gradually again. Until then, we are likely to see further SGD weakness and I wouldn’t be surprised if the currency drops over the next three months to a low of S$1.44 against the US dollar seen at the beginning of the year.