The recent monetary tightening by the Monetary Authority of Singapore (MAS) has strengthened the Singapore Dollar (Singdollar) against foreign currencies. As inflation continues unabated, it is likely that MAS would further tighten monetary policy with the continued strength of the Singapore Dollar.
Currently, the Singapore Dollar is at or close to its record highs against many foreign currencies, including our close neighbours, such as Malaysia and Thailand, and further abroad in Europe and United Kingdom.
Note: at time of writing, 1 Singapore Dollar equals 3.23 Malaysian Ringgit, 26.26 Thai Baht, 0.59 Pound Sterling or 0.71 Euro.
So, what implications does this have on Singapore businesses?
Read Also: Coping With Inflation In Singapore: What Can MAS Do (And At What Cost)?
Inflation Is The Main Driver For The Strengthening Singapore Dollar
As Singapore is a small and open economy, our monetary policy is centred around the management of the exchange rate. This is because the exchange rate has a much stronger influence on inflation than the interest rate in Singapore. Our gross exports and imports of goods and services are more than 300 percent of GDP and domestic expenditure has a high import content. Almost 40 cents of every dollar spent domestically is on imports.
Management of the exchange rate is our only form of monetary policy. This is unlike other central banks which may use other monetary policy tools such as setting interest rates or controlling of money supply. Our capital markets are open and domestic interest rates are largely determined by global interest rates and foreign exchange market expectations of the Singapore dollar. Specifically, MAS moderates inflation by managing the Singapore dollar nominal effective exchange rate (S$NEER), which is managing the Singapore dollar against a trade-weighted basket of currencies.
To counter the recent surge of inflation, MAS has tightened monetary policy, leading to a stronger Singapore Dollar.
Strong Singapore Dollar May Help Lower The Cost Of Imports
For businesses that import goods as part of their material costs, a stronger Singapore dollar can help lower the cost. As the Singapore Dollar strengthens against most other foreign currencies, imported goods become cheaper if the price of the goods has remained unchanged.
However, in this current environment of high inflation, the strong Singdollar may only help to absorb some of the price increases of these import goods. The more favourable exchange rate may be insufficient to offset the cost of imported inflation for certain goods.
For businesses that do not import goods, a strong Singdollar may have no apparent impact on the business operations. However, it does have an effect on employment.
Strong Singapore Dollar Makes Singapore Employers More Attractive To Foreign Talent
For employers, the strong Singdollars makes Singapore companies more attractive for potential foreign employees. At an exchange rate of 1 Singdollar to more than 3 Malaysian ringgit, it is easier for Singapore employers to find Malaysian workers willing to work in Singapore. This is true for many other countries where Singapore businesses typically source our foreign manpower.
Employers may find themselves more attractive to hire freelancers overseas or to entice expatriates to relocate to Singapore as the stronger Singdollar make their compensation more valuable in their home currencies.
However, even as it becomes more attractive to hire foreign workers, Singapore employers need to be mindful of the restrictions on work passes for foreign employees, including foreign worker quota for Work Permit and employment criteria for S Pass and Employment Pass.
Read Also: Foreign Worker Quota In Singapore: What Is It And How To Calculate It For Your Business
Strong Singapore Dollar Makes Exports More Expensive
For Singapore businesses that export goods or services, the stronger Singdollar may increase revenue as exports become more expensive.
According to MAS board member and Minister of State for Trade and Industry (MTI), Mr Alvin Tan, the strengthening of Singdollar is not expected to negatively impact exports as “Singapore’s exports are generally in high value-added products and services where demand is less sensitive to price and, therefore, exchange rate changes.”
Impact Of Exchange Rate Is Dependent On The Currency Your Business Operations Is Denominated In
Regardless, the impact of exchange rate and the stronger Singapore dollar would depend on which currencies and how much the business is denominated in foreign currency. If the business import contracts are all denominated in Singdollar, there may be no exchange rate cost savings. Likewise, the business revenue is denominated in foreign currencies that are weakening against the Singdollar, the exchange rate may contribute to poorer earnings.
For companies with foreign currency exposure, management of your foreign currencies is integral to smooth business operations. Having a multi-currency business account can help your business manage its foreign currency cashflow, and even allow you to hedge your business risks by exchanging foreign currencies at favourable rates.
However, businesses need to keep in mind that the current strength of Singdollar is driven by inflation and underlying dilemma may be less of how to manage foreign currencies to your business advantage but more of how to keep pace with inflation and whether to pass on the additional costs to your customers.
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