On 14th October 2015, our central bank, the Monetary Authority of Singapore (MAS), announced that it would continue to ease monetary policy to accommodate for the slower growth that Singapore is experiencing, largely due to weaker global growth expectations.
To make things simple, monetary policy is like steroids for the economy. If our economy is underperforming, MAS can stimulate it by injecting some steroids. That is what happened, by easing our monetary policy.
Singapore manages its monetary policy by using an exchange rate regime. The exchange rate is pegged to an undisclosed basket of currencies from other countries that are deemed important to Singapore and its trades. Basically, these other currencies included in this undisclosed baskets of currencies would be countries that are close trading partners of Singapore.
The rate of appreciation is set to reduce slightly
MAS has set on the path of a modest and gradual appreciation of the Singapore dollar (SGD) against a basket of undisclosed currencies in the long term. The October announcement does not change this intention, but rather, it signals a slower pace of appreciation for the SGD.
In the short-term, Singaporeans will feel a slight brunt as our purchasing power may reduce because the exchange rate will not be in our favour. We might not be able to see the SGD 1.00 = MYR 3.12 for quite a while. JB goers might need to buy 1 less Ramly Burger to make up for the weakening SGD.
However, in the longer term, the sectors that are exchange rate sensitive will be able to benefit from the weaker currency we have. These sectors include the manufacturing and tourism industries, which depends a lot on the SGD currency not being too strong so that goods are cheaper globally (against other currencies).
Weaker SGD equates to rising cost of living
Most of the food and products that we consume are imported due to land scarcity. A large quantity of such products comes from neighboring countries. Since our currency have fared relatively well compared to neighboring countries like Malaysia and Indonesia, it is easy to expect that our cost of living will reduce. However, that is frequently not the case since commodities are traded in the US dollars (USD).
If eggs are priced globally at 10 eggs for USD1, this will not change just because Malaysia’s Ringgit (MYR) has depreciated against the SGD.
With the SGD appreciating slower, this would mean that we may have to pay a higher price for food and other essentials which are imported goods.
Good news for exchange rate sensitive industries
During the second quarter of 2015, we saw that the SGD has been appreciating against major currencies globally. This meant that goods manufactured in Singapore and sold globally became more expensive because external parties have to purchase our goods in SGD.
With a slower appreciation of the SGD, industries such as manufacturing and tourism will finally have a breather in the hope that their decline would come to an end soon.
We believe that the mentioned industries will see the light of day approaching, and workers will have their well-deserved bonuses to pay for their next holiday. Bonuses may not come in at end-2015, but hopefully, by mid-2016.
Applaud MAS action on the easing
With core inflation – inflation that excludes accommodation and private road transport – expected to be at a mere 0.5% in 2015 and in the range of 0.5% – 1.5% in 2016, easing monetary policy will make Singapore more competitive and invigorate our economy.
Although Singapore is not near the “Golden Inflation Benchmark” of 2% annually, a slow appreciation is considered relatively conservative. This could be due to MAS’ anticipation that our Singapore Government will prepare its own stimulus programme in “Budget 2016”. If too much steroids is injected, it might cause overheating and make the Singapore economy unstable.
By allowing some room for maneuvering, MAS has played an awesome strategy “reeling in and out” of the Singapore’s economy.