Case Study I.
Exchange Rate Policy at the
Monetary Authority of Singapore
Emily Barr and Danny Purvis
Basic Information
• Currency: Singapore Dollar (S$ or SGD)
• US $1.00 = S$ 1.2780
• One of the highest per capita GDP
• Exports provide main source of revenue
• Electronics, chemicals, service
• Port of Singapore:
• Busiest port in the world
• (Total Shipping Tonnage)
Exchange Rate Systems
Fixed Exchange Rate Floating Exchange Rate
Advantages Advantages
Minimizes International Countries are more protected
Trade/Investment Risk from the economic conditions of
Elimination of Destabilizing foreign countries
Speculation
Central Bank interventions are
Requires Discipline in Economic not needed
Management
Freedom in internal operations
Disadvantages
Large holdings of foreign Disadvantages
reserves are required
Promotes currency speculation
Fixed rates can also be
unstable (devalue/revalue) Exchange Rate Risk
Loss of Freedom in terms of Investors and MNCs must
Internal Policy (interest rates) spend considerable resources
Countries are vulnerable (and to protect against
dependent) on the economic Inflation
conditions of other countries
Trends in Exchange Rate Systems
Overall Shift…
Fixed Exchange Rates Freely Floating
In 1975, approximately 87 percent of developing countries
had some type of fixed exchange rate.
By 1996, that percentage had dipped well below 50
percent.
Spurred by dissolution of the Bretton Woods Era
History of Singapore’s
Foreign Exchange Policy
Prior to 1970: SGD pegged to Pound
1972: Pound came under speculative attack
SGD briefly floated, than switched to US$ peg
1973: Major devaluation of the U.S.$
Collapse of Bretton Woods, SGD floated again
1974-1981: Shift of exchange rate policy towards
money market operations and monetary policy for
control
1981-2001: Managed Float
Current Exchange Rate System:
Managed Float
Since 1981, Singapore has focused on management of the Exchange Rate
SGD managed against a Periodically Reviewed
basket of currencies based Typically every 3 mo.
on major trading Ensure currency valuation is aligned
partners/competitors with fundamentals of economy
Choice of Exchange Rate for
Managed Float Target of Monetary Policy
Trade-weighted exchange rate Implies that Singapore gives up
is allowed to fluctuate within control over domestic interest rates
undisclosed policy band (and thus money supply)
“Unholy Trinity”
Monetary Authority of
Singapore (MAS)
Mission: Promote sustained, non-
inflationary growth and a sound and
progressive financial center
MAS is the central bank of Singapore
Has the authority to regulate all elements of
monetary, banking, and financial aspects
within the country of Singapore
Vision for Singapore: Be a World Class
Financial Center
Full service provide in capital and money
markets
Regional hub for retail and wholesale
financial services
The “Unholy Trinity”
The “Unholy Trinity”
Illustrates various tools a country can use when determining
monetary policy
A country can exercise 2 out of the 3, but cannot utilize all 3
concurrently (“tri-lemma”)
Monetary Independence
Ability to control the supply of money in circulation (and thus
influencing the interest rates)
Exchange Rate Stability
Altering the exchange rate by various methods in order to
depreciate/appreciate and maintain a stable ER
(3) Financial Integration
The free and continuous conversion of currency for FDI and
changes in the holdings of stocks, bonds, loans, bank accounts,
currencies, etc
The “Unholy Trinity”:
Singapore’s Trade-Off
Trade (in terms of exports/imports) is the cornerstone to
Singaporean Economy
Imports and Exports consistently > GDP
Because of this, it is essential that Singapore maintain an open capital
account
Interest Rate Control vs. Exchange Rate Control
Historically, larger economies are more responsive to changes in interest rates
because they have an expansive domestic banking industry
Changes in Exchange Rates: yielded much quicker results
Since trade was imperative to everyday life
The Difference Between Real and Nominal Exchange Rates
Nominal Exchange Rates
The nominal exchange rate is the value of a
country’s currency in relation to other currencies
without the adjustment for inflation.
The nominal exchange rate measured the ratio
at which Singapore dollars were traded for other
dollars on the spot market.
The Difference Between Real and Nominal Exchange Rates
Real Exchange Rates
The real exchange rate is the actual exchange
rate for the two currencies of concern adjusted
for inflation.
The real exchange rate measured the ratio at
which Singapore dollars were equivalent to other
currencies in terms of purchasing power.
Singapore’s Exchange Rates
Prior to 2001
From 1981 to 2001 the Singapore dollar had been
on an appreciating trend against the main
global currencies, including the United States.
During this time, Singapore experienced rapid
economic development, high productivity
growth, and a high savings rate.
The S$ nominal exchange rate appreciated by
74% while the S$ real exchange rate
appreciated by 92% from 1981 to 2001.
How Pegged Currencies Led to
the Asian Financial Crisis
(1997-98)
Some Asian countries pegged their currencies to
the US dollar from 1995 to 1997
For most countries that were impacted, it began
from a belief that domestic debt denominated in
foreign currency would no longer be serviceable
if the currencies were allowed to float.
How Pegged Currencies Led to
the Asian Financial Crisis continued
Many of the Asian currencies were not able to support the
peg because of weak economic conditions and the
depreciation of their currencies against the US dollar.
In July 1997 the Thai Baht collapsed and this spread to the
rest of the region.
What started out as a currency crisis quickly spread to the
wider economy and led to economic downturns in several
countries.
Overall Impact:
The Financial Crisis and Asian Countries
Many foreign investors began to panic, and lost
confidence in the currencies of those countries
and their overall economies.
In the countries that were most affected by the
crisis, such as Thailand, banks and other
companies collapsed or had to be rescued.
This resulted in massive unemployment
Asian Financial Crisis:
The Impact on Singapore
Singapore was not directly hit by the crisis, but still
suffered from the effects of the economic
slowdown of its neighbors.
As a result, Singapore fell into a recession during
the second half of 1998.
Overall, the Singapore economy declined by
1.4% in 1998 in terms of real gross domestic
product.
Singapore vs. Thailand:
The Varying Affects of the Crisis
Singapore engaged in several positive financial
policies
The MAS signaled a willingness to allow the
nominal exchange rate to depreciate
somewhat, but in an orderly manner.
The MAS widened the band within which the
exchange rate would be allowed to fluctuate.
Singapore vs. Thailand:
The Varying Effects from the Crisis
continued
Fiscal policy was adjusted by implementing significant cost-
cutting budgetary measures
Employer contribution rates to the Central Provident Fund were
reduced, which lowered the effective cost of labor.
The Singapore government also aimed to further reduce costs
to businesses by implementing a 10% corporate tax rebate
Recovery from the Financial Crisis
During the crisis, Singapore still experienced a
healthy inflation rate between 0-3%
By the beginning of 1999 the Singapore
economy had already experienced a positive
growth, powered by a strong rebound in the
manufacturing sector
The recovery sustained through the year and
overall GDP for the year increased by 7.2%
Recommendation
Our Recommendation: Maintain the Managed Float
Freely Floating Rate would introduce too much volatility and likely
result in investors/MNCs re-evaluating trade/investment decisions
Fixed Rate would provide stability, but may skew the actual value
of the currency
Hong Kong example
Managed float allows Singapore with flexibility to deal with
sudden changes in the global economy while simultaneously
preserving the purchasing power of the Singapore dollar.
Recommendation continued
Historically, Singapore has been famous for low inflation rates.
A freely floating exchange rate system would go against the
primary goals of MAS
Freely floating system may actually encourage inflation since it
allows the cost of imports to rise while the exchange rate falls
The country can attribute much of its success to the managed
float that they have maintained and perfected over the
decades
As of August 2010, Singapore has the fastest growing economy in
the world with an estimated 17.9 percent increase in GDP for the
first half of the year
Recommendation continued
Singapore is still relatively small.
Because of this, coordinated monetary and fiscal policy actions
are possible
Primary advantage of having a freely floating exchange rate
system is to have the ability to pursue an independent
monetary policy
Which at this point in time is not a feasible strategy for
Singapore.
Conclusion: altering the exchange rate system would be
detrimental to Singapore’s economy as a whole, since the
economy is almost entirely based on a stable currency that
promotes international trade and investment
Thank You!
