Case Study: Exchange Rate Policy at the Monetary Authority of Singapore

Exchange Rate Policy at the Monetary Authority of Singapore International Finance – Case 2

13 November 2012

Table of contents

1. Singapore Economy 2. Situation & Mission of MAS 3. Traditional Monetary Policies 4. Managed Floating System: Watching the BBC ! 5. How BBC worked for Singapore 6. Conclusion

Exchange Rate at the Monetary Authority of Singapore , November 2012

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1

Singapore Economy


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Singapore Economy | Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion

General Presentation of Singapore’s Economy Basic Information » Currency: – Singapore Dollar (S$ or SGD) – 1 USD = 1,2235 SGD

» One of the highest GDP per capita » Large Saving & Trade surplus

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High historical budget surplus

Goals » Remain a worldwide top trading partner » Remain a major financial center


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2

Situation & Missions of MAS


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Singapore Economy| Situation & Missions of MAS | Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion

Situation & Missions of MAS

Missions

• Promote sustained, non-inflationary growth • A sound and progressive financial centre • Reduce unemployment • Promote industrialization

Means of Actions

• Banking regulation • Fiscal policy • Advanced econometric monetization • Savings + Trading surpluses  High liquidity reserves available

Monetary Policy

• Adequate monetary policy to achieve the goals


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3

Traditional Monetary Policies


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Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies | Managed Floating System| How BBC worked for Singapore | Conclusion

Traditional Monetary Policies Advantages of both regimes Fixed exchange rate regime

• Predetermine the exchange rate • Be in control of exchange rate risks • Absorb monetary shocks by adjusting money supplies • Expect discipline in economic management

Floating exchange rate

• Change according to market conditions • Leave monetary authorities free to influence the domestic supply interest rates and inflation • Restore the trade balance

Disadvantages of both regimes Fixing Singapore’s currency

• A loss of freedom in terms of internal policy • Vulnerability and dependence • Require large holding of foreign reserves • Fixed rates can be unstable

Floating exchange rate

• Very volatile in a short run • Promote currency speculation • Reinstall exchange rate risk


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4

Managed Floating System


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Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System | How BBC worked for Singapore | Conclusion

Watching the BBC: Managed Floating System Singapore self-invented a 3 rd way in between fixed and floating regimes: the “dirty float”

» Based on the BBC(Basket Band and Crawl)

Basket:

• Target NEER is calculated against a basket of currencies • T.W.I : Currencies from major trading partners

• Centered around target NEER • SGD freely floating within the band

Band:

Crawl:

• Flexibility tool : • Enforcement of bands by MAS enables short term currency stability • Credibility in the markets (Cf Asian 1997/98 crisis) • Allows capital flows

• Adjustment factor used to reflect long term change in economic fundamentals • Historically upward


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Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System | How BBC worked for Singapore | Conclusion

Managed Floating System: Watching the BBC ! Singapore self-invented a 3 rd way in between fixed and floating regimes: the “dirty float”


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5

How BBC worked for Singapore


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Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion

How the BBC worked for Singapore The effects of this “Managed Float” strategy on the Singaporean Economy » MAS focused on maintaining low inflation levels » Currency not used as a competitive tool – Increasing productivity and innovation through large investments – Move up the value chain – Appreciation of the REER in accordance with improving economic fundamentals – Huge Budget surplus & GDP Growth

» Singapore v.s Hong Kong – Hong Kong : Fixed Exchange rate »

High growth

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High inflation levels

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Problem during the Asian financial crisis 1997/98: Devaluation of HKD / Deflation

– Singapore: “Dirty float” »

High growth

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Low inflation levels

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High credibility in the markets: widening of trading bands


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Conclusion


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Conclusion Our recommendation: Keep the current exchange rate policy » Singapore is a relatively small economy, highly dependent on: – International trade – Financial Markets

» Managed exchange rate was highly beneficial to the economic boom – Record GDP growth – Sound public finances – Low inflation – Stability maintained even during the Asian crisis

» Keep current system at least until the Yuan turns floating – Avoid speculative pressure – Benefit from stability


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Questions ?


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Case Study: Exchange Rate Policy at the Monetary Authority of Singapore

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