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

Singapore Economy

Exchange Rate at the Monetary Authority of Singapore, November 2012

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

General Presentation of Singapores 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 High historical budget surplus

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

Exchange Rate at the Monetary Authority of Singapore, November 2012

Situation & Missions of MAS

Exchange Rate at the Monetary Authority of Singapore, November 2012

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

Situation & Missions of MAS

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

Missions

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

Exchange Rate at the Monetary Authority of Singapore, November 2012

Traditional Monetary Policies

Exchange Rate at the Monetary Authority of Singapore, November 2012

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 Disadvantages of both regimes Fixing Singapores 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 Change according to market conditions Leave monetary authorities free to influence the domestic supply interest rates and inflation Restore the trade balance

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

Exchange Rate at the Monetary Authority of Singapore, November 2012

Managed Floating System

Exchange Rate at the Monetary Authority of Singapore, November 2012

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 3rd 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:

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

Crawl:

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

Exchange Rate at the Monetary Authority of Singapore, November 2012

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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 3rd way in between fixed and floating regimes: the dirty float

Exchange Rate at the Monetary Authority of Singapore, November 2012

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How BBC worked for Singapore

Exchange Rate at the Monetary Authority of Singapore, November 2012

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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 High inflation levels

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

Singapore: Dirty float

High growth Low inflation levels High credibility in the markets: widening of trading bands

Exchange Rate at the Monetary Authority of Singapore, November 2012

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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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