1981 was a pivotal year for the development of Singapore as they experienced their first exposure to the international market by opening an airport and airlines. This required monumental changes to Singapore’s trading systems, which resulted in the implementation of a new monetary policies. Singapore’s monetary reforms had the overarching goal of achieving price stability for sustainable economic growth, hence, the government runs a managed floating regime. This refers to a system in which the value of the exchange rate has the freedom to fluctuate within an undisclosed policy band, to which the Monetary Authority of Singapore (MAS) determines biannually. The SGD uses a basket of currencies from major trading partners and competitors such as the GBP and USD, as a reference point to determine the value of the currency. These various currencies are tabulated by their assigned weights in accordance with the importance of Singapore’s trading relations with that country.
Contrary to optimistic beliefs in Singapore’s economy, the trade war between China and the US have had severe effects, leading Singapore to have skimmed the edge of a technical recession. A technical recession refers to negative economic growth over two consecutive quarters. This was due to the increasingly bad market of advanced technology playing into the Singaporean economy’s dependency on its manufacturing sector. As America is a major trading partner with Singapore, the SGD is often compared against the USD. Hence, during this period of time, the SGD has depreciated from 1.393USD to 1.353USD.
The depreciation of SGD is due to a decrease in demand in FOREX, thus the government was previously required to purchase SGD with official reserves to shift D2 back to D1. In light of the depreciation of SGD, the total costs of government intervention to maintain the currency within the fluctuation range increases by relying more official reserves. This method is unsustainable as official reserves can easily run dry and cause the Singaporean economy to experience detrimental effects.
However, the main form of control the MAS utilised to maintain the value of the SGD was though the manipulation of interest rates.
If Singapore had persisted with this strategy, it might have detrimental effects as it might have secured Singapore’s fate of experiencing an impending technical recession. Despite the government’s intentions of higher interest rates which would incentivize foreign firms to save and invest in Singapore, the more immediate effect may have been that consumers will save more. As a result, as consumption decreases, aggregate demand would decrease, causing firms to produce less and thus invest less, furthering the economy’s down spiral.
A few days ago, in response to pessimistic predictions based on the market, in the first time in three years the MAS reduced the SGD’s appreciation rate “slightly”. By reducing the lower bound to which the value of currency is allowed to fall till, it decreases the pressure on the government’s resources, which allows more flexibility in the economy. This saved the economy by a hair but is only an impediment for the inevitable.
As SGD is pegged to a basket of main trading partners—partners which are financial leaders in the global economy—one would assume this system would be advantageous. Theoretically, being managed against strong currencies would provide stability to the SGD, causing future trends to be more predictable and thus allows flexibility. Furthermore, this stability is able to help Singapore ensure low inflation rates as prices of prices for exports and imports are more stable. These factors would act as an incentive for foreign firms to invest in Singapore, as fluctuation rates are less volatile than others, contributing to the potential economic growth.
The reality of this situation differs from the theoretical. Looking at the most recent year, currencies which have been expected to remain strong and stable have underwent unforeseen handicaps. For instance, the implementation of Brexit had caused GBP to significantly, disrupting trading patterns with its international partners. Furthermore, the trade war between the US and China has stagnated the growth of the USD and RMB. Due to Singapore’s relations and reliance on these countries, the sensitivity to these interpersonal relationships had forced the SGD into a vulnerable state, causing the currency to be more prone to depreciation. This contradicts with the theoretical model, demonstrating the unpredictability of what one would assume to be a steady currency.
Ultimately, this situation illustrates how any exchange rate system is prone to volatility, to which we should expect the unexpected. In relation to Singapore’s structure, in comparison to other exchange rate systems it provides a stronger sense of security, the stability of the SGD can be observed prior to this year. However, it generates a strong dependency on trading partners, to which as can be observed, may have fluctuating effects on the SGD.