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Exchange Rate Policy at the Monetary Authority of Singapore International Finance – Case 2 13 November 2012 Jeremy Dunate, Idriss El Kadiri, Yoann Filin, Igor Fischer, Ludovic Giraud
Exchange Rate Policy at the Monetary Authority of Singapore International Finance – Case 2
13 November 2012
Jeremy Dunate, Idriss El Kadiri, Yoann Filin, Igor Fischer, Ludovic Giraud
2 Exchange Rate at the Monetary Authority of Singapore, 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
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Singapore Economy 1
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General Presentation of Singapore’s Economy
» 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
Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion
Basic Information
» Remain a worldwide top trading partner
» Remain a major financial center
Goals
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Situation & Missions of MAS 2
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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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Traditional Monetary Policies 3
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Traditional Monetary Policies
Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion
Advantages of both regimes Disadvantages 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
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
• 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
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Managed Floating System 4
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Watching the BBC: Managed Floating System
» Based on the BBC(Basket Band and Crawl) Singapore self-invented a 3rd way in between fixed and floating regimes: the “dirty float”
Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion
• Target NEER is calculated against a basket of currencies • T.W.I : Currencies from major trading partners Basket:
• Centered around target NEER • SGD freely floating within the 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
Band:
• Adjustment factor used to reflect long term change in economic fundamentals
• Historically upward Crawl:
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Managed Floating System: Watching the BBC !
Singapore self-invented a 3rd way in between fixed and floating regimes: the “dirty float”
Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion
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How BBC worked for Singapore 5
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How the BBC worked for Singapore
» 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
The effects of this “Managed Float” strategy on the Singaporean Economy
Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion
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Conclusion 6
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Conclusion
» 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
Our recommendation: Keep the current exchange rate policy
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Questions ?
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Jeremy Dunate: [email protected] Idriss El Kadiri: [email protected] Yoann Filin: [email protected] Igor Fischer: [email protected] Ludovic Giraud: [email protected]
Thank you for your time!
