Friday, July 5, 2013

The Strange And Mysterious Workings Of Singapore’s Monetary Policy

Singapore is a pretty unique economy, what with being a very open island trading nation, and with its political and social history.

Its approach to monetary policy is just as unique. Unlike the vast majority of central banks, Singapore’s Monetary Authority (MAS) uses the exchange rate as its primary monetary policy instrument. While this in itself is not too radical, unlike exchange rate regimes in the past the application of this policy is not through targeting a level of the exchange rate, but the slope and breadth of its appreciation.

This makes economic sense, as inflation is an appreciation in the general price level, not the price level itself. If the goal of monetary policy is stable prices (and/or economic growth), then a policy of exchange rate appreciation to regulate an increase in prices is appropriate.

This is especially true when you consider that because Singapore produces little of its own consumables (limited arable land for food production is one example; fresh water is another constraint, desalination notwithstanding), inflation is largely due to imports and not domestic production.

The result is a monetary policy regime that is quite different from virtually everyone else’s.

One consequence of this is that, given Singapore’s high long term growth rate, the effective result is that MAS is constantly having to accumulate international reserves to contain the appreciation of the exchange rate, as the latter would be a de facto tightening of monetary policy. This has led to charges of currency manipulation, which is a bit ridiculous. Of course there’s manipulation, that’s the whole point.

Now the reason why I’m writing this post is another aspect of Singapore’s policy approach that is just as radically different, which is its approach to liquidity management.

Before I get into that however, I need to make a small digression. Over to Prof Balding (excerpt):

What if Temasek Actually Earned 17%?

…According to Temasek at the end of the fiscal year in March 2012 (Temasek has not yet released their March 31, 2013 annual report), they reported $198 billion SGD under management. If we assume that Temasek has exactly $198 billion SGD and not one penny more or less and that they earned exactly 17% and 17.01% or 16.99% this implies they began with $508 million SGD (increasing the range to 17.44% and 16.5% does not fundamentally alter this analysis).

This actually reconciles rather closely with other available information rather closely in two ways…

…Doing this however only creates a new and enormous problem.

From 1974 to 2012, Singapore enjoyed total operational public surpluses from $307 billion SGD and incurred new borrowing of $381 billion SGD. This means that between 1974 and 2012, Singapore had a total of $688 billion SGD in free cash flow for investment purposes.

Here is where we encounter the problem if we assume that Temasek earned 17% since 1974. In its public balance sheet ending March 31, 2012, the Singapore government lists total assets of $765 billion SGD. If we subtract out the $198 billion SGD managed by Temasek we are left with $567 billion SGD. If Temasek earned 17% annually from 1974 to 2012 that means that the government was receiving $688 billion SGD to somehow end up with $567 billion. In other words, the non-Temasek public Singapore investors managed to lose $121 billion SGD or about .5% annually.

Let us take this analysis one step further and assume that the public surpluses and borrowing earned a modest 5% after expenses and costs (the 5% number is for illustrative purposes only but less than 7% claimed by GIC). If the yearly surpluses and borrowing were invested every year and earned 5% annually, this would yield a total of $1.3 trillion SGD. The difference between the actual Singaporean non-Temasek assets and what Singapore should have if surpluses and borrowing since 1974 earned a conservative 5% is a staggering $750 billion SGD. In other words, Singapore is about $750 billion short of what it should have if Temasek earned 17% and the remain money earned 5%!

Though the evidence fails to support the claim that Temasek earned 17% annually since its inception in 1974, even if this is true it only creates bigger problems. If Temasek did legitimately earn 17% annualized what happened to the rest of this so called investment juggernaut?

I’ve touched on this particular subject before (here and here), but I want to delve a little deeper into this issue in this post.

Most central banks, using an inflation targeting regime and an interest rate policy instrument, manage liquidity through open market operations. This is sometimes done through the buying and selling of government securities (effectively the way quantitative easing is being done in the West), or more normally, through the issuance or buy back of central bank securities.

In Malaysia, Bank Negara issues BNM Bills through auctions, with maturities between 1-month to 12-months. Issuance of securities takes money out of the banking system, and those moneys are kept at the central bank, sans any return. The interest cost of these securities will need to be paid out to the bond holders, without any commensurate return to compensate (central banks earn their revenue in other ways).

These central bank securities are never taken as part of the government’s overall debt burden. I repeat, never. They are securities fully backed by cash and not invested. That’s the whole point of the exercise – to reduce the amount of money available in the financial system. Investing the monies raised through such means thoroughly defeats the intended purpose.

I would term this “monetary” debt, not “fiscal” debt. In fact, I find it hard to think of this as debt at all.

Here’s where Singapore again differs substantially from the norm; they mix both fiscal debt and monetary debt under the same class of securities. Instead of issuing debt from MAS, the practice has been to issue short term T-bills from the government. While the buying and selling of existing government securities have often been used to manage liquidity, the difference here is that Singapore appears to be specifically issuing short term government debt for this purpose. This is slowly changing, as MAS was granted the authority to issue its own debt in 2010.

Nevertheless, only about a fifth of outstanding short term official debt is currently MAS bills, and the majority is still in the form of short term Treasury securities, i.e. the official debt of the government, to the tune of SGD162 billion as of March 2013. That’s approximately 40% of total outstanding government debt.

Historically, the ratio has been closer to 50%, and has only come down over the last few years as MAS bills began to displace T-bills as the liquidity management tool of choice. More to the point, since money raised through T-Bill issuance is sitting in the government’s account at the central bank, it earns precisely zero.

Where Prof Balding is getting his numbers wrong is assuming that all the debt issued by the Singapore government is being invested or managed by Temasek or GIC. The truth is, half the debt issued over the years just sits at the central bank costing the government the prevailing short term interest rate but yielding precisely nothing. That would change the calculation of estimated returns substantially. In fact, without going through the numbers myself (I can’t report any workings as my data source is work-related), I suspect almost all the discrepancy disappears.

Unfortunately, MAS and the Singapore government have been unwilling, or unable, to explain this particular intersection of Singapore’s monetary policy and government debt at all. In fact, I don’t see many other economists picking up on this nuance either, with most taking the official line that Singapore’s official debt issuance is for “the development of the capital markets.”

That may be partially true, but juxtaposing the structure of Singapore government debt with conventional central bank liquidity operations, and you come up with a much more plausible and rational explanation.


  1. If such a unique aberration spawns prosperity why no one out there is imitating it? That is pretty suggestive of its rottenness.

    Balding knows as much as anyone else that Spork is a huge Ponzi scheme with a money laundering mechanism, masquerading as a tax haven thingy, wired into the core as a supplement, period. Ask Andy Xie that: option=com_content&task=view&id=199&Itemid=32

    Just like Xie, Balding strangely gets no response when cheapskate drunks like Jeyaretnam et al are either bankrupted or thrown into the slammer. Why? Cause the figures won't add up no matter how creative the accounting is, that's why. So silence is golden rather than spout garbage and reveal one stupidity for all to see....hahahaha

    And to top it off, they admit to rate rigging after being caught red handed:

    after it messed around with NDFs:

    which confirms the suspicion out there that the bastards will stoop into the scum pond to sabotage regional economies.

    But all these shady shenanigans is passé for Spork. After all, they are a majority ruled and peopled by a certain morally and physically filthy ethnic who likes to call others corrupt when they themselves are the corrupt ones. That's the moral equivalent of the physical reality of unwashed arses and the stink it raises. The astute Malays of yore could see through that hypocrisy a long time ago, that's why we have this proverb for them pigs and those of their ilk:

    Berkokok berderai-deria, punggung bergelumang tahi

    Check that one out.

    No amount of whitewashing with speculative hocus pocus hokey or pure conjectural balderdash is going to change that reality, whether we like it or not, period. As they say, show us 'em numbers and we start believing.

    As for Solow, here is a penny for the great man's thoughts on all things endogenous, ramseyian or otherwise

    Warrior 231

    1. warrior,

      How much weed have you been smoking? How did you get from my comment that Singapore's monetary policy is appropriate for pursuit of price stability and growth in the context of its circumstances, to it being an instrument of prosperity?

      That doesn't necessarily follow, nor do I make the claim that appropriate or not, Singapore's monetary policy approach is successful in achieving those goals. It's the specifics of the policy regime that I wanted to point out, not its effectiveness.

      Also, the numbers do mostly add up, once you factor in that half the annual increase in Singapore's government borrowing is effectively money out of circulation. In some years, these amounts are even more substantial e.g. in 2008: 117% of net borrowing, in 2002: 289%.

      In recession years this ratio turns negative, behaving precisely as it would if government securities were being used as a liquidity management tool.

      As for the rest, it's totally irrelevant. Even if there was a systematic bias in forward and spot rates (and I'm not arguing there is not), it's the effective impact on growth and inflation that determines the policy response, not the level of exchange rates themselves. Rate rigging makes no difference in this regard.

    2. 1. Weed is of grade 1 quality, dude so no problems in interpreting the subliminal tone of your article. Reread it again, I need not say more.

      2. I often wonder why is it sooooo difficult and taking sooooo long for Singaporkians and their apologists cum aficionados to just debunk Balding by simple modelling. I mean what’s stopping them by showing the flaws of his argument via simple models. After all that wouldn’t compromise any ‘secrecy’ stuff, wouldn’t it? Or is it that the super duper intelligent pigs who rule Spork have been stumped by this one, which would be pretty impossible right, given their descent from Heaven......hahahahahahaha

      As for Andy Xie, why is no one asking the obvious? The guy was in Singapore at the time of his”offence” (effectively granting the Singpigs ‘legal custody’). His freaking email was all over the place and his accusations so blatant that they will put Francis Seow, JB Jeyaretnam, Chee Soon Guan et al to shame as would it the WSJ, Time and the Far Eastern Economic Review who have one time or another got effed in money laundering haven. Well I guess that’s all redundant and irrelevant to folks who love Marina Sands and Raffles Place etc, I reckon. Ah.....the oddities of it all but stranger things have been rarely so obvious..........

      3. As I said earlier, bereft of hard data, it is hard to entertain purely speculative theorising. 2 examples hardly suffice to prove a point by any measure as does 1 swallow doesn’t make a summer. So the less said the better.

      4. a. While I was aghast at your take on the Singapig conundrum, the take on NDFs not affecting CB monetary policy (by default inflation/growth) was amazing. Tell me how " the level of exchange rates themselves" comes about if not for rate rigging being ONE of the several mechanisms...?

      As long back as the 1970s, offshore markets impacts on spot rates and by extension CB policy have long been recognized. The paper linked below contains many references to that effect, citing the German and Swiss CB intervention in the Eurodollar markets as prime examples:

      And what does the same paper say about the NDF marts:

      “They lead to a reduction in the ability of the authorities to conduct independent monetary policy, particularly under a fixed exchange rate regime, and thus a subsequent loss of control over macroeconomic conditions.........(page 8)

      See also Box 2 (page 8) and many other parts of the same IMF paper that restate that contention repeatedly.

      Even Singapore, gets specific mention for its ‘non-internationalization of the S$’ crap.Beat me why, non-internationalisation.....hahahahahahhaaha wink wink.....(you see they freaking scared their S$ get effed and the implications of that...that's why. Case of hancurkan orang lain ok, dia tak bolehlah...a spoilt brat, if you ask me!!)See page 45 of the appendix.

      And for those who love to diss Mahathir’s capital controls, their efficacy gets more than passing interest throughout the paper, including the appendix.

      And not only that, the impact of NDFs on interest rates and by default, the yield curve is well illustrated here:

      which by the way contributes to appreciation/depreciation pressures. And of course how NDFs facilitates speculators!

      And considering the above, it is not surprising why countries, besides Malaysia, have outlined measures against NDFs to maintain control over policy:

      a fact known as early as 2008 (see page 41.Of course the whole paper counts!)

      And I need not go into the negative spillover effects of NDF trade on spot rates, as transmission channel of inflation etc etc. There are too many papers on that (last count: more than 50 in my trove)

      Warrior 231

    3. Part 2

      Other articles of Interest

      1. This paper for instance look at cross country volatility and implications of Renmimbi NDF trade arsing from trade integration, exchange regimes and financial openness. The findings are again pretty obvious:

      2. This one looks at the pros and cons of currency internationalisation on monetary policy:

      Off topic but related (especially on the crime of rigging)


      Cheers, mate. Have a nice day ahead + sorry for the rant. Not aimed at yer person at all, honest.

      Warrior 231

    4. warrior,

      You can read what you want between the lines; but I know what I meant to write and I don't see any discrepancies.

      1. This blog post was intended to outline the mechanisms used in Singapore's monetary policy with reference to Prof Balding's calculations, not to extol the virtues thereof. It's not perfect; in fact there are many flaws, including conceptual. But that's not the point I was trying to make.

      2. Probably for the same reason why the Malaysian government does such a bad job of doing the same - those who actually understand what's going on have no authority to speak; those who do have the authority to speak are clueless.

      There are a few factors I can think of to reconcile the figures, of which this blog post outlines one. Another would be the fact that government accounts are almost never consolidated, and typically recorded on a cash basis i.e. they are at best rudimentary analogues of standard accounting practice.

      I would not be surprised for instance that all the assets transferred to Temasek and GIC are carried at historical book value, not market value.

      3. Government deposits at MAS are hard data, from the same source that Prof Balding obtained most of his government revenue, expenditure and borrowing from.

      4. All those papers are looking at a monetary policy regime that is fundamentally different from Singapore's. Let me repeat that - we're not looking at the same animal.

      NDFs and spot rates would be relevant and in fact critical in a fixed exchange rate regime, but Singapore is not targeting an exchange level for its exchange rate. It's targeting the rate of appreciation, specifically of the NEER and not any particular market rate (which is probably the reason why the regulators never spotted the market rigging in the first place).

      That's why I called it unique. To my knowledge, nobody is or has ever used this particular approach, and I don't know of many academic papers that actually examine it in detail (you might try this one).

      Again, this approach is not without its own flaws. but spot rates and NDFs aren't really relevant in this type of policy regime. Thinking about it, I suspect the causality actually runs the other way around - the policy regime influenced and abetted the cheating, not the other way around.

    5. You miss a key point I made in my first post mate, hence the different animals we are seeing. Retread it again.

      The point was: Singapig was allowing the NDF mart to wreck the regional economies.

      The papers I quoted then becomes relevant to the above contention as they ( the papers) clearly imply a link between offshore ( read NDF) and spot rates. Simply put, tweak the NDF can wreck spot rates and CB policy of OTHER countries get whacked.

      It doesn't matter whether the MASy were targeting the rate of S$ appreciation and stuff related to Singapig"s own policy needs, for that's perfectly clear as exemplified in their adoption of certain policies like non-internationalization. Whether unique or otherwise is not my concern either.

      What they were deliberately doing was short circuiting policy in other regional economies via their blatant ignorance of the NDF rigging until they were caught that is. Now don't tell me they are dummies when it comes to NDF rigging just cos they were conditioned to look for rate of appreciation. That's immaterial to my point.

      Simply put, they knew NDFs was a good mechanism to eff other economies and they used it deliberately, period.


    6. warrior,

      The point you raise is:

      1. Off topic; and
      2. Badly overtaken by events.

      No country in the region operates a fixed exchange regime anymore except for Hong Kong's currency board. Brunei is in a currency union with Singapore, so MAS effectively sets policy there. Indonesia, Thailand and the Philippines use an explicit inflation targeting framework. Malaysia and China left dollar pegs in 2005 - both use hybrid policy approaches, with China more exposed on the currency front. Malaysia's regime is highly discretionary, but is largely hands off the exchange rate and forex intervention is only conducted in periods of high volatility (i.e. a variance target, again not level). The rest have underdeveloped financial and monetary systems.

    7. 1 You wouldn't have countries reproaching the NDF market in Spore if there is no volatility spillover from there and thus no effect on CB policy:

      If it is inconsequential, there would be no need for restrictions and warnings, dude.

      And when I say speculators use the NDF to place bets and sabotage the currency, its a fact. Here is a set of examples:

      2. The papers I mentioned and many more stress that spillover exists repeatedly and constitutes one of the main risk from NDFs, and fixed regimes are PARTICULARLY vulnerable. Note I stress, " particularly" meaning that spillover is NOT confined to them only as many studies repeatedly confirm. I can give you a whole lot of them studies but already showed that with the Bank of Indonesia paper, I linked to in my first comment. Here are some more:公開發表論文/1A-2王凱立.pdf



      No the first one is not in slit eyed yellow man chicken scratching language, trust me. The second one,clearly asserts the spillover fact again. The econometrics in all hold up and don't lie.

      Even the ones that do not detect significant spillover call for policing the NDF on account
      of the arbitrage opportunities between NDF and the onshore futures mart:

      Or of the interest rate yield curve thingy:

      3. The contention that the relevant people are not speaking up is purely conjectural hokey. Me thinks they are sitting tight cos such modeling wont work and their numbers won't add up. So the best option is silence. If it is otherwise, they would be the first to pounce and tear the guy apart.

      I don't have access to the data so I can't say anything conclusive but I reckon there are many holes in Spork's sums and I seriously doubt they use archaic accounting methods as alleged. More likely that they keep two sets of books.....wink wink.

      You heroic attempts at upholding Singapig's honour is as shocking as it is laudable dude but nevertheless tragic, sad and may I add misplaced ; D

      Warrior 231

    8. warrior,

      1. Where in all of these papers, is the link between exchange rates and monetary policy? It appears to be missing. All of the papers you've linked to show concern over the impact on price discovery in foreign exchange markets, not on the conduct of monetary policy itself, especially in the context of floating exchange rate regimes.

      2. What is the marginal impact of the rigging on NDF and spot markets? That's missing too. All that has been shown is that there are linkages (which is undeniable), not the effect of the rigging.

      3. Volatility that would trigger central bank intervention isn't on the order that is being captured by those studies you've linked to. That's small fry. You will have to do better than that.

      4. Of course they keep two (or more) sets of books. So do most governments. That's the point I'm trying to tell you - there is no consolidation of accounts. Neither Khazanah nor Petronas nor EPF are carried on the Malaysian government books either.

      Government accounting globally is seriously rudimentary, and there are almost no standards. Almost all governments do the books on a cash basis when the private sector is all on accrual, for crying out loud. Your local mamak shop is probably more sophisticated.

    9. BTW, I'm not "defending" Singapore's honour. What I'm interested in is truth. There are problems with Prof Balding's calculations; and all I'm doing is pointing it out.

    10. 1.Paper about linkages between NDFs and exchange rates? Can’s imagine myself saying that. Thats a new one indeed! All I did was show that there was considerable spillover from NDF to domestic spot/futures marts or vice versa either unidirectionally or bidirectionally. Anyone can then make the linkages between rigging aka rate setting in NDF and exchange rates. Its a no-brainer.

      2.I noticed that you patently ignored the assertions made in this paper as I linked in my second comment.

      The IMF paper clearly showed that NDFs do the same stuff as offshore currency marts to CB monetary policy. Hence, the little vignette about the German and Swiss CB actions in the Eurodollar marts. In simple words, NDFs have the same destabilizing potentiality as Eurodollar marts etc on CB policy (look at box 2 again for the description on NDF and the lines below the same box).

      3. I also observed that if NDFs are small fries as claimed, how come there was no rubbishing of the following links. Absurd isnt it for those countries to reproach the NDF market in Spork if there is no volatility spillover from there and thus no effect on their CB policy. Mind you, the IDR market for NDFs runs into several hundred millions daily.

      If it is so inconsequential, there would be no need for restrictions and warnings from CB, wouldn't it dude?

      2. And I reckon the economic journos on this agencies had nothing better to do than cook up a storm to sell copies.....over what? Lame NDFs , that's what.........hahahahaha

      I also noted there was no mention or comments about the following link. Small fry again, I reckon. ( proves, the guy talking about arbitrage in no 3 below was right, wasn't he)

      3. The papers I mentioned stress the incontrovertibility of volatility spillover and not merely about pricing mechanics as you claim.

      Come on man, I am sure everyone knows about rigging aka rate setting. In plain speak, currencies,up or down, create pressures on exchange rates and consequently interest rates.Now tell us how does interest rate movements do not affect CB monetary policy? Scratching my crotch on this one.....hahahahaha
      ( page 22 onwards is pertinent though the whole paper is preferable)

      As I said too, not ONLY fixed rate regimes are susceptible for regimes with whatever other permutations are similarly affected too:

      Even the ones that do not detect significant spillover, call for policing the NDF on account
      of the arbitrage opportunities between NDF and the onshore futures mart:

      Or of the interest rate yield curve thingy:

      Probably, all these authors are crazy for quaffing about inconsequentials.

      Sporks role in al this? Conveniently ignoring rate setting aka rigging as long as it profited them till one fine day they are caught red handed. Same old story here as in the money laundering, tax evasion thingies as was during the CLOB fiasco 15 or so years back.

      Warrior 231

    11. 4. As for Spork and Balding, nothing will change the fact they can't even model something simple to debunk Balding. Hence, the conclusion they are hiding something stands unrebutted. As I stress, one needs to see hard data before one can pass judgments not flimsy conjectures based on scanty evidence, secrecy concerns notwithstanding. And Andy Xie, goes unnoticed as well..............du di dum dum du di dum .......

      Sorry that its a crying shame my local mamak isn't strutting his sophistication in the premier financial hub of the East. Yeh, the same hub that claims to manage close to a trillion worth of stolen or laundered assets from around the globe. Am sure don't wanna be a caped crusader heroically defending dross.

      This is my final comment on this issue. As a Shia, I will be off on my regular pilgrimage to Qom, Iran in view of holy Ramadan and observe the month in silence, inshallah. Salam Ramadan al Mubarak to you, Hisham and family. May Allah (SWT)bless you folks always.

      Warrior 231

    12. That's not fair!!

      But wishing a safe journey and a wonderful Ramadan to you too.

      And I cannot resist:

      1. The link between NDF and onshore markets is not in question, the link between exchange rate and monetary policy in a floating rate regime is.

      2. Your "vignette" dates back to the 1970s, when Germany was trying to resurrect Bretton Woods (which culminated in the Euro) and Switzerland was using money base targeting, which would be directly impacted by changes in offshore deposits. Those examples aren't exactly relevant in today's environment.

      3. I know the math involved (I use them myself), and the volatility spillovers these papers are looking at aren't of an order that would trigger central bank forex intervention. Yes, I read through the lot. You appear to be confusing the existence of an NDF market with de facto market distortions, which is not correct. It's the distortion from rate rigging that counts, and I don't see that being objectively examined here.

      From the BIS paper:

      "Foreign exchange market intervention has been used as a main instrument in achieving foreign exchange market stabilisation in Korea. As is also the case in other countries with floating exchange
      rate systems, the objective of foreign exchange intervention in Korea is to (i) mitigate short-term exchange rate volatility, (ii) stabilise the foreign exchange market, (iii) pre-empt speculative attacks, and iv) acquire foreign reserves, rather than to maintain a certain exchange rate target. In fact, it is true that with its thin foreign exchange market Korea faces the possibility of severe exchange rate volatility caused by various external shocks, due to changes in the global economic environment and even geopolitical risks surrounding the Korean Peninsula. In addition, the Korean foreign exchange
      authorities have also played the role of market maker through intervention by supplying sufficient liquidity in the market and filling the gaps between bids and offers in the market. After the currency crisis in 1997, intervention was, unusually, utilised to increase international reserves in order to
      enhance Korea′s credit rating and avoid the possibility of additional crisis.


      "...under the free floating exchange rate system the exchange rate produced by foreign exchange market forces could be regarded as an equilibrium exchange rate in a market behavioural sense."

      The McCauley paper, which you seem to insist is relevant, is largely looking at liquidity risks from a large offshore market for currencies being internationalised.

      Note that intervention to manage the exchange rate is indistinguishable from forex liquidity intervention.

      4. Hard data?

  2. Purely off topic, but merely to substantiate how the mother effing Spork NDF wrecks spot rates:

    and by default the central bank's rate fixing:

    As I stress, my allegations will always be substantiated.

    For the efficacy of capital controls,this brief paper is a useful primer:

    Warrior 231

  3. If the short term size of these NDFs does not warrant any CB forex intervention.

    Are there any possible long term effects by these naked longs/shorts that may distort market sentiments? If these spoof trades are repeated often enough, do they make people belief that some currencies are more attractive than others? therefore inviting herd of bidding and dumping that are opposite of underlying economic fundamentals.

    Vietnam real economy(manufacturing,oil & gas) had been growing at pretty fast pace than the most mature ehem... financial centric countries, but somehow the Dong value is trending the way opposite against the latter.

    The Vietnamese themselves are more in favor of shorting the Dong by buying gold/USD/SGD. How do we explain such lack of faith?

    Is there anyway that these spoof trades increases the GDP the financial centric contries? Giving these economies unfair advantage in trade bargaining or preferred clearing currencies.

  4. Hi Hishamh,

    Besides that impact on inflation in Singapore, the stronger SGD also helps to attract workers, foreign entities and it also strengthens the capability of Singaporean companies in trade and investment negotiations (eg: Iskandar needing Singapore investments). Is there any research done on these items and its impact to neighbouring countries like Malaysia (for example, brain drain, trade negotiations)?

    Another question I have in mind is, how/why Singapore is successful in mitigating the impact of a stronger SGD on their manufacturing exports?

    I can't help but notice the comments above on money laundering etc related to Singapore, on my last check, Singapore's Finance/Insurance services industry only contributed to 11.9% of their GDP, while the biggest chunk comes from Manufacturing. Shouldn't we be talking more about Singapore's manufacturing export competitiveness (while maintaining a policy of appreciating SGD)? Compare this with our own country, why can't we appreciate MYR as well?


    Best Regards,

    1. Hi Kenny,

      For the first part, not that I know of, though I haven't been specifically looking for such research. One thing though - Singapore's rate of brain drain is even higher than Malaysia's.

      For question 2, they haven't and for the most part they don't need to. Neither does Malaysia for that matter.

      We're all part of the East Asian supply chain, and exchange rate movements would only affect export competitiveness if exports and imports are totally independent. Exchange rate movements would only have a deleterious impact on competitiveness with respect to local value added. Since imported inputs form a large portion of exported output (i.e. value added is relatively low), the effect is nowhere as big as you might expect.

      Take for example Singapore's oil & gas refining business, which is large, capital intensive and services most of the region's output (us, Brunei and Indonesia). Both inputs and outputs are priced in US dollars, so the level of the SGD is almost irrelevant.

      Having said that, while manufacturing is still Singapore's largest economic sector, it has also been rapidly shrinking in nominal terms (from over 25% of GDP in 2006 to 19.4% in 2012). It's still holding up in real terms, but that suggests price and profit growth have flattened. The main growth areas are wholesale/retail trade and business services.

      Plus, while I've talked about the effect of Singapore's FX policy on inflation, it is not an obvious policy choice for anybody else. Malaysia's domestic economy is much larger and inflation is more a domestic phenomenon than an imported one.

      There's also what's called the monetary policy trilemma - you cannot control the exchange rate, domestic interest rates and domestic money supply, or capital flows simultaneously.

      By opting for the exchange rate as the policy instrument, Singapore basically relinquishes any influence over domestic credit conditions. Given what's been happening right now (a massive credit boom and truly ginormous private external debt), it's a choice they may come to regret.

    2. Salam and welcome back. Best Eid Fitr wishes and blessings to you and family.

      1. You may be right about the Singapig situation given the credit boom and loans growth. Even Nomura is getting cautious:

      Besides as the US economy improves, more than one Fed regional president are signaling that QE tapering should commence soon (as early as September) which by default means an increase in US rates and a rally in the dollar.And which also means bad news for those holding dollar denominated debt like Air Asia. Plus Singapig for the obvious economic implications, of course.

      Although Bernanke sets a 6.5 unemployment rate as the benchmark to trigger tapering, I dont see him keeping to that target. Besides, he is effectively a lame duck already as his term is due in January.

      2. Anyway, I am a bit dumbstruck and saddened by the "misrepresentation" of my facts about the NDF thingy above. I will clarify and reply within the week as the requisite bullets are already in hand.

      Warrior 231

    3. Just an additional morsel to chew upon:

      Although the report appears rather optimistic about prospects, but a more sanguine view would be in order if they knew what lies ahead.......

      Warrior 231

      Warrior 231

  5. Hi Hishamh,

    Thanks for the explanation.

    On the brain drain issue, is there any study on the Net brain drain (outflow - inflow), that will be a fairer comparison between Malaysia and Singapore I think. On this issue, we should only take into account of working professionals and executives.

    On the currency impact to exports, you are right if the outputs are dependent on inputs priced in foreign currencies, with additional value add (in the example of Singapore) which is passed on to further in the chain. However, some exports are "manufactured locally", take our local palm oil exports for example, with input costs being majority local currency, in this scenario, a movement in FX affects our exports greater, correct? It appears that Singapore is more resilient to FX movements, as they can easily pass on their costs, while our exports have to be priced lower.

    Thirdly, the point that Singapore has no control over interest rates, and thus, is at risks of a higher interest rate reset by, USA for example. I think, the US will not reset interest rates higher by much margin, as it also impacts their own domestic economy, and its politically disastrous to do so(a small 50 basis points increase will double a person's interest payment obligation), thus, I think any near future interest rates increase will be minute and gradual (5 to 10 basis points perhaps?), I know I'm merely speculating here. If a huge interest reset does happens, what prevents Singapore from not following the US's interest rates to protect their own domestic population? Besides that, what is the ratio of Singapore citizens loans vs savings ratio, with comparison to Malaysians? Just my thoughts.

    Your blog really interests me, as the beauty about economic studies is really, a balancing act between monetary policy, fiscal policy and last but not least, political mileage (of the person in power). From my perspective, it appears that Singapore does perform that balancing act better than us in the current global economic and political climate.

    1. Kenny,

      1. I believe there is, though I can't remember where I saw it. I'll post it if I find it again. IIRC, Malaysia's outflow was about 50/50 between skilled and non-skilled.

      2. You'd be surprised - palm oil cultivation for example relies heavily on fertilizers, most of which have to be imported. As I recall, fertilizer cost is about a third of total cost of production.

      In any case, with commodities there's an added complication in the elasticity of demand. Many basic commodity groups have both inelastic demand and short term inelastic supply, which means both actually change very little in response to price changes. The primary impact of exchange rate movements thus falls on prices, not on volumes i.e. the income effect of higher prices dominates the substitution effect.

      Moreover, the causality between prices and the exchange rate is typically the opposite of what you've written - prices drive the exchange rate, not the other way around.

      3. A forex target is not consistent with a domestic interest rate target. If Singapore intervenes to slow a domestic interest rate response to a hike in the US (which has almost always moved not less than 25-50bp), this should lead to an outflow of funds which in turn puts downward pressure on the exchange rate. To maintain the forex target in turn, MAS would have to buy SGD and sell USD on the open market, reducing international reserves while simultaneously putting downward pressure on the money supply. This raises domestic interest rates.

      You can't have your cake and eat it too.

      4. I don't know about Singapore's (I have the loan data, but not the deposit data), but Malaysia has a ratio of about 2:1 in favour of financial assets.

  6. Thanks Hishamh, as always for the good explanation :)

  7. So this is one of the reasons why Singapore currency keeps on appreciating over the years. Their government is using it to neutralise the inflation caused by imported goods.

    Malaysia (like China) of course will not want to do the same. Stronger currency will make our exports more expensive.

    How interesting. Thanks Hisham for highlighting.