Economics

A Wall Street Journal article from May 8, 2009 by Paris  Venkat discusses moves by the Singapore central bank to reduce the value of its currency against the US dollar. Singapores central bank  the Monetary Authority of Singapore (MAS)  was quoted as saying that the bank will initiate purchases of US Dollars if the value of the US dollar should fall beyond SGD 1.47. Experts commented that this was the MAS essentially telling the market that it will not let the SGD appreciate in value too much. However, some sources also indicated that such a planned devaluation of the Singaporean dollar was not planned to last over the long term (Paris  Venkat, 2009).

Understanding the relative strengths of currencies against each other can be understood through supply and demand. The MAS purchase of US dollars will translate to a planned artificial increase in demand for the US dollar. As the central banking institution, a decision by the singular MAS to purchase US dollars will translate to an increase in demand for the US dollar which will lead to a higher price for US dollars in terms of Singapore dollars. Conversely, this can also be seen as the MAS actively devaluing the Singapore dollars value compared to the US dollar.

Purchasing US dollars is not the only way that the MAS can effectively devalue its currency. It can also act on the supply side by simply printing more Singapore Dollars. This will inundate the currency market with excess SGD supply.  This increase in supply will translate to a lower equilibrium price for the Singapore dollar  the end objective of the MAS currency manipulation.

There are many reasons why a countrys central bank would act to actively make their own currencies drop in value. Most of these reasons revolve around protecting the export industry. When an exporting countrys currency has a relatively lower value compared to an importing country, the exporting countrys goods appear to be cheaper to the importing country. By having a lower price due to currency differences, the exporting countrys products immediately become more attractive to importing countries and as such the exporting industries benefit tremendously. With this in mind, we can see why the MAS would want to prevent Singapores currency from appreciating too much. Singapores economy is highly rooted in export.  In 2008, Singapores exports of goods and services were valued at 234 of its GDP. Singapores export oriented industries would suffer from extended periods of high currency valuation. It is important to consider that the decision to devalue the SGD has to be balanced with the damage associated with a weak currency. While it benefits exporters, a weak local currency hurts industries which are reliant on imports.  Singapore is a small country with limited resources which makes it heavily dependent on import products.  In 2008, the value of Singapores import products reached 215 of GDP.  This gives us a picture of a country which is highly dependent on trade for survival. Currently, Singapore is a net exporter. However, the net exports would be diminished with a devalued currency as the costs of the imported products would increase.