Singapore economy up; Singapore dollar allowed to strengthen

Based on Advance GDP Estimates released by Ministry of Trade & Industry, Singapore real Gross Domestic Product (GDP) rose by 7.2 per cent on a year-on-year basis in first quarter of 2008, faster than the 5.4 per cent gain in the final quarter of 2007. (Source: MTI, 10 Apr 2008)


Manufacturing rose by 13.2% (0.2%)*; Construction rose by 14.6% (24.3%)*; Services Producing Industries rose by 7.6% (7.7%)*. The significant improvement for manufacturing sector was largely due to the surge in the output of the biomedical manufacturing cluster.

* Figures in brackets were for the last quarter for 2007.


On the same day, Monetary Authority of Singapore (MAS) Singapore released the monetary policy statement that will allow S$ exchange rate to further appreciate against a basket of trade-weighted currencies continuing with the policy of appreciation of S$ since October 2007.


This strengthening of S$ against other currencies was to moderate inflation and cost pressures faced by Singapore. MAS went a step further this round to re-centre the exchange rate policy band at the prevailing level of the nominal effective exchange rate (S$NEER).  There will be no change to the slope or width of the policy band. (Source: MAS, 10 April 2008)


Note that in October 2007, MAS had tightened the policy through a slight increase in the slope of the policy band. The latest move by MAS was to accept the appreciated S$ against other currencies since October 2007 as the new norm.


With this stance taken by MAS, currencies strategists such as Goldman Sachs, OCBC and Stanchart revised their one-year forecast for S$ against US$ to S$1.32, S$1.325, S$1.35 respectively. (The Business Times, 11 April 2008)


The policy change, which was widely regarded as an aggressive move, caught most analysts by surprise. (The Straits Times, 14 April 2008) Similarly, investors in foreign currency deposits have to contend with lower S$ when they convert their foreign currencies deposits into S$ at maturity. That is the nature of investing in foreign currency instruments which are affected by foreign currency exchange rates. You may gain on fixed deposit interest income but this interest income may be wiped out by foreign currency loss.


Written on 4/15/2008 11:57 AM


Copyright © 2008, the author known as LKT in Singapore.


The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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