Motorists wanting to drive a car on Singapore roads must bid for the Certificate of Entitlements (COE). There will be two COE Open Bidding exercises in a month. The bidding exercises are held on the first Monday and third Monday of the month. The price for the COE is the Quota Premium (QP) which the motorists are willing to pay. One aspect, among others, that motorists will consider is the quota number available for each of the bidding exercises. Another will be the current state of the economy.
In order to extend existing vehicle on expiry of current COE, motorist will need to pay the Prevailing Quota Premium (PQP). PQP is computed based on moving average of the QP over the last 3 months.
I did a review on whether the Straits Times Index (STI) has any correlation with the PQP. This is not a statistical study but a simple study based on two sets of numbers, namely the PQP and STI, for 2 years starting January 2008.
PQP and STI numbers were taken on the last day of the month, thus ignoring the daily movement of the STI. PQP is based on Category A cars which are less than 1600 cc engine capacity and include all taxis. This category has the most quota compared to other vehicles.
The quota for COE decreased gradually over the 2-year period.
Jan 2008 – 4200
Oct 2008 – 3600
Apr 2009 – 2600
Oct 2009 – 2200
It is also noted that the global financial crisis started in September 2008 sparked off by the collapse of Lehman Brothers. The Great Recession engulfed the nations for most of 2008 and 2009.
The graphs for PQP and the STI are appended. Both lines showed similar pattern. As STI declined from May 2008, PQP did the same until both hit the bottom in March 2009. Then both lines started to rise after that. However, STI started to plateau from July 2009 without significant movement, but PQP continued to surge ahead. The factor of limited quota has taken hold on the motorists and with limited supply, it was expected that prices will rise.
One conclusion is that STI and Quota Premium are affected by the economy. STI and PQP were at locked-step especially when a recession hit.
Copyright © 2010, 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.