Projected Impact on Export Competitiveness from Strengthening of Singapore Dollar

The Monetary Authority of Singapore's (MAS) monetary policy is aimed at keeping inflation low, especially over the medium term. Achieving low inflation also supports sustained economic growth.

MAS seeks to achieve this through an exchange rate-centred monetary policy, in particular, by managing the Singapore dollar against a basket of currencies of Singapore's major trading partners. When inflationary pressures build up, MAS allows the trade-weighted exchange rate to appreciate faster, thereby helping to reduce imported inflation. MAS has tightened its monetary policy stance three times since October 2021, when the Authority shifted to a slight appreciation of the policy band within which the exchange rate is managed. This has been in line with rising global price pressures and the improvement in external economic conditions.

The strengthening of the Singapore dollar is necessary to dampen inflation and to help preserve the purchasing power of businesses and households. It is not expected to have a significant negative impact on Singapore's exports. Growth in non-oil domestic exports has remained firm in Q1 2022. With continuing uncertainty in the global economic environment, Singapore's exports are, primarily, dependent on demand rather than our exchange rate. This is borne out in EDB's latest survey of Business Expectations of the Manufacturing Sector, which showed that the Singapore dollar exchange rate is not a key limiting factor for manufacturing firms' export orders. Singapore's exports are, generally, high value-added products and services where demand is less sensitive to price and, therefore, exchange rate changes. Further, a stronger exchange rate helps reduce the import costs faced by our export industries.

MAS expects core inflation to continue to rise in the coming months before peaking at around 4% in Q3 this year. Inflation is, however, expected to remain at elevated rates for some time, higher than what we have experienced in recent years. This has, primarily, been due to pressures in global energy and other commodity markets.

However, because MAS began shifting its policy stance early, it has been able to respond to rising inflationary pressure through gradual shifts in exchange rate policy, including in its latest April Monetary Policy Statement. Had MAS not begun tightening policy last year, ahead of many central banks, it would have had to allow for a steeper appreciation of the exchange rate.

MAS' monetary policy response is also part of the Government's multi-pronged strategy to deal with rising inflationary pressures. As Members know, the Government has set aside considerable resources to help Singapore businesses, especially SMEs, and our households cope with higher costs.

Mr Speaker, I have two supplementary questions for the Minister of State. One, how does MAS expect the strengthening of the Singapore dollar to affect Singapore's GDP forecast for the year? Two, the tightening effects of our monetary policy are, eventually, relative to what other countries have similarly done. So, how has the surge in the US dollar dampened the effects of the measures to tighten or strengthen the Singapore dollar, and if so, will further measures be needed?

I thank the Member for his supplementary questions. In the absence of further disruptions caused by the Ukraine war or a severe setback in trajectory of the pandemic, the Singapore economy should grow at an above-trend pace for the second consecutive year at around 3% to 5% this year. The April 2022 Monetary Policy Statement has reaffirmed MAS' assessment of this GDP growth forecast range, barring significant external shocks that I mentioned earlier. And MAS' monetary policy stance is consistent with the macroeconomic outcome of GDP growth within this forecast range.

As I have mentioned in my original answer, MAS manages the Singapore dollar against a basket of currencies of Singapore's major trading partners, within the policy band. So, any bilateral exchange rate movement will, accordingly, have a more muted impact on the Singapore dollar's effective exchange rate, which remains in line with MAS' monetary policy stance, as announced in April.

But MAS will continue to focus on medium-term price stability and avoid sudden large shifts in policy and, in aggregate, will remain vigilant to developments in the external environment and their impact on the Singapore economy.

Thank you, Speaker. I thank the Minister of State for his clarification. I wonder, in light of what he shared about how MAS has allowed three separate adjustments to the band since last year, I would note that the Singapore dollar has only appreciated, depending on how one measures it – between 1.5% and about 2.7% or 2.8% since then. Of course, inflation rates are significantly higher than that. I am wondering whether a stronger appreciation of the Singapore dollar may be warranted and if this is a consideration that MAS will seriously consider in the months ahead.

I thank the Member for his question. We do not give advance guidance of future exchange rate policy. But, as I mentioned earlier on, MAS will continue to focus on medium-term price stability and avoid sudden large shifts in policy. But the key thing is that because of the way in which our exports and imports are structured, the impact on price competitiveness vis-à-vis our exports is not heavily affected. I think that is quite critical.

The second part is that we will continue to strengthen our companies, as well as the export competitiveness, but I think the appreciation of the slope will help our exports to remain competitive in the long run.