Impact of Currency Fluctuations on Singapore's Economy

Mr Gan Thiam Poh asked the Minister for Trade and Industry with the fall in currencies of our major trading partners in the region and the increasing possibility of the tapering of quantitative easing by the US (a) what is the economic impact on Singapore, especially on our businesses, unemployment rate and economic competitiveness; and (b) what measures will the Ministry take to minimise the fallout of such undesirable volatility on Singapore's economy.

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The prospect of a tapering of the quantitative easing (QE) programme in the US has led to volatility in financial and currency markets in recent months. Part of the liquidity arising from QE in the advanced economies has come to the region in the form of short-term capital flows. In anticipation of the tapering of the QE programme in the US, such capital flows have reversed, resulting in a depreciation of regional currencies.

While Singapore's trade-weighted exchange rate has also experienced some volatility, it remains comfortably within the policy band. Our foreign exchange and domestic money markets have continued to function well, and the MAS has not had to take extraordinary measures in the implementation of monetary policy.

Looking ahead, the actual tapering of the QE programme is likely to take place gradually, in tandem with a strengthening of underlying economic conditions in the US. As a result, financial and currency markets are likely to adjust to the QE tapering in an orderly manner, although we could continue to see some volatility in the markets in the run-up to the Federal Reserve's decision. The impact on our exports to the US and other markets will also be small, as global growth is not expected to be significantly affected by the tapering.

Mr Gan has expressed concerns that the depreciation of regional currencies against the Singapore dollar could affect our competitiveness. In this regard, it is important to note that the exchange rate is only one of a number of factors affecting our exporters' ability to secure orders and gain market share. Singapore's trade-weighted exchange rate is the instrument of monetary policy to secure price stability. It cannot be used as a tool to gain export competitiveness. To enhance Singapore's competitiveness over the longer term, the Government will press on with ongoing efforts to restructure the economy, and help firms improve productivity and build up innovative capacity. This will, in turn, ensure healthy job creation and wage growth for Singaporeans over the long term.

On balance, our assessment is that notwithstanding the volatility in the markets, the eventual QE tapering is likely to have a limited impact on the Singapore economy, including our unemployment rate. However, the Government is mindful of the risks of a more disorderly process of QE tapering. In particular, if the QE tapering is done prematurely or if financial markets overreact to the QE tapering leading to a sharp spike in interest rates, the US economy could stall. This could adversely affect our exports to the US. The sharp pullback in financial market will also affect the sentiment-sensitive cluster

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of our finance sector, including stock broking and fund management activities. At this juncture, however, the risk of such a scenario is low.