Why is SGD poised to get stronger in the next 6 months?

According to Channel News Asia, the Singapore Dollar (SGD) is slated to rise gradually and modestly in the next 6 months. See

This is indeed good news for potential holiday goers as the costs of overseas travel will become lower. However, the exchange rate policy conducted by the Monetary Authority of Singapore (MAS) has wider macroeconomic implications beyond the individual realm of holiday expenses.

The stronger SGD is in response to an improving external economic conditions that Singapore currently faces, as noted in the GDP growth of 4.3% in 1Q 2018. This is because the major trading partners of Singapore, such as USA and the Eurozone, appears to be enjoying a robust recovery after nearly 6 years of slow economic growth.

It follows that Singapore mainly exports high quality goods such as pharmaceuticals and refined petroleum, which have high income elasticity of demand (i.e the demand for such goods will rise dramatically following increases in world incomes). Therefore, the exports of Singapore is expected to rise sharply, and given that exports in Singapore occupies a large proportion of aggregate demand (AD), the AD of Singapore will rise substantially, which will lead to high demand pull inflation.

Moreover, with strong global economic demand comes higher prices of commodities / raw materials such as crude oil prices or precious metals such as palladium and platinum used in high-end electronics. As a import-reliant economy, Singapore will face rising import prices, leading to higher costs of production in the economy. When this happens, the short-run aggregate supply (SRAS) of Singapore will fall substantially, leading to high imported cost-push inflation.

With high inflationary pressures on the horizon, the MAS is making the anticipatory move of revaluing the exchange rate policy band to allow the SGD to appreciate gradually and modestly. With the stronger SGD, this will mitigate the rise in exports and hence lead to lower demand-pull inflation. Also, the higher SGD will lead to a slower rise in the prices of imports, hence leading to lower imported cost push inflation.

In a nut-shell, the stronger SGD will lead to lower inflationary pressures in the next 6 months. But if the impending trade war leads to a weaker global economic outlook, the MAS may only allow the SGD to appreciate less modestly, since Singapore's exports will rise more slowly, thereby there is less inflationary concerns.

For further questions on the conduct of exchange rate policy by MAS, you may consult our Principal Economics Tutor, Mr Clive Foo during his economics tuition classes conducted @ Toa Payoh Branch.

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