Question 3 Pls do not handwrite the answer, this is for easy reading i) Is the S

Question

Question 3

Pls do not handwrite the answer, this is for easy reading

i) Is the Singapore dollar strong, by policy choice by the Monetary Authority of Singapore (MAS) and/or by its overall performance in the economy and surpluses in its balance of payments? Discuss and explain the effects as favourable or unfavourable, including any mitigating policies as well for Singapore to remain competitive overall

ii) Hong Kong has a fixed exchange rate policy while Singapore has a managed floating exchange rate policy. Compare their different approaches both as small and open economies in terms of their relative exchange rate stances (with appropriate diagrams) and in warding off externally induced financial crises (such as the Asian financial crisis in 1997).

Explanation / Answer

i.

Singapore's vital bank is predicted with the aid of economists to ease monetary coverage on Wednesday (Oct14) - in effect, enabling the Singapore dollar to weaken - to aid a struggling economic climate.
1. What's fiscal coverage?
The best way a nation controls the supply of cash to customers and businesses, ordinarily targeting an inflation price or curiosity cost, to inspire costs of goods and service to stay stable and promote economic development.
2. WHO CONTROLS fiscal policy IN SINGAPORE?
Its significant financial institution - the economic Authority of Singapore or MAS.
3. HOW DOES MAS manage ITS monetary coverage?
Most nations, including the us and China, undertake an interest expense coverage the place primary banks elevate or reduce interest charges.
Singapore is the only main economic system on the planet to use the exchange fee, guiding the Singdollar better or decrease.
MAS says the alternate price is the first-class instrument for a small, open financial system like Singapore. It's a more effective approach to manipulate inflation, as much of the country's patron items are imported.
4. SO IF MAS DOES not SET curiosity rates IN SINGAPORE, WHO DOES?
MAS has readily given up manipulate of home interest premiums. As an alternative, borrowing costs are mostly decided with the aid of US interest premiums and traders' expectations of the future motion of the Singapore dollar.
5. HOW DOES MAS' exchange-fee coverage WORK?
MAS lets the Singdollar rise or fall against an undisclosed basket of currencies of its major trading companions, intervening when needed to keep the alternate rate inside its unspecified target band.
To discourage speculation and be more amazing, MAS does not expose what is in its basket of currencies or specify its trading band.
It adjusts the % of appreciation or depreciation of the Singdollar via altering the slope, width and of this trading band.
The alternate fee that MAS targets is exchange weighted such that the currencies of Singapore's higher trading partners undergo extra weight. This exchange-weighted trade price is referred to as the Singapore dollar nominal strong alternate price or S$NEER.
6. WHAT'S happening ON WEDNESDAY (OCT 14)?
MAS reports its monetary coverage twice a year - in April and October - to be certain that it is consistent with financial fundamentals and market conditions.
On Wednesday, MAS will announce its financial policy stance for the next six months.
It will also explain the explanations for its choice in phrases of its assessment of Singapore's monetary and inflation outlook.
7. What's MAS' current coverage STANCE?
For the reason that October 2012, MAS' large coverage stance has been of a "modest and gradual appreciation" of the Singdollar.
However on Jan 28, it made an unscheduled move to ease monetary policy, the primary due to the fact that July 2005, after Singapore's monetary progress sagged in 2014 to its weakest in 5 years. MAS lowered the slope of its coverage band, in outcome slowing the p.C. Of the Singdollar's positive aspects versus the currencies of its essential buying and selling companions.
In April, at the first of this 12 months's two scheduled meetings, MAS refrained from additional motion.
8. WHAT DO ECONOMISTS assume MAS TO ANNOUNCE ON WEDNESDAY AND WHY?
A majority of economists surveyed by Bloomberg and Reuters assume MAS to ease financial coverage for a second time this yr as Singapore's fiscal efficiency has worsened considering that its final evaluate in April.
As with much of the rest of Asia, Singapore's trade-based economic climate has been knocked by means of a sharper-than-anticipated slowdown in China and uncertain recoveries in US and Europe. A Reuters ballot of economists forecast third-quarter GDP to have shriveled zero.1 per cent from the prior quarter, after a four per cent contraction in April-June.
That may meet the definition of a technical recession, the primary for Singapore since the depths of the monetary challenge in 2008-early 2009.
MAS' present policy environment does no longer allow for further depreciation of the Singdollar, which would aid Singapore's exports, a key driver of fiscal growth.
With Singapore consumer prices having fallen for 10 straight months to August, the threat of imported inflation from a weaker Singdollar has been reduced, enabling extra space for MAS to ease.
However some economists say there is a extra-than 50 per cent hazard of no MAS move on Wednesday. They point to MAS' final evaluation where it emphasised the risks of a tight labour market using up inflation.
9. IF IT EASES, HOW precisely WILL MAS DO IT?
Listed here are some moves the MAS might make, and what they'd mean.
A. Slash the upward slope of the band


lowering the slope of the band permits for slower positive aspects in Singdollar over time.
This was an option the MAS exercised in January when it joined a wave of worldwide monetary easing. The unscheduled transfer helped send the Singdollar to its weakest level considering 2009 against its US greenback.
B. Transfer the of the band scale down


this could sign the alternate expense will have to stay on the vulnerable aspect within the close future. Re-centering the coverage band scale back by using half of a band can be an identical to a one-off devaluation of the Singdollar by 2 per cent, DBS team Holdings senior currency economist Philip Wee said in a observe on Oct 6.
C. Widen the band


growing the width of the band is technically a neutral stance intended to permit extra volatility in the regional buck. Nevertheless, a Nomura Holdings survey of its purchasers in September confirmed ninety two out of 100 polled expected the Singdollar nominal mighty exchange price will weaken as a minimum zero.1 per cent right away if such action used to be taken.
10. WHAT DOES EASING imply FOR THE SINGDOLLAR and you?
The Singdollar has fallen about 5 per cent in opposition to the us buck up to now this 12 months. It'll in most cases depreciate about 8 per cent in total this yr to $1.44 versus the USA buck, in line with analysts surveyed by Bloomberg.
If MAS eases, it would weaken the Singdollar further. This will have vast-ranging knock-on results from the prices of imported merchandise in retail outlets to extra expensive abroad vacations and reviews.
A weaker Singdollar and expectations of extra depreciation will push nearby interest premiums greater, affecting home loans and all different patron and trade loans.

ii.

Managed drift regime and the S$NEER

Secondly, unlike most countries which adopt either a flow or constant trade rate regime, Singapore's coverage is a hybrid of both. The Singapore buck (SGD) is allowed to drift freely, and the MAS will reveal the force of the forex centered on the S$NEER. The S$NEER is the Singapore greenback Nominal powerful trade fee which comprises of a basket of currencies as discussed prior.

Each year in April and October, the fiscal Authority of Singapore will liberate a statement on the present economic trend in Singapore and the direction of its fiscal coverage. This is released on a bi-monthly groundwork. In the announcement record, MAS will point out its action on the S$NEER coverage band.

MAS focal point on three elements of the band
a) The slope of the band
b) The width of the band
c) the level the band is d

inside the band, the SGD is subjected to daily fluctuations similar to some other foreign money. Firms from abroad should purchase or sell SGD to pay neighborhood companies for goods required. Associations should buy or promote the forex to hedge towards future actions. Speculators and traders can exchange it freely within the currency exchange market. This freedom is primary for an open financial system like ours to flourish.

Nevertheless, once the SGD is deemed to be trading beyond the band, MAS will step in to purchase or promote SGD to maintain its trajectory inside the S$NEER band. What MAS is doing is basically modulating the strength of the SGD against the $SNEER.

The band prevents the foreign money from fitting too robust, making exports extra steeply-priced to international international locations or too weak, so that you can result in decreasing buying energy within the home country. The width of the band determines how a lot volatility or action the SGD can manoeuvre in. By means of narrowing the band, the SGD may have much less room to manoeuvre earlier than MAS intervenes.

The slope of the band offers a sign of how aggressive the MAS want its policy to be over the subsequent six months. By using increasing the slope of the band, SGD can recognize at a turbo percent.

Why is Singapore different? Neither fixed nor float (Managed drift)

Singapore is a small and open economic climate. If the currency have been to drift freely, MAS would not have the flexibleness to deal with shocks and therefore no longer in a position to maintain the purchasing energy of the SGD. A floating approach would intent the SGD to be too unstable in the brief run main to undesirable penalties.
If we've got a fixed forex regime, the SGD will likely be pegged to a single international forex. This has penalties with it because the industry cycle of both economies is also specific. For example within the case of Hong Kong which was peg to the USD, they experienced an asset fee bubble within the 1990s when its economy used to be developing swiftly but there was a monetary slowdown in the united states main to reduce interest premiums.
A constant trade price would no longer permit the MAS to adjust the worth of the SGD to counter shocks from overseas. Throughout the Asian economic main issue, regional currencies depreciated sharply in opposition to the USD. The SGD depreciated in opposition to the USD also but through a lot lesser. In fact, the SGD appreciated moderately in trade weighted phrases as MAS had the flexibleness to permit the NEER to upward push above its policy band.

Trade price as monetary coverage
In a monograph released through the MAS in 2001 titled Singapore's alternate price coverage, the primary financial institution recognizes that with a purpose to manipulate the currency, it will need to relinquish manipulate over the curiosity rates of the country.

The option of exchange rates because the on the spot target of economic coverage implies that MAS has given up manage over home curiosity premiums (and money supply). Within the context of free capital motion, interest premiums are mostly determined by way of international curiosity rates and investor expectations of the longer term movement of the Singapore buck. (MAS Singapore's trade cost coverage 2001, pp.2)

This trade rate policy has been demonstrated strong over time. The SGD has liked against its principal buying and selling companions currencies. This indicates a strong financial system with excessive productiveness growth and high financial savings cost. (MAS Singapore's trade cost coverage 2001, pp.Three)

comparing the interest premiums of the U.S. And Singapore, Singapore's home interbank cost had been quite shrink than that of the USA interest rates given that the 1980s (as shown in chart 1 and 2 under) reflecting market expectations of an appreciation of the S$.

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