What Drives the Singapore Dollar? Here are Key Indicators to Track

Key Takeaways:

1. The Singapore dollar has strengthened against most Asian currencies so far this year, and has been resilient against the US dollar.

2. The strength of the Singapore dollar has been driven by successive monetary policy tightening by the Monetary Authority of Singapore (MAS) since October 2021.

3. Going forward, the MAS is likely to monitor Singapore’s economic growth and inflation prospects to determine whether further tightening is required.

How Has The Singapore Dollar Performed Against Other Currencies?

If you have travelled to Japan or Malaysia over the past year for your holidays, you would probably have noticed that the Singapore dollar has been exceptionally strong.

Take for example the Japanese Yen. At the start of the year, one Singapore dollar would get you about 98 yen. This rose to about 108 yen on 6^th September 2023, representing an increase of about 11 per cent from the start of the year.

Alternatively, we can consider the Malaysian Ringgit. One Singapore dollar would get you 3.29 Ringgit at the start of the year. This would have increased to 3.43 Ringgit on 31^st August 2023, marking a strengthening of about 4 per cent over this period.

For many investors, the Singapore Dollar has been a beacon of stability amidst global economic uncertainty. However, the strength of the Singapore Dollar is no accident.

What makes the Singapore Dollar so resilient and will it remain so? Let's break it down.

What’s Driving The Strength Of The Singapore Dollar?

The Monetary Authority of Singapore (MAS) manages the Singapore Dollar not through interest rates, like many other central banks, but through the exchange rate. MAS takes into account various economic factors, including economic growth and inflation when making monetary policy decisions.

How does MAS go about determining the exchange rate? It defines a central exchange rate for the SGD against a basket of foreign currencies. This is known as the "Nominal Effective Exchange Rate" (NEER). The SGD is allowed to fluctuate within a specified band around this central rate.

The NEER is calculated based on a weighted average of the SGD's value against the currencies of Singapore's major trading partners. This means that changes in the exchange rates of these partner currencies can influence the SGD's value.

MAS actively monitors the SGD's exchange rate within the band. If the currency starts to move too far from the central rate and threatens economic stability, MAS may intervene in the foreign exchange market. They can buy or sell SGD to influence its supply and demand, which in turn affects its value.

Since October 2003, MAS’ semi-annual monetary policy cycle has been scheduled for April and October. However, it can also make an off-cycle monetary policy announcement if there are significant changes to the macro environment.

The key reason for the strength of the Singapore dollar is due to successive monetary policy tightening by the MAS since October 2021. After setting the slope of the policy band to 0% in March 2020 in response to the Covid-19 pandemic, MAS started to allow the slope of the band to increase slightly again from October 2021 as Singapore’s economy started to recover.

As inflationary pressures continued to build, the MAS further re-centred the policy band upwards at the prevailing level of the S$NEER in April 2022. This continued through to October 2022 when we saw five successive monetary policy tightening moves in total. At the last Monetary Policy Review in April 2023, the MAS maintained its policy stance.

What’s The Outlook For The Singapore Dollar?

#1 – Singapore’s Economic Growth Is Slowing

At the last Monetary Policy Review in April 2023, the MAS noted that Singapore’s GDP growth is projected to be below trend this year. Singapore narrowly averted a technical recession with the economy growing by just 0.1% in the second quarter, after contracting by 0.4% in the first quarter.

The key drag to Singapore’s growth has been a sharp decline in trade, with key exports falling by 13.4% in the second quarter of 2023 compared to the previous year. The weakness continued into the third quarter, with exports contracting by 20.2% in July.

The MAS believes that Singapore’s economic slowdown could be deeper than expected with growing risks to the global economy. In August 2023, the Ministry of Trade & Industry narrowed Singapore’s GDP growth forecast for 2023 to 0.5% to 1.5% from 0.5% to 2.5% previously with continued weakness in the economy.

With a slowing economy, the MAS could pause the appreciation of the Singapore dollar to prevent a strong exchange rate from further dampening exports.

#2 – Inflation Is Easing

MAS also considers inflation in its monetary policy as it aims to promote price stability in Singapore. After all, a rise in inflation could be detrimental to sustainable economic growth in the long term.

The good news is that price pressures have started to ease in Singapore with the moderation in global commodity prices and the strength in the Singapore dollar. The core consumer price index (CPI), which excludes private transport and accommodation costs, rose by just 3.8% in July from a high of 5.5% in January and February this year.

MAS expects core inflation to “ease materially” by the end of this year, and expects core inflation this year to average 3.5% to 4.5%. Excluding the effects of the GST increase earlier this year, core inflation is projected to reach around 2.5% by the end of 2023. With more confidence in achieving medium term price stability, the MAS may see less of a need to tighten Singapore’s monetary policy further by strengthening the Singapore dollar.

#3 – Long Term Fiscal Strength

Apart from near term economic fluctuations, Singapore’s long term fiscal position also has an important impact on its exchange rate. Singapore boasts a healthy fiscal policy, marked by consistent budget surpluses, low public debt, and vast foreign reserves.

Prime Minister Lee Hsien Loong recently described the reserves as providing “one extra card to play” in tough times, ensuring that Singapore has a cushion to fall on in turbulent times. For example, $31.9 billion from the past reserves was used for Covid-19 response measures in fiscal year 2020, while a further $5 billion was used in fiscal year 2021.

Currently, the government is required by the Constitution to achieve a balanced budget and not incur a deficit at the end of a parliamentary term. The fiscal deficit for 2023 is expected to narrow to just 0.1% of gross domestic product (GDP), after a deficit incurred of 0.3% of GDP in 2022. With rising spending needs such as developing healthcare infrastructure and initiatives to combat climate change, Singapore’s continued ability to maintain a strong fiscal position will be key in ensuring the strength of the Singapore dollar in the long term.

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Disclaimers

This research is commissioned by Citi in collaboration with Beansprout, an MAS-licensed platform offering individuals simple financial guidance. Gerald Wong, CFA, has more than 10 years of experience in the investment advisory industry, and is passionate about helping others make better investment decisions.

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