Singapore MPS and The Free Lunch Machine

I wrote the piece below last year, tongue in cheek, on the April 2011 Monetary Policy Statement.

Buying Into The Free Lunch of USDSGD And The MPS

April 8, 2012 9:56 AM

Skeptics will be proven wrong if they do not buy into the free lunch that the nation has been giving away in the past years.

Singapore does not have a monetary policy. Using their currency to control inflation. That is a mighty mean feat in this open economy which is quite exposed to global trends but is made possible ala Swiss style with hefty reserves and an open cheque book.

It was only during a heated discussion between 2 rival economists, one who prefers to be known as a strategist, who have both worked before at the central bank, that it dawned on me how little we know about the practical and theory of our policies.

For starters, many don’t remember Section 757, where a foreigner or foreign entity is prohibited from borrowing more than 5 million sgd on shore unless it’s for the purpose of buying a local asset. This rule has been set since time immemorial because those were dark days then. Days where outflows had to be discouraged to keep investments onshore. Overseas issuers of corporate bonds also have to swap their proceeds out immediately into another currency.

Now that we have evolved into an economic powerhouse, inflows go unchecked while outflows are still prevented, leaving us with excess liquidity in the system. In other words, SGD cannot be a global funding currency like the JPY has been.

The appreciating SGD policy has created excessive inflows into Singapore as global funds look for inflation hedges around the world. With inflation at 5.5%, it’s certainly a worthy hedge for the American housewife with the spare funds. Sgd is surely set to appreciate to that tune if inflation sustains.

Trade flows dominate less than a percentage of global fx volumes, capital and speculative flows, the rest. That leaves the central bank the sole warrior in battling the inflows these days, quite turning the tables on the Asian crisis outflows of 1997.

While the central bank has pledged to neutralize their intervention efforts, there is a time lapse  of t+2 before they do so. This means the money would be deposited before it is withdrawn sending rates lower to set lower precedence for the next batch of inflows.

Do returns really matter ? When the appreciation is almost guaranteed ? Especially in the face of QE2 and the European print press ?

Taking a step back. What if the money were invested in assets ? Tangible assets but not export oriented assets which suffer from an appreciating sgd. Asset prices would soar leaving a slush of liquidity in the system as sellers reap their windfalls that will not be neutralized. Liquidity begets liquidity into a big liquidity trap which borrowers do not complain about.

In a small economy, assets are scarce. So the chase begins.

Appreciation is not free. In the OTC world, when one is long, someone is short. And a promise is a promise. Perhaps that is why Switzerland does have monetary policy and no promise of a free lunch. And that is perhaps why Dumb and Dumber 3 may even become a box office hit one day as SGD spirals into a no brainer investment.

How did it come to this ? Because it’s not just Singapore but the entire SGD Neer basket. We have re centered twice since Lehman. And inflation is still soaring. The Neer basket hasn’t experienced such gains in the meantime.

The Dark Side beckons then. Singapore is only as good as it’s word and the words of the SGD Neer basket. The day would come when inflows get to a point of being unmanageable. Even Taiwan has given up the fight late last year.

Meanwhile, for this ex skeptic, Dumb and Dumber still appeals to me in the next trading week.

Back to the Present

Incidentally, Dumb and Dumber 2 is set to be produced in Sep 2012.

Where are we now ?

From a former fishing outpost to a port, Singapore has used its population initially to attract investors to the country in the 1950’s-60s. The general workforce has then expanded to include Malaysians in the 1970’s to 80’s. When costs escalated, we turned to China and Bangladesh for the cheap labour. (Indonesians not so because of the minor skirmish of a war in the 70’s).

Then recently, the Philippines and India for the more educated workforce at low prices.

The main gist is CHEAP LABOUR.

We need the cheap labour to survive and compete while value adding in stable governance, low taxes and good infrastructure.

Break Down

It is not just the trains. Fault lines showing up now in over reliance on foreign labour.

Trains breaking down because maintenance staff are entirely foreign and quite used to tying tracks together with plastic cables back home.

The  cleaning jobs now rely on the aged population who were the pioneering cheap workforce of the country, many earning less than domestic help.

Where is it leading the country ?

After a lacklustre election win, the government has rolled out some nice headlines.

Managing our Dependence on Foreign Workers (

– Cutting down quotas from Jul 2012 onwards.

Singapore will end a program that allows wealthy individuals to gain permanent residence quicker by putting money in the island, after an influx of foreigners in recent years spurred property prices and fueled voter anger.
Locals have woken up and smelt a rat !
The only beneficiaries of a strong SGD are foreigners who work here without any SGD liabilities !
Hot money flows in for the MPS and leaves with a mini windfall each time. None of that gets circulated into the economy !
The strong SGD does not prevent asset inflation  , which is the cause of local ire against property prices.
 With these measures and the world in the midst of a currency war, I dare not hold out any hope for the free lunch machine to be switched off.
Singapore likes to be different. And being different means being the only central bank in the world on HIKE mode.
And it is with great sorrow that I observe, as for last year and the year before, local traders are the only ones who do not buy into the free lunch machine. Everyone else seems to understand more than too well. Dialogues I have with hedge funds, offshore traders, foreign central banks… all echoes the same refrain “SGD is a no brainer.”  That my friends and I think so hard and deep into the matter has cost us dearly.
Friends, Singaporeans and Countrymen, let us all join in the parade.  It just doesn’t feel so right though.