Who Needs SGD NEER ? We Have SGD REER ! – The Great Singapore Economic Debate !
MAS calls it a “unique” monetary policy framework because it is managed on foreign exchange rates rather than interest rates unlike all the other central banks.
NEER – Nominal Effective Exchange Rate.
Basket – USD, EUR, MYR, IDR, JPY, HKD, THB, TWD, KRW, CNY, AUD, INR, PHP, GBP, CHF. More significant for some and less significant for others. Perhaps a handful (or more) people know the exact weights of each currency in the basket (but they will have to kill you if they tell you), while the rest make pretty educated guesses for the weights.
By allowing the currency to appreciate or depreciate against the basket of currencies, Singapore tries to tame inflation and manage growth at the same time. The sharp reader would say it has not been working really well in recent years but that is contentious because the counter argument would be that the situation could have been worse.
I just read a most intuitive piece of work by an established economist in Singapore, who happens to be a Singaporean, contriving a new angle (to me it’s new, at least) of perceiving the NEER’s impact on the economy, inflation, various industries and ultimately, most of our livelihoods.
Titled “Who Gets Hit Harder By Real Exchange Rate Appreciation ?”, the article exposes that keeping a strong SGD relative to the NEER will become a norm, coupled with the labour market trends here, that REER will appreciate at a faster rate.
Here is my attempt to dissect the pretty lengthy, bombastic and necessarily verbose 20 pager.
REER – Real Exchange Rate.
At the moment, the 2 biggest drivers will be 1. wage inflation and 2. the NEER strength. That is a double whammy for any export sector company.
1. Manufacturing Sector
2. Services Sector – tradeable services and non tradeable services
Manufacturing – transport engineering, electrical machinery, precision engineering, transport engineering, food manufacturing and chemicals
Tradeable services – financial services, wholesale business, professional and business services, transport and communications services
Non tradeable services – retail trade, F&B, government, social and recreation services
1. Wages are going up ! – tighter migration policies and higher CPF rates.
With the implementation of the Progressive Wage Model for cleaning companies, not to mention the teachers and police officers as well as for nurses.
2. Domestic Inflation has been exceeding Imported Inflation for the past 3 years and there is little the MAS can do about it by keeping the SGD strong versus the NEER.
Thus the plan is to “restrain aggregate demand” i.e. reduce the incentive to produce which will slow the over heating economy down and bring down demand for scarce resources such as land, labour and capital.
That will serve to reduce demand pull inflation and allow the supply driven inflation from tight labour markets and income growth to balance the picture out.
>> Sounds too perfect ! More money less work !
3. The Vision is for the lower value add companies to restructure and move up the value chain and relocate the cheap work overseas.
Too Bad If You Are Manufacturing …..
1. General Engineering works
2. Metal Stampings
3. Audio & video equipment
4. Cleaning & polishing equipment
5. Lamp & light fixtures
6. Wearing apparel (doesn’t include designers I guess)
7. Marine engines & ship parts
8. Ship & boat repair
9. Land transport equipment
10. Rubber & rubber products
Good Thing If You Are Manufacturing …
1. CEMENT (because it dries too quickly to be imported !!)
2. Food preparation (has to be fresh)
3. Wood & wooden products except furniture ???? (no idea)
4. Bread, biscuits & confectionery
5. Soft drinks
6. Pharmaceutical prodcts
7. Computers & peripheral equipment
For services, it looks like financial services, management consultants and wholesale trade will be affected. These are probably the financial processing centres they set up in Changi Business park and the lot.
To Laugh Or To Cry ?
I then chanced upon another piece of work by another eminent local economist, addressing the issue of our current national debate between growth and population policy. I would rather call it a dilemma.
It is a relatively easier 2 page treatise, outlining the pros and cons of stricter migration and foreign worker policies.
The immediate loss of growth and competitiveness will be balanced by higher productivity and higher incomes in the long run.
Or will it ?
I sense the writer’s anguish as he argues that the cons outweigh the pros and I think it is important to summarise as much as I can.
1. Aging population will not benefit especially if their property values are diminished
2. Loss of revenue and growth in an economy that is verging on recession (we just managed to escape recession because 2nd quarter GDP was revised to +ve)
3. Labour protectionism will not increase productivity
4. The effect of wage growth would be inflationary
5. Loss of tax revenues of est. SGD 1.1 billion would result in less social spending
Indeed we are living in troubled times.
To be or not to be will still lead us to the same place. Thank you Bernanke !.. and Obama !
Our properties are going up but we will continue to keep bitching because “we should have always had bought an extra one !!”
Yet we cannot have our property market collapse like it has done in the past or folks will be out in the streets.
We just have to acknowledge that Singapore will have to find a new niche for herself in the future. It would really have to depend on the people’s will as was mentioned in the PM’s speech in September which I wrote about. [link – An Important Speech For Singapore]
I salute the government for their vision but I do not salute the NEER. It is evidently clear that the NEER has outlived its purpose and is unable to manage the CPI which is mostly domestically generated. Why go the ROUNDABOUT way ? to UNDO a FAILING by trying to temper offshore demand for Singapore goods & services to dampen inflation when the NEER is supposed to help fix that ?
In January 2013, we will have the great population debate. Whatever the outcome, there will be consequences to live with and I am excited. Been working with my life coach to look forward to these things rather than to just keep dwelling on things that we cannot change.