Forex Lesson 3 : Explaining Singapore's Managed FX Policy System

I explained to my father AGAIN last night how Singapore’s exchange rate policy works because he did not get it the last time, I suppose. And for me, I do not expect many Singaporeans care.

For the few who understand the exchange rate policy, there are even fewer “Singaporeans, I do not think there are more than a handful or maybe hundred, including past and present money market dealers who understand how SIBOR works or what SIBOR is.”

But that is story for another time, or you can read the link above.

Let’s clarify a few things and perhaps address some misconceptions in the country about our Foreign Exchange Rate Based Monetary Policy and I will do this in as few words as I can because I have written over a dozen articles in the past 2 years that I have been told, surprise, are “too technical”.


  • Singapore’s managed foreign exchange mechanism is UNIQUE in the world because no other country is using purely foreign exchange without other forms of monetary policy.
  • Since 1981 when it was implemented, the brainchild of the late Dr Goh, I believe, the SGD has appreciated 42.41% against the USD (and about 66.83% against the MYR).
  • We are not entering a CURRENCY WAR. MAS merely decided that the path of appreciation will be slowed down. It means that the SGD will continue to allowed to appreciate between 0.5 to 1.5% (market guess) to the basket of currencies that make up the SGD NEER ( Nominal Effective Exchange Rate) basket.
    Estimated NEER
    sgd neer
  • Yesterday’s move by MAS is the second ever on record that they have surprised markets with an sudden  announcement outside their semi annual Monetary Policy Statement dates (April and October coinciding with GDP release).

Business Times published this last year.


Why do we use the Foreign Exchange Rate Based Monetary Policy ?

  • Legacy because it worked. By keeping the currency on an appreciation stance as long as we have inflation, we shall enjoy investment inflows into the country that has greatly helped in economic development in the 80’s that was bolstered by a stable government.
  • Money can come in but cannot go out. There is a section 757 where a foreigner or foreign entity is prohibited from borrowing more than 5 million SGD onshore unless it’s for the purpose of buying a local asset.
  • Singapore will always be inflationary because she has limited resources and almost everything has to be imported including labour and raw materials. Thus keeping a strong currency ensures that imported inflation will be kept in check .
    A recent study in 2012 in the semi annual Macroeconomic Review has vindicated that the mechanism works best . (page 91)
  • Dispenses away with headache of monetary policy and rate setting.

Why does lower inflation lead to higher interest rates and not the other way like other countries ?

  • There is no central authority to set SIBOR. MAS can influence the amount of liquidity in the system to an extent in their daily money market operations but cannot directly influence the SIBOR rate.
  • When expectations are for the SGD to weaken, the USDSGD forward points would rise. Taking those forward points and deriving the Swap Offered Rate (SOR) with a “known” Libor, higher forward points would result in a higher SOR.
  • SOR can be seen to be correlated to SIBOR but cannot replace SIBOR because it is an off balance sheet item (derivative) while SIBOR is a balance sheet item (lending). *note it is possible to derive SIBOR from SOR by stripping out LIBOR and factoring out the cost of funds charges etc

Limits to the Foreign Exchange Rate Based Monetary Policy

  • 2013 : There is a limit to how far Singapore can use the exchange- rate policy to contain inflation, central bank Managing Director Ravi Menon said in July. Still, the measure remains the broadest and most effective tool
    “We need to avoid competitive currency devaluations.” Ravi Menon, managing director of Singapore’s central bank, said today. Past episodes of currency friction “have only led to more misery and further downward spirals,” he said.
  • After the world (US) turned to the Zero Interest Rate Policy, Singapore was put to the test. With high inflation back in 2010-2013, Singapore was forced to keep the appreciation stance of 2.5%. That meant that any foreigner buying SGD would be almost guaranteed of a 2.5% per annum appreciation against the NEER basket – A FREE LUNCH ?
    Singaporeans did not enjoy this because their base currency is the SGD.
    But it led to inflows and low interest rates, with SOR turning negative back in Aug 2011, which could be attributed to the asset bubbles and increased borrowings and risk taking behaviour.
  • There is little the Exchange Rate Policy could do for domestically generated inflation that we have been experiencing in recent times.
    So the MAS has been going in circles like I said in 2012 that they are trying to fix Singapore inflation by reducing offshore demand for Singapore goods and services ?
    “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 ?”

That is about all I can think of at the moment. Hope it helps.


More reading taken from some old articles :

MAS is the central bank of Singapore. Their  mission is to promote sustained non-inflationary economic growth, and a sound and progressive financial centre.

  • To act as the central bank of Singapore, including the conduct of monetary policy, the issuance of currency, the oversight of payment systems and serving as banker to and financial agent of the Government
  • To conduct integrated supervision of financial services and financial stability surveillance
  • To manage the official foreign reserves of Singapore
  • To develop Singapore as an international financial centre

Singapore DOES NOT HAVE A MONETARY POLICY.  They opt to use an Exchange Rate Policy adopted in the early 1980’s when the economy was in deficit.  It has been effective in the past when managed with a non internationalisation policy whereby offshore parties cannot borrow more than SGD 5 million from onshore sources.

It is stated in this 2001 paper that the “basic philosophy underlying Singapore’s exchange rate policy is to preserve the purchasing power of the SGD, in order to maintain confidence in the currency and preserve the value of worker’s savings, especially their CPF balances. Over the years, the managed float has served Singapore well in this respect. Inflation and interest rates have been low, expectations are for the SGD to appreciate over time.”

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