Singapore refutes US accusation of currency manipulation
MAS says its policy framework has always been aimed at ensuring medium-term price stability
Singapore
SINGAPORE "does not and cannot use the exchange rate to gain an export advantage or achieve a current account surplus", the Monetary Authority of Singapore (MAS) said in response to the US Treasury's move to put Singapore on an updated watch list over its "uncommon" exchange rate and its material current account surplus.
Singapore made the semi-annual watch list for the first time after the US Treasury expanded the number of trading partners covered in the report from its top 12 trading partners to 21 trading partners.
Total goods trade between the US and these 21 trading partners amounted to nearly US$3.5 trillion in 2018.
Having expanded its scope of review, the US Treasury then used updated thresholds as its means to monitor the risk of unfair currency practices. Currency manipulation feeds into trade conflicts as it can impact the price competitiveness of exports, with the topic coming sharply into focus as trade tensions between the US and China ratchet up.
According to the US Treasury report, Singapore hit two of the three criteria, which meant it was placed on the monitoring list along with Ireland, Italy, Malaysia, and Vietnam. They joined China, Japan, South Korea, and Germany already on the watch list.
Singapore had a total current account surplus that stood at 17.9 per cent of its gross domestic product (GDP) in 2018, breezing past the threshold set by the US Treasury of 2 per cent.
To be sure, it has consistently run a bilateral goods trade deficit with the US, which in 2018 totalled US$6 billion. The current account surplus or deficit is the difference between a country's exports, and imports of goods and services.
At a US$6 billion deficit, Singapore is in the clear on a third US criterion, which is a significant bilateral goods trade surplus with the US pegged at a threshold of US$20 billion.
Singapore also, by the US Treasury's assessment, runs a "persistent, one-sided intervention in foreign exchange markets" over a six-month period. The US Treasury estimated that in 2018, Singapore made net foreign exchange purchases of at least US$17 billion, which is equivalent to 4.6 per cent of gross GDP. The US Treasury's threshold is 2 per cent.
Once on the US Treasury monitoring list, an economy will remain there for at least two consecutive reports.
The report comes three weeks after the Monetary Authority of Singapore (MAS) made public in May its decision to disclose more data on its foreign exchange intervention operations, starting July 2020.
The data will comprise MAS's net purchases of foreign exchange on a six-month aggregated basis, and with a six-month lag from the end of the period. This will begin with the data for the second half of 2019.
MAS said then that it has decided to disclose further information on its monetary policy operations, "without compromising their effectiveness".
In the report put out on Wednesday, the US Treasury said it "welcomes this development" on data disclosure.
Responding to the US Treasury report, MAS on Wednesday said it does not manipulate its currency for export advantage.
"MAS does not and cannot use the exchange rate to gain an export advantage or achieve a current account surplus. A deliberate weakening of the Singapore dollar would cause inflation to spike and compromise MAS's price stability objective," said the central bank in a media statement.
MAS said Singapore's monetary policy framework has always been aimed at ensuring medium-term price stability. MAS manages the Singapore dollar nominal effective exchange rate (S$NEER) within a policy band, which MAS pointed out is "just as other central banks conduct monetary policy by targeting interest rates".
It added that Singapore's current account balance should be viewed "in context". It said that in its early years of development, Singapore ran persistently large current account deficits averaging close to 10 per cent of GDP between 1965 and 1984, when its investment needs were greater than available savings.
"As the economy matured, its investment needs tapered off, while national saving rose. Consequently, the current account turned into a surplus position," said the central bank. "MAS assesses that together with rising affluence that will raise consumption, Singapore's current account surplus will be reduced when public and private savings are drawn down for the needs of an ageing population."
Selena Ling, head of treasury research and strategy, OCBC Bank, said MAS's monetary policy reflects that Singapore is a small open economy and a price-taker, rather than an attempt to boost export competitiveness per se.
"The tricky part is that MAS's monetary policy framework is centred on the exchange rate and intervention in the FX market is par for the game to manage the SGD within the S$NEER band," said Ms Ling in a report.
"Singapore's monetary policy framework is unlikely to fundamentally change as a result of this report, but the nuancing may become increasingly important to address the US perception of currency intervention going forward."
She added that if the released data on net foreign exchange purchases is hypothetically less than 2 per cent of GDP - that is, lower than the US estimates of around 4.6 per cent - this may help to address the third criterion of persistent, one-sided intervention in foreign exchange markets.
"This probably is the most realistic criteria improvement that can be achieved over the next 6-12 months."
In a report, UOB's economists said that China remains the centre of attention, noting that "the US Treasury again directed most of its commentary and the harshest words in the report towards China".
This comes even though China still only met one of the three criteria in the report, albeit with the most significant bilateral trade surplus with the US. China's trade surplus with the US stood at a record US$419 billion for 2018, according to the US Treasury report.
This puts China "at the top position among the countries on the monitoring list to be most likely labelled as a currency manipulator if the Treasury chooses to do so in the next report", the UOB report added.
