SINGAPORE DOLLAR (Rise in value)

[Mr Speaker in the Chair]

Mr Robert Chua Teck Chew asked the Minister for Finance what are the reasons for the rapid rise in the value of the Singapore dollar against other major currencies; what is the impact of the rising dollar on businesses and their international competitiveness; and what measures are being taken by the Government to address the problems facing businesses resulting from the rapid rise of the Singapore dollar.

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, since the end of 1993, the Singapore dollar has risen by around 6.5% against the US dollar. However, this rapid rise of the Singapore dollar against the US dollar is more a reflection of the weakness of the US dollar against all international currencies than any unusual strengthening of the Singapore dollar. Over the same period, the Singapore dollar has actually weakened by a range of 2-6% against the Japanese Yen and most European currencies. In trade weighted terms, the Singapore dollar on average has appreciated by much less against the currencies of our export competitors than against the US dollar.

The value of a country's currency at any point of time is a reflection of its economic fundamentals and market sentiment. The strength of the Singapore dollar over the past few years thus reflects market demand for the Singapore dollar and our strong economic fundamentals which include low inflation, budget surpluses, high savings, large reserves and a strong balance of payments.

Indeed the strength of the Singapore dollar has itself been a factor underpinning our economic fundamentals. The appreciation of the Singapore dollar in recent years has allowed us to neutralise imported inflation, a crucial consideration, as we import some 70% of consumer goods as well as capital and intermediate products used in exports. For the economy as a whole, our international competitiveness has not been affected. Singapore is now in an enviable position of having high economic growth, averaging 10% over 1993 to early 1994, as well as low inflation of about 3%. The volume of non-oil domestic exports has increased by over 20% in the first five months of this year, compared with 17% in 1993.

The Government's exchange rate policy is to promote sustainable non-inflationary growth. Attempts to weaken the Singapore dollar artificially in support of specific export sectors would only buy us temporary improvements which are quickly undermined by inflation, given our heavy reliance on imports and the current tight labour market. A weaker Singapore dollar raises the cost of imports. Under tight labour market conditions, the increase in labour demand resulting from the short-term gain in export competitiveness will exacerbate overheating in the labour market. Workers will want to make up for the cut in real wages caused by higher prices of imported food and other consumer goods. The resulting increase in wages and other costs will quickly offset the gains from a weaker currency.

Macro-economic policy tools, like the exchange rate, can seek to provide a stable framework for sustained economic growth but cannot on their own ensure that this is achieved. With inherent limits to labour force growth in Singapore, only improvements in productivity can generate international competitiveness and sustained economic growth. Government will continue to promote education, skills upgrading and encourage the adoption of new technologies. Government will also continue to lower corporate and personal income tax rates over time in order to enhance the supply side efficiency of the economy.

It is recognised, however, that a strong and appreciating currency will affect some companies more than others, depending on the sources of their income and their import content. Over the short-term, companies sensitive to Singapore dollar appreciation can manage their currency exposures by hedging in the financial markets. Over the longer-term, however, such companies can only remain competitive and viable by improvements in productivity, by automation or by relocating their more labour-intensive operations offshore. Singapore Airlines is an example of an international service company which has continued to grow and remain profitable, notwithstanding the fact that much of its income is denominated in foreign currencies. Japanese companies have also learned to survive under much heavier foreign exchange burdens. Between the end of 1984 and July this year, the Japanese Yen appreciated by 156% against the US dollar. Over the same period, the Singapore dollar rose by 44% against the US dollar.

Mr Robert Chua Teck Chew (Nominated Member): Sir, does the Ministry or the Government take into consideration the hardship being faced by businesses caused by the rapidly rising dollar and what measures is the Government taking to make sure that they will still survive against such a background?

Dr Richard Hu Tsu Tau: I have just said earlier that in trade weighted terms, the appreciation has not been as spectacular as the US dollar. But for those companies whose export is mainly to the US market and therefore are much more sensitively exposed, they can manage short-term risks through the financial markets.

Mr Robert Chua Teck Chew: I just want an assurance from the Minister that we do not just consider inflation but the interests of manufacturers and exporters are taken seriously in the management of the currency.

Dr Richard Hu Tsu Tau: Indeed, we do, and the Ministry of Trade and Industry keeps a very close eye. If individual companies encounter serious problems, I suggest they raise them with the Ministry of Trade and Industry and they will be brought to our attention.

Dr Kanwaljit Soin (Nominated Member): Sir, in the Minister's opinion, does he think that the decreased prices of imports are being passed on to consumers generally?

Dr Richard Hu Tsu Tau: As far as the cost of intermediate goods is concerned, it is factored into the production cost. Whether the manufacturer finally passes on to the consumer domestically, I do not know, but certainly they would pass it on for their exports in order to remain competitive. The situation domestically depends entirely on the circumstances and there is no assurance that all or part of it may or may not be passed on. I think competition ought to take care of that.