DEPRECIATION OF CURRENCIES OF NEIGHBOURING COUNTRIES (Effect on Singapore's competitiveness)

Mr Leong Horn Kee asked the Deputy Prime Minister how the relative depreciation of the currencies of Singapore's neighbouring countries will affect our competitiveness.

The Deputy Prime Minister (BG Lee Hsien Loong) (for the Prime Minister): Mr Speaker, Sir, with your permission, I will answer Question Nos. 1 and 2 together.

Mr Speaker: Yes.

BG Lee Hsien Loong: The depreciation of the regional currencies relative to the Singapore dollar will have some impact on our export competitiveness. But we should take a broader perspective. First, the Singapore dollar has depreciated against the US dollar and most European currencies since July last year. On an overall trade-weighted basis, the Singapore dollar has been stable.

Second, we are not direct competitors with the ASEAN economies in most product categories. An internal MAS study shows that, for both goods and services, our major competitors in the region are the NIEs, and within ASEAN, Malaysia. The Singapore dollar has not appreciated against the Hong Kong or Taiwanese currencies.

Third, what matters to our export competitiveness is the real exchange rate, namely, the nominal rate, which is then adjusted for cost or inflation differentials between us and our trading partners. The sharp depreciation of the regional currencies will eventually raise domestic prices in these economies and erode the initial gains in competitiveness.

Fears that a fall in the Indonesian rupiah will drag the Singapore dollar down are at this stage hypothetical. The Indonesian government has not yet decided to set up a currency board system.

The Singapore dollar should not be unduly affected by movements in the Indonesian rupiah. Indonesia's exports do not compete with Singapore's exports. The weight of the rupiah in our basket is small. Furthermore, our exchange rate policy is not mechanically driven by the trade weights. MAS exercises judgment in managing the exchange rate, and takes into account exceptional market factors. MAS will maintain confidence in the Singapore dollar, by intervening in the foreign exchange market where necessary.

Mr Leong Horn Kee (Bishan-Toa Payoh): Sir, may I ask the Deputy Prime Minister, with the lowering of the currency rates in our neighbouring countries, like in Indonesia and Malaysia, and therefore they have become more competitive and enjoy low manufacturing cost, would the promotion of the Growth Triangle concept be more useful?

BG Lee Hsien Loong: Mr Speaker, Sir, yes, indeed, the Growth Triangle concept is useful and the lower cost in the neighbouring provinces of Malaysia, Indonesia, Johor and Riau, should enable our businesses and companies which have operations there also to benefit from this lower cost. But, as I explained earlier, it is the real exchange rate which determines our competitiveness, not the nominal one.

Let me explain the difference. If we trade with Indonesia and the rupiah goes down from 2,500 rupiah to 10,000 rupiah, other things being equal, Indonesian costs have gone down four times and therefore they are four times more competitive than us. But other things do not remain equal. When the rupiah goes down, imports cost more, people are unable to pay, they agitate for higher wages, and wages go up, inflation goes up. And if, for the sake of argument, the rupiah has gone down four times but prices have gone up four times in Indonesia, then although there has been a nominal depreciation of their currency, there is no real effect on our competitiveness or their competitiveness. It will not completely work out like that. It takes some time, and at the end of it, I think our neighbouring countries will end up somewhat more competitive than we are, but not to the extent as shown just by looking at the exchange rates now.

Dr Lee Tsao Yuan (Nominated Member): Sir, does the Deputy Prime Minister think that, in light of the fact that probably there will be a real exchange rate devaluation among the regional countries, actually competitiveness will be a bigger issue for us now and particularly in the medium term after these Asian economies recover than before, let us say, July of last year?

BG Lee Hsien Loong: I think it will vary from industry to industry. Overall, yes, it will be offset somewhat because we have become more competitive compared to, say, developed countries, and the developed countries were, to some extent, competing against us for investments and exports. But against the neighbouring countries, they will end up somewhat more competitive than us, particularly our more labour-intensive industries. The older plants which have been here for some time - mass production, very low margins - will be under pressure and adjustments will have to be made.

At the upper end, the effect on us is not so much on the cost as on the state of the markets, and some of those have been affected too, particularly where they export to the region or where the region has a big influence on world prices. For example, with petrochemicals, when the region boomed it was a big consumer and now that the region is down, prices are down. Some of our projects are going to see investors reconsidering them, and maybe deferring them for some time. But it is part of being in an economic slowdown.