STRENGTHENING OF SINGAPORE DOLLAR AGAINST US DOLLAR (Impact on Singapore's competitiveness)

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STRENGTHENING OF SINGAPORE DOLLAR AGAINST US DOLLAR:

(Impact on Singapore's competitiveness):

. Dr Lily Neo asked the Deputy Prime Minister and Minister for Finance in view of strengthening of the Singapore dollar against the US dollar over the past few years (by some 25% since 1997), (a) how will it impact on Singapore's competitiveness; and (b) what con

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sequences will a stronger Singapore dollar have on Singaporeans in general.

The Second Minister for Finance (Mr Lim Hng Kiang) (for the Deputy Prime Minister and Minister for Finance): Mr Speaker, Sir, first of all, I am not sure how Dr Lily Neo came to the conclusion that the Singapore dollar has strengthened by some 25% against the US dollar since 1997. I hope she will enlighten us afterwards. In fact, compared to its value in 1997 just before the Asian financial crisis, the Singapore dollar today is still 17% weaker against the US dollar. Nevertheless, let me use this opportunity to explain the main considerations and our approach in managing the Singapore dollar.

MAS manages the Singapore dollar against a trade-weighted basket of currencies of our major trading partners and competitors. In view of the weakness of the economy and absence of inflationary pressure, MAS has managed the exchange rate flexibly, and the trade-weighted exchange rate has eased since 2001. It was only recently in April 2004 that MAS shifted to a modest and gradual appreciation of the trade-weighted exchange rate as the economy strengthened and early signs of inflationary pressures emerged.

The main objective of the exchange rate policy in Singapore is to maintain low inflation and a stable domestic currency, as a sound basis for sustained economic growth. The exchange rate should not be used as an instrument to gain export competitiveness, or a substitute for essential adjustments the economy needs to make as our external environment changes.

But we recognise the need to improve the competitiveness of the Singapore economy. We have done this by deregulating the economy and directly reducing CPF contribution rates, rentals,

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utility charges and tax rates. Over the past two years or so, unit business costs have come down. Ultimately, firms stay competitive by increasing productivity, creating new products, and actively seeking out new markets. The Government has also tried to support and facilitate this process through various targeted measures.

In addition, the high import content of Singapore 's economy means that a depreciation of the Singapore dollar would entail higher costs for producers and consumers. A weaker Singapore dollar will lead to higher import prices and result in rising inflation in the economy. This would erode the purchasing power of Singaporeans.

A strong and stable exchange rate supported by our sound economic fundamentals over the past two decades has generated confidence in Singapore as a regional financial centre and trading hub, and a rising standard of living for all Singaporeans. MAS will continue to manage the exchange rate in a flexible manner to ensure that exchange rate policy remains supportive of economic activity, while maintaining low inflation.

Dr Lily Neo (Jalan Besar): Mr Speaker, Sir, the figure of 25% I quoted was the occurrence of fluctuations of different times since 1997.

Sir, may I ask the Minister on the effect of the exchange rate fluctuations on the consumer price index and retail price index, and how have the exchange rate fluctuations impacted our trade relations with our major trading partners, such as the USA, Europe, ASEAN, China and India?

Mr Lim Hng Kiang: Mr Speaker, Sir, I still cannot figure out how she came to that conclusion. If you remember, before the Asian financial crisis in 1997, the Singapore dollar was probably 1.42 or

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1.45 to the US dollar. Then, with the Asian financial crisis, the Singapore dollar depreciated. So the lowest we reached was probably 1.85 and now it has rebounded, strengthening to 1.66 and, in recent weeks, it has weakened to 1.72. If you look at this fluctation, nowhere has the Singapore dollar strengthened by 25% to the US$. Anyway, we have to move with the external economic situation. As I explained earlier, the role of MAS is to make sure that the Singapore currency responds appropriately to the external conditions.

Mr Low Thia Khiang (Hougang): Sir, what are the currencies included in the basket, as mentioned by the Second Minister for Finance, and what is the weightage of these currencies in the basket?

Mr Lim Hng Kiang: As I have explained, the Singapore dollar is managed against a trade weighted basket. So the weighting has some relation to the trade that we have with our partners, and the currencies we choose are those of the major trading partners and also our competitors.

Dr Lily Neo: Mr Speaker, Sir, maybe I will refer the Minister to my source, ie, www.oanda.com. Sir, may I also ask the Minister how did our competitiveness fare vis-a-vis countries like China and India? Will the increase in the Singapore dollar value make our export dearer and will the currency fluctuation that we have experienced recently affect our competitiveness and thereby lead to further erosion of jobs to these countries?

Mr Lim Hng Kiang: Mr Speaker, Sir, my comments on the competitiveness of the Singapore economy is already elaborated in my answer. The Singapore economy does not just depend on the Singapore dollar for its competitiveness.

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Ultimately, it depends on how we improve the competitiveness through productivity, new products, innovation and looking for new markets. As for Singapore exports, compared to China and India, as I explained, from 1997 till now, the Singapore dollar in fact depreciated quite sharply against the US$. Since the Chinese renminbi is pegged to the US$, for that period 1997 to 2001/2002, in fact we had gained competitiveness on the basis of currency. But then, we strengthened recently from the bottom of 1.85 to about 1.66. But the renminbi is still pegged to the US$. So, during this period, of course, we lost some competitiveness because of the currency. But, as I said, we cannot depend on the Singapore dollar for the crux of our competitiveness. In the end, it boils down to the fundamentals, which are productivity, innovation, new products and markets.