Issues Raised in Parliament

Reply to Parliamentary Question on the Singapore Dollar

For Parliament Sitting on 29 Jun 1998

Question:
To ask the Deputy Prime Minister (a) what steps the Government intends to take to check the decline of the Singapore dollar, and (b) how has the decline in value of Japanese yen affected our dollar and trade.

Answer:

(a) What steps the Government intends to take to check the decline of the Singapore dollar.

1. In the first 2 weeks of June, the S$ had weakened against the US$ from below S$1.6000 to US$1, to as much as S$1.7560 to US$1 on 16 Jun 98, when the Asian currencies, particularly the Yen, plunged. The Singapore dollar has since bounced back.

2. However, the MAS manages the Singapore dollar against a weighted basket of currencies of Singapore's main trading partners, and not against any single currency. While the Singapore dollar has weakened against the US dollar, Deutschemark and Sterling, it has appreciated substantially against the Ringgit, Rupiah and Baht. On a trade weighted basis therefore, the value of Singapore dollar has appreciated slightly. This is in line with the long-term fundamentals of the Singapore economy - high savings rates and low inflation, fiscal and current account surpluses, large foreign reserves and low foreign debt.

3. Notwithstanding our fundamentals, some volatility in the S$ exchange rate is unavoidable in the midst of the large fluctuations in the other Asian currencies. Any further decline in regional currencies would affect the value of the Singapore dollar vis-a-vis the US$, as these economies are Singapore's important trading partners.

4. The MAS will continue to allow market forces to determine the value of the S$, consistent with Singapore's economic fundamentals. However, market excesses in overly pessimistic conditions will have to be checked by central bank intervention as was illustrated in the US-Japan joint intervention in the foreign exchange markets on 17 Jun 98 to correct the sharp decline in the Yen. MAS will take the necessary steps against any unduly steep fall in the S$ and stands ready to act decisively against any unwarranted speculative attack on the Singapore dollar.

(b) How has the decline in value of Japanese yen affected our dollar and trade.

1. Japan is a significant export market for the regional economies including Singapore. It accounted for 18% of regional¹ exports and 7.6% of Singapore's total non-oil domestic exports in 1997. A falling yen would raise the prices of imported goods and further dampen the weak demand for regional imports including from Singapore. Japan is also an important market for Singapore's services exports. For example, it is our second largest single market for tourism, accounting for 15% of total visitor arrivals in 1997. A continuing weakening of the yen would lead to a further decline in Japanese arrivals and aggravate the slowdown in the retail, restaurant and hotel industries.

2. The region has also been a major recipient of Japanese foreign capital. Direct investments from Japan have accounted for an increasing share of total FDI approvals in ASEAN-3², from 15% in 1992 to 24% in 1996. In Singapore, Japan contributed a significant 21.5% of total FDI inflow between 1990-95. A weakening of the yen would adversely affect Japanese companies' overseas expansion plans. This could have a dampening effect on the growth of Japanese investments in the region.

3. Moreover, a weakening of the yen is likely to exacerbate the weak balance sheet position of Japanese banks, which would lead to a further consolidation of Japanese international banking activities, including those in the Asian Dollar Market. This would in turn adversely affect the growth of the financial services sector in Singapore.

4. As a significant exporter of electronics goods, Japan also competes with Singapore and some of the other regional economies in major markets such as the US and EU. The continued depreciation of the yen will therefore exert greater competitive pressure on regional exports. Finally, as shown by events in recent weeks, a weakening of the yen has a tendency to unsettle regional financial markets.

¹ Indonesia, Thailand, Malaysia, the Philippines and Brunei.

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² Indonesia, Thailand and Malaysia.

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