atans1

Dr Goh’s Diamond Hard Truth reaffirmed

In Economy, Political economy on 19/10/2012 at 6:49 am

As a retiree, I was getting worried that PM, Tharman and gang had abandoned a Hard Truth that Dr Goh Keng Swee had laid down (and which has served us well, unlike some of Hary’s Hard Truths): Singapore’s exchange rate policy cannot be used as a tool to manage the country’s export competitiveness.  It was a Diamond Hard Truth, engraved in granite, that the Singapore dollar is a key macro-economic policy tool to keep inflation under control.

Increasingly based on the comments of forecasters and the central bank’s actions, I had gotten the impression that the exchange rate policy was being used as a tool to manage the country’s export competitiveness.

This worry got worse earlier this year with inflation above 5%, ministerial jokes about inflation (that even BT contradicted), and the tightening of the FT policy that had employers screaming.  

Until last Friday that is, when the central bank, in a decision that surprised the market, decided not to ease its monetary policy in spite of slowing exports due to a weaker global economy. (The S$ has appreciated since January by 6% against US$.)

And the  Trade and Industry Minister Lim Hng Kiang said on Monday, “The [central bank] recognises the need to strike the right balance between ensuring exporters are not unduly hurt by a stronger currency in the short-term, and capping underlying price and cost pressures in the economy. However, the exchange rate cannot be used as a tool to manage Singapore’s export competitiveness.”

 Over the longer term, he added, competitiveness could only be achieved through higher productivity and innovation such as creating new products that the market demands. (Ya been hearing this rubbish since the 1980s but the new products and productivity never appear, bit like Godot)

(He could, and should, have added that S’pores exports require imports. Dr Goh used to emphasise that a cheap S$ means export costs go up because the prices of imports used to make the exports goes up. Minister Lim did not make this point. He should have reminded S’poreans of this Hard Truth.)

Mr Lim was responding to a question posed by an economic literate NMP, Tan Su Shan, who is MD of wealth management at DBS Bank. She asked if the central bank would “consider recalibrating its strong Singapore dollar policy and allow the Singapore dollar nominal effective exchange rate to appreciate at a slower pace”.

“The strengthening of the Singapore dollar is a key macro-economic policy tool to keep inflation in check over the medium term,” he added.

Finally, readers might want to send this BBC clip  about local inflation fears to the junior minister who talked rubbish on inflation in August http://atans1.wordpress.com/2012/09/03/err-lee-what-did-you-say-abt-food-inflation/. It’s not juz me, it’s the BBC

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  1. So what are the new industries that will create products for exports? Are there any?

  2. Input the inflation, and output the inflation,
    especially productivity and innovation near to zero.

  3. The MAS has a tough job on the exchange rate. In this world of competitive devaluation, MAS’s hands are tied. If Sing $ is to be kept strong, e.g. fixed to gold, it will attract hot money to the country. It’s too a small country to bear the world’s capital inflow. Just look at what the Swiss has to do to maintain the value of Franc.

    That said, local inflation has more to do with government policies than the exchange rate. I believe the current inflation rate (and thus the policies) is harmful to Singapore in the long term.

  4. [...] Singapore: RWS’ Dolphins Going Through Hoops to Get Here – Thoughts of a Cynical Investor: Dr Goh’s Diamond Hard Truth reaffirmed – Singapore Armchair Critic: Two [...]

  5. As another retiree, i curse at the ever shrinking purchasing power of my saving. Saw an old man sitting alone on a bench at the Macritchie reservoir staring blankly at the POSB bank book in his hands. Lost … The silence ones … And the sizeable chunk of the voting power in a decade time. We will remember how the misallocation of capital to fuel the property boom have hurt and penalized the savers then.

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