Work on Harvard Business School case Study "Exchange Rate Policy at the Monetary Authority of Singapore" prese...
Exchange Rate Policy at the Monetary Authority of Singapore International Finance – Case 2 Jeremy Dunate, Idriss El Kadiri, Yoann Filin, Igor Fischer, Ludovic Giraud
13 November 2012
Table of contents 1. Singapore Economy 2. Situation & Mission of MAS 3. Traditional Monetary Policies 4. Managed Floating System: Watching the BBC ! 5. How BBC worked for Singapore 6. Conclusion
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Singapore Economy
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Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion
General Presentation of Singapore’s Economy Basic Information » Currency: – Singapore Dollar (S$ or SGD) – 1 USD = 1,2235 SGD
» One of the highest GDP per capita » Large Saving & Trade surplus
High historical budget surplus
Goals » Remain a worldwide top trading partner » Remain a major financial center
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Situation & Missions of MAS
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Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion
Situation & Missions of MAS
Missions
• • • •
Promote sustained, non-inflationary growth A sound and progressive financial centre Reduce unemployment Promote industrialization
Means of Actions
• • • •
Banking regulation Fiscal policy Advanced econometric monetization Savings + Trading surpluses High liquidity reserves available
Monetary Policy
• Adequate monetary policy to achieve the goals
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Traditional Monetary Policies
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Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion
Traditional Monetary Policies Advantages of both regimes Fixed exchange rate regime • Predetermine the exchange rate • Be in control of exchange rate risks • Absorb monetary shocks by adjusting money supplies • Expect discipline in economic management
Floating exchange rate • Change according to market conditions • Leave monetary authorities free to influence the domestic supply interest rates and inflation • Restore the trade balance
Disadvantages of both regimes Fixing Singapore’s currency • A loss of freedom in terms of internal policy • Vulnerability and dependence • Require large holding of foreign reserves • Fixed rates can be unstable
Floating exchange rate • Very volatile in a short run • Promote currency speculation • Reinstall exchange rate risk
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Managed Floating System
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Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion
Watching the BBC: Managed Floating System Singapore self-invented a 3rd way in between fixed and floating regimes: the “dirty float”
» Based on the BBC(Basket Band and Crawl)
Basket:
• Target NEER is calculated against a basket of currencies • T.W.I : Currencies from major trading partners
• Centered around target NEER • SGD freely floating within the band
Band:
Crawl:
• Flexibility tool : • Enforcement of bands by MAS enables short term currency stability • Credibility in the markets (Cf Asian 1997/98 crisis) • Allows capital flows
• Adjustment factor used to reflect long term change in economic fundamentals • Historically upward
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Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion
Managed Floating System: Watching the BBC ! Singapore self-invented a 3rd way in between fixed and floating regimes: the “dirty float”
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How BBC worked for Singapore
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Singapore Economy| Situation & Missions of MAS| Traditional Monetary Policies| Managed Floating System| How BBC worked for Singapore | Conclusion
How the BBC worked for Singapore The effects of this “Managed Float” strategy on the Singaporean Economy » MAS focused on maintaining low inflation levels » Currency not used as a competitive tool – Increasing productivity and innovation through large investments – Move up the value chain – Appreciation of the REER in accordance with improving economic fundamentals – Huge Budget surplus & GDP Growth
» Singapore v.s Hong Kong – Hong Kong : Fixed Exchange rate »
High growth
»
High inflation levels
» Problem during the Asian financial crisis 1997/98: Devaluation of HKD / Deflation
– Singapore: “Dirty float” »
High growth
»
Low inflation levels
»
High credibility in the markets: widening of trading bands
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Conclusion
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Conclusion Our recommendation: Keep the current exchange rate policy » Singapore is a relatively small economy, highly dependent on: – International trade – Financial Markets
» Managed exchange rate was highly beneficial to the economic boom – Record GDP growth – Sound public finances – Low inflation – Stability maintained even during the Asian crisis
» Keep current system at least until the Yuan turns floating – Avoid speculative pressure – Benefit from stability
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Questions ?
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Thank you for your time! Jeremy Dunate:
[email protected] Idriss El Kadiri:
[email protected] Yoann Filin:
[email protected] Igor Fischer:
[email protected] Ludovic Giraud:
[email protected]
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