The recent surge in the value of the Singapore dollar has led to speculation that the exchange rate could be boosted by the central bank again. Is the rising dollar bad news for the country?
Among the knock-on effects of the strength of the currency is a worry that inflation could spiral upwards. In the last couple of weeks, the Singapore dollar has reached record-breaking levels against a number of the world’s other major currencies. In April 2018, the central bank intervened in an attempt to keep the dollar under control. Yet, just a few months later there is now a strong possibility that they have to take action again.
Naturally, many of the country’s residents are beginning to get worried about how this issue could affect them. The truth is that an increasingly strong dollar is likely to produce a variety of different effects on people living or doing business here.
What It Means for Businesses in Singapore
Companies can expect a strong local currency to have a big effect on any international business that they carry out. When they deal with other currencies, the cost of buying and selling will be directly determined by the exchange rates. If the dollar is strong then importing foreign goods into Singapore is going to be cheaper to do. On the other hand, exporting to other countries gets more difficult, as it is more expensive for foreign firms to buy goods from Singapore.
Given the reliance of the local economy on exported and imported goods, this can have a massive effect on the overall economy. Businesses that rely on international tourists may also find that the number of visitors drops due to the increased cost of visiting Singapore when the dollar is high. Economic growth in the first quarter of 2018 was recorded as 4.5%, but this figure slowed down to 3.9% in the second quarter of the year. The forecast for 2018 is of 3.2% growth, according to a poll carried out by the Monetary Authority of Singapore.
This latest poll also showed that confidence among professional forecasters and analysts was higher in terms of the outlook for the country’s manufacturing sector. However, the feeling was less positive than before around the construction industry in Singapore.
This uncertainty makes currency trading on the Singapore dollar more attractive to certain private and institutional investors. It is worth bearing in mind that the dollar can be traded against many major world currencies, such as the US dollar, the Australian dollar, and the euro.
Will It Affect Salaries?
One of the main worries when a currency grows in strength is how it will affect salaries. The truth is that it shouldn’t have a direct influence on people who earn and spend local currency. Their salary is unlikely to change when the local currency fluctuates.
However, salaries and job stability can be affected indirectly by the strength of the Dollar. As we just saw, this can affect companies that import or export goods. This can lead to the business either growing or else suffering from a slump that affects staff eventually.
A 2017 graduate employment survey showed that business, law, medicine, and computing were the top degree programs. Job in these industries are less likely to be at direct risk of a strong Dollar than the likes of the construction and manufacturing industries.
Is the Cost of Living Set to Rise?
Regardless of whether salaries are directly affected, a strong national currency can cause problems for residents in others ways. Perhaps the most noticeable is when inflation rises and causes the cost of living to go up for everyone. Interest rates on loans increase in this case, as well as the cost of buying everyday goods.
In July of this year, the country’s core consumer prices increased at a higher rate than had been in the last four years. Core inflation of 1.9% was seen in that month, with the annual figure for 2018 expected to be close to 2%. The Money Authority of Singapore (MAS) had predicted between 1% and 2% inflation for this year. The year to date figure shows an average of 1.6% so far. The fact that the prediction is on course so far has led to suggestions that the MAS may decide against tightening its policy this year.
What Does the Future Hold?
There are a number of factors that will influence the direction that the Singapore dollar takes in the near future. One external issue to bear in mind is the on-going trade war between the US and China.
The current stand-off between these two economic giants was one of the main issues taken into account by the central bank in its latest policy review. Keeping inflation under control is another key concern right now. While the figures are on target just now, the fear of inflation running out of control is sure to be a worry that is reflected in the updated policy.
Taking everything into account, the overall expectation is of a moderate tightening of policy in October. This means that the Singapore dollar should remain strong but that inflation should be kept at around current levels for the time being.