MacroEconomics Of Singapore - Fiscal & Monetary Outlook 2007 - SPJCM

Slide 2: Singapore- Some Facts  Island Nation – With a total area of 704 square kilometers (vs India’s 32,87,590)  Limited Manufacturing Potential  Strong Services Sector – with Travel and Hospitality, Financial Services and Retail and Wholesale trade accounting for a large part of the GDP.  Trading / Trans-shipment Hub –The second largest container port in the world

Slide 3: Monetary Authority of Singapore  MAS has traditionally adopted a Strong Singapore Dollar policy  The result is a) Stable Singapore Dollar b) Low Inflation c) Low Interest Rate d) Confidence in Singapore’s financial sector.  MAS believes that a large depreciation in the currency to enhance export competitiveness jeopardizes all the above.

Slide 4: Monetary Policies & Currency

Slide 5: HISTORY OF SGD 1845-1939, Singapore used Straits Dollar, which was replaced by Malayan Dollar 1953 – Malay and British Borneo Dollar Till 1963 – shared common currency with Malaysia 1965 – Monetary union between Singapore, Malaysia and Brunei broke down

Slide 6: SGD is not Pegged  The Singapore dollar, SGD, is under a managed float regime guided by the currency's trade weighted index. The MAS`s long term policy is to manage a “trade weighted appreciation of the currency” to dampen imported inflation and to balance aggregate demand.

Slide 7: Monetary Policy in theory INSTRUMENTS TARGET  Interest Rates  Price stability –  Money supply Inflation  Exchange rates  GDP growth  Full Employment  Balance & foreign reserves

Slide 8: What Singapore Decided  Ultimate Objective : Price Stability as the Basis for Sustained Economic Growth  Intermediate Target: Trade-Weighted Exchange Rate

Slide 9: Rationale Behind Exchange Rate Policy Small Size of Economy & Resource Constraints Openness to Trade Openness to Capital Flows

Slide 10: Elaboration for the Exchange Rate Policy  The high degree of financial openness and sensitivity of capital flows to interest rate differentials makes it difficult to target either money supply or interest rates in Singapore.  Net flows of funds from abroad account for the bulk of changes in domestic money supply. Likewise, domestic interest rates are largely determined by foreign rates and market expectations on the future strength of the Singapore dollar.  Given the small domestic base, any attempt by the MAS to raise or lower the domestic interest rates, or money supply, for any sustained basis would be foiled by a shift of funds into or out of Singapore.

Slide 11: 2006-2007 SIBOR  SIBOR : stands for Singapore Interbank Offered Rate and is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the Singapore wholesale money market  The S$ interbank rate (S$ SIBOR) hovered between 3.44 % & 3.55 % in 2005 and has come up to 5.9% in the early 2007. The SIBOR is expected to stabilize around the current levels 0f 5.7% against the back drop of a pause in US Fed Funds rate hikes.

Slide 12: LIBOR vs SIBOR  LIBOR : 5.51 %  SIBOR : 5.76% Source : http://www.mas.gov.sg

Slide 13: RATES Fixed Deposit Rates : 2.8% to 4.6% Prime Lending Rates : 5.1 % to 6.1% Cash Reserve Ratios: 5% to 7.2% (slightly higher)

Slide 14: Singapore Foreign Exchange Reserves Singapore Foreign Exchange Reserves in Millions (US $) 160,000.00 140,000.00 120,000.00 100,000.00 80,000.00 60,000.00 40,000.00 20,000.00 0.00 2001 2002 2003 2004 2005 2006 Year (Source: Monetary Authority of Singapore)

Slide 15: year 2003 2004 2005 2006 Current Account Balance 38909 36414.5 47616.5 57660.6 exports 344872.7 418576 474526.4 530409 imports 299696.8 368989.2 417274.4 463919 year 2003 2004 2005 2006 Capital Account Balance -30735.7 -12868.4 -31923.3 -33261.5 year 2003 2004 2005 2006 Net Errors and Ommissions 3601.2 -3077.2 4703.5 2596.6 year 2003 2004 2005 2006 Overall Balance 11774.5 20468.9 20396.7 26995.7 year 2003 2004 2005 2006 Official Reserves (Net) -11774.5 -20468.9 -20396.7 -26995.7 Figures in Million US$

Slide 16: BOP Variables 600000 500000 400000 Current Account Balance Amount in $ 300000 Exports Imports 200000 Capital Account Balance 100000 Overall Balance 0 2003 2004 2005 2006 -100000 Year

Slide 17: Balance of Payments - Analysis The rising current account position has been associated with an improving official foreign reserves (OFR) position, which increased almost 12-fold since 1980 to reach S$163 billion at end-2003 The increased flows through the financial account balance have largely reflected net outflows from the portfolio and \"other investment\" accounts, which have typically offset the inflows due to foreign direct investment (FDI) From the trade perspective, the contraction in gross national expenditure had caused imports to decline, thus boosting the merchandise trade surplus. On balance, these factors have boosted the current account surplus position.

Slide 18: FISCAL POLICIES

Slide 19: Singapore - Fiscal Policy Singapore’s fiscal policy is Expansionary The private sector is the engine of growth, and the government's role is to provide a stable and conducive environment for the private sector to thrive Tax and expenditure policies should be justified on microeconomic grounds and focus on supply-side issues, i.e. incentives for saving, investment and enterprise

Slide 20: Fiscal Policy... Expenditure Distribution Year 2006 Year 2007 12% 4% 11% 4% 42% 37% 42% 48% Source : http://www.mas.gov.sg

Slide 21: Fiscal Policy… • Objectives of Tax Policy – Revenue Raising – Promotion of Economic and Social Goals • Principles of Tax Policy – keep tax rates low – tax base broad • Fy-07 Taxation Highlights - Corporate Income tax reduced - Goods and service tax hiked Source : http://www.mas.gov.sg

Slide 22: Corporate Tax comparison – with other countries Source : http://www.mas.gov.sg

Slide 23: Tax rate comparison

Slide 24: Effect of Fiscal Policy-GDP growth

Slide 25: East Asian Currency Crisis

Slide 26: Impact of Asian Currency Crisis Singapore’s Exports to Affected Countries falls Demand in Singapore’s Affected Exports become Countries Less Plummets Asian Currency Competitive Crisis Singapore’s Singapore’s Brokerage Banks were Firms hurt Hit

Slide 27: Impact of Asian Currency Crisis

Slide 28: Impact of Asian Currency Crisis

Slide 29: Asian Currency Crisis - Singapore’s Response Monetary Authority of Singapore (MAS) allowed the SGP Dollar to fall against the US Dollar in line with the regional currencies It allowed the SGP Dollar to fluctuate in a flat and wider target band. The decision was facilitated by absence of domestic inflation and necessitated by the desire to remain competitive.

Slide 30: Asian Currency Crisis - Singapore’s Response The govt. unveiled a S$ 2 billion off budget package in mid 1998. Package of incentives Property Tax Rebates Rental and Utilities Rebates Speeding up of Development Projects Deferring stamp duty on uncompleted projects. Property Prices began stabilizing in the second half of 1998.

Slide 31: Researched & Presented by students of SPJCM for educational purpose.