Wednesday, 14 September 2011

In The Sea Of Weak Currencies, Can Singapore Be An Exception?

The world major economies are competing to weaken their currencies.  The USA, Europe and Japan, all of them, do not like to have strong currencies of their own.  The weak world economy and fundamentals have forced major economies strategically wanting to have a weak currency to boost exports, create jobs and stimulate the economy.

Even emerging economies, like China, also do not want to have strong currency despite of having huge foreign reserve.

So, how far, can Singapore dollar continue to maintain its strong position? Can the sole purpose of fighting inflation but at the expense of economy continue?  The Monetary Authority of Singapore in a statement in August wanted a moderate appreciation of Sing dollar.  

Competition of Weak Currencies

Every major economy wants to create more jobs, wants to stimulate economy and wants to have more exports.  There is no more national pride to maintain a strong currency.  For the USA, the only way to solve their economic and debt problems is to continue printing the dollar.  How can an over supply currency be a strong money?

The USA has also one of the highest per capita poverty in the world. A recently BBC report said:    
The number of Americans living in poverty rose to 46.2 million last year, nearly one in six people, according to the US Census Bureau's annual report.
The 2010 data shows the poverty rate at 15.1%, from 14.3% in 2009. The number of Americans without health insurance also rose slightly to 49.9 million. (BBC)

In the Euro zone, debts problems (and unemployment) continue in the PIGS countries.  Is it really good for Euro zone to solve the debts problems immediately and make the Euro much stronger than the dollar?   The PIGS uncertainty has an unexpected (or intended) result: a weak euro.

However, when your neighbours are having troubles and problems, are you really better off even you are rich and having a strong economy?   

Safe-heaven can be a problem too

Look at Switzerland. The safe-heaven Swiss franc is too strong to be comfortable to their economy.  Yes, the Swiss inflation is low (nearly zero) but the economy is bad due to the strong Swiss franc.  And the major contributing factor is a weak euro resulted from the PIGS debt problems.  

In another BBC report, it said: Across Switzerland's manufacturing and tourism industries, the story is the same. From the big pharmaceutical companies to the family-run hotels in the alps, every area of Swiss economic activity is being affected.

As the crisis in the eurozone continues, the Swiss franc is being seen as a safe haven by international investors.
As a consequence, the Swiss currency is rising to undreamt of levels.

Anything with a price tag in Swiss francs is being priced out of the market, and Swiss industry leaders are voicing extreme concern.”

To Singapore, we are too proud to have a strong Sing dollar.  But when everyone (at least the major economies) is against it, why are we so special? Even with strong Sing dollar, our inflation is high. Does it mean our inflation will jump if we relax the strong currency policy?

Unlimited printing of Swiss Franc and the dollar

Early this month, the Swiss National Bank (SNB) has set a minimum exchange rate of 1.20 francs to the euro, saying the current value of the franc is a threat to the economy.

The SNB said it would enforce the minimum rate by buying foreign currency in unlimited quantities.

It is the same saying like the USA, if there is a need to borrow more money by issuing bonds, the US Treasury will print dollar as there is a need.  Now the Swiss central bank is doing the same, if there is a need of Swiss franc in the market, they will print Swiss franc to meet the market demand just not to over value the Swiss franc.

Will the competition to weaken currencies solve the basic problems?

No one knows.

The saying in Singapore politics is we are now entering the new normal. The world economy is already entering a new normal.  In fact as early as the sub-prime crisis, the new normal in business and economy has already begun.  How long will the new normal matured and stabilised? We don’t know.

The new normal will create new opportunities and risks.  Are our MAS, Temasek and GIC ready for the challenges in the new normal era? Can the old wisdom of Tony Tan as he claimed during PE2011 help the government with a better understanding of the world financial market?

Judging from the appointment of Wong Kan Seng as special advisor to the PM and chairman of Singbridge, one will wonder whether there is a change for the new normal. Perhaps, the PAP still prefers to use the old bottle to solve the new normal problems.

Will they say or disclose something when the New Parliament opens on 10 Oct 2011?  It is such a co-incidence that Oct 10 is the beginning of the new China 100 years ago in 1911 with the founding of Republic of China and the end of Qing Dynasty.

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