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Is a strong Singapore Dollar always good and a weak Singapore dollar always bad? Critically discuss.

Appreciation of Singapore dollars the advantages With strong S$ dollar, by selling S$ dollar in exchange for foreign currency in the foreign market, Singapore consumers will see lower prices on foreign goods and services. This is because Singapore imports will be lower when converted to S$. This has the direct effect of lowering the prices. Besides that, it also has the indirect effect of lowering the prices of locally produced goods and services that use imported inputs (e.g.: raw materials) from foreign countries. This will benefit consumers and producers alike. Lowered prices on foreign goods and services helps in limiting inflation. As most of our foods in Singapore are imported, the impact of food prices is minimal. Besides that, a stronger S$ would moderate the external demand for local good and services, easing the inflationary pressures for domestic resources like labor and land inputs. And as long as the labor market remains tight, wage expectations should adjust higher too. Those consumers looking for travel will also benefit from this since they can save their expenses to other countries. With US dollars depreciating to 1.25, Singapore consumers who travel to US will save from the exchange rates. Besides with strong S$ dollars, investors are more likely to invest their money in Singapore and thus appreciate our currency. This is because investors believe that even a high interest rate would not be attractive if there is an expected of depreciating dollar. Appreciation of Singapore dollars the disadvantages However, a stronger S$ dollar has its downsides too that can affect both the export and imports. With strong S$ dollar, Singapore firms will find it hard to compete with imports. Import products are seen much cheaper. Hence, the demand for domestic will dropped. A stronger S$ dollar would also affect the exports. Manufacturers will find that the margins will probably suffer and Singapore firms will find it hard to compete in foreign markets. This, in fact worries some exporters here where they prefer to have a stable S$ dollar. As what Singapore Manufacturers Federation president Renny Yeo quoted as saying, For exporters, the strengthening of the Singapore dollar make them less competitive.

In addition, foreign tourist will find it more expensive to travel and vacation in Singapore. This has been a debate whether having a strong dollar will hurt the tourism industry here. Trade and Industry Minister Lim Hng Kiang viewed it differently. He mentioned that although studies show that exchange rate is an important factor, he believes that what draws Singapore is attraction. To him, he thinks that the relative exchange rate was a factor, but not the most important factor. Others such as DBS economist Irwin Seah optimistically believe that the impact of a strong S$ dollar on tourism industry here will probably be quite minimal because the major markets are regional countries and most of these countries currencies are expected to appreciate too. Weakening (depreciating) of Singapore dollars the advantages Besides the advantages of strengthening S$ dollars, a depreciating S$ dollar has its own advantages too. Depreciation of S$ took in Singapore in year 2008 whereby MAS has chooses to loosen its monetary policy as a stimulus for export-producing economy. With weak currency, exports will likely to soar. This is because when Singapore currency is weak, goods and services produce in Singapore would be more competitively priced in the world markets in short term. Hence, Singapore firms will find it easier to sell goods in foreign markets and manufacturers are facing less pressure to keep their cost low and to remain competitive. In addition, domestic demand would also be boosted by the substitution effect of the higher prices of imported goods increase demand for Singapore produced goods. Singapore household would likely switch to locally goods and services since they find imported goods and services as substitutes are expensive. Lastly, with weakened S$ dollars, more foreign tourists can afford to visit and vacation in Singapore. This will boost the Singapore Tourism Industry and foreigners are more willing to spend in Singapore hence increasing purchasing power which will relatively boost up the economy. Weakening (depreciating) of Singapore dollars the disadvantages However having a weaker exchange rate for more competitive exports may have its disadvantages. Though with weaker exchange rate will cause the exports to growth, it is actually much lower than they expected and short term. This is because with higher export

growth would cause the economy to overheat. This increases the demand for labor and thus eventually led to higher wages and rentals. There will be also a surge in labor cost. Besides, the weaker exchange rate will also directly result in higher price of import goods. This is because each S$ is worth is less in US$ term and hence, imported goods will cost more when converted to S$. Domestic price of the imported goods will directly goes up and the price of the locally produced goods that uses imported inputs (such as raw materials) will indirectly increase. Thus, the high foreign price will eventually lead to inflation to rise. Recommendations Weighing the pros and cons of appreciating and depreciating the S$ dollars, our group personally believe that with strong S$ dollar is always good since it reflects a strong government stability and business infrastructure. Mentioned by Association of Small and Medium Enterprise president Lawrence Leow in Todays newspaper dated Friday October 15, The volatile global currency movements have been troubling a lot of companies because some of them have businesses in multiple locations. MAS recent move to tighten its monetary policy in fact is to cope with this measure. This is because a strong S$ dollar will help cushion off changes in the product prices in other foreign countries. Strong S$ dollars also gives confidence to foreign investors to invest their capital in Singapore. In education sector, Singapore having a distinct and globally recognized education has attracted a lot of foreign students, especially those in regional countries to study here despite the high fees costs. This reflects that S$ dollars will still be stable despite the appreciation of dollars. Singapore having rank 4th in the latest Global Financial Centers Index has indicates its competitiveness as an international financial sector and also demonstrated resilience during the recent economic crisis. This has earned investor trust and confidence as a reliable financial center. Much of its success has been contributed to Singapore productivity growth, characterized by talented and skilled workforce, socio-political stability, low tax environment, strict enforcement of law, and availability of wide range of financial products and services and government policies that enhance financial sector.

To cope with having appreciation of S$ dollars that hurt in tourism industry, Singapore government has actually diverted their group of tourist to rich foreign tourist to travel in Singapore. This is by building the Integrated Resort in Marina Bay which encourage foreign tourist to gamble and spend their money here. For exports glooming situation, Renny, the president of Singapore Manufacturers Federation advices that, what companies can do is by increasing their productivity to offset the appreciation to remain competitive. The other way is to keep exploring new markets. This is because with productivity growth, Singapore goods become relatively less expensive and thus remain competitive. And the other way to explore new markets is to find business abroad to keep cost down to benefit the exchange rate. Currently, many local companies and SMEs in Singapore are globalizing and investing abroad instead of relying on domestically.

To conclude, what our group personally believes the main concerns for Singapore consumers and producers are (1) the rising cost and (2) inflation rise for a prolonged period with appreciating Singapore dollars. Hence, it depends largely on MAS to balance with stabilizing the currency while maintaining the inflation rate here.

Written by: Siti Radilah Binte Ahmad Sidek