For some basic economic modelling explanation, let us understand how some parts of the economy affects the other. Today, we have a discussion on Foreign Exchange, Productivity and Inflation.
Singapore does not use interest rates to control our economy, that we all know.
So one of the key instrument we uses is our exchange rates. However, the confluence of events have now really put our forex instruments into tight spots without room to move around.
With the US government needing to revive their job market, and as well as to pay back their debts, they took the path of cheapening their USD. Hence, we now have a situation of US$ 1 to S$1.25. For those who remember the old days when US$ 1 gives you S$1.80, so now USD really is cheap.
However, the implications for Singapore economy for a strong SGD is a lot more on a longer term basis because Singapore is not very productive. Our productivity ratios really sucks. Hence when a American MNC thinks about setting a factory or office here, they could think that their US$ 1 million investment will earn US$2 million (high productivity) in US vs US$ 1.5 million here (lower productivity).
When we have a weaker SGD and cheaper stuff like rent here, the situation is negated by the fact that they only need to invest US$0.75 million here to get that US$ 1.5 million. Which works out to be the same ratio, 1 is to 2. However, with high rentals, and strong SGD, this US company now have to put in US$1 million versus the US$0.75 million. Given that scenario, they simply will not locate their office here since the ratio is only 1.5. We are simply not competitive with a strong SGD and high prices.
So, in order to reduce this long term competitiveness issue, the government must crash the inflation (running at 5%) here first or even to the point of deflation of asset prices. When inflation is better managed, they will then have more room to maneuver in terms of the currency. Then they can start to improve our forex competitiveness. Once we have some forex competitiveness, it will bring us some much needed time to fix our productivity issues.
Productivity issues always takes a long time to fix. We have been trying hard to fix the productivity issue for a while (decades). Hopefully, this time round, the government may take their own campaign seriously, rather than just fly the "Bee" around, without collecting any real honey.
As a side explanation, the current inflation of asset prices are the result of hot money flowing in to Singapore due to the situation around the world. Singapore is a open economy and money flows in quickly and out quickly. With the money that is being pumped into the various big economy around the world, just the loose change is enough to cause significant inflation here.
Complex? Wish I could explain it better. Hopefully I will be able to in my coming articles.
