2019-21

A
PROJECT REPORT ON
TITLE

(UNDER THE GUIDANCE OF: )

SUBMITTED BY: -

Bipasha Runda – 19BSPHH01C0274

INTRODUCTION

The main purpose of the project is to study the extent to which Singapore suffers from
external economic turmoil due to its high degree of trade openness. Since the colonial era and
its fundamental moment as an independent country, Singapore has become a commercial and
financial centre for the rest of the world with its geographical location, low tariffs, and
minimal capital controls. Singapore is a small economy with a population of 5 million and an
increase in land area of 712 square kilometres.

Cities face three limitations: the city cannot be a producer of all its needs in any way, it can
neither consume all its production nor become a source of resources for that production.
Therefore, external solutions for transactions are needed. Free trade is Singapore’s powerful
bet on its own economic development. However, as everyone knows, this kind of openness
has its advantages and disadvantages. Since Singapore relies on trade, the whole framework
brings us to a major question: How vulnerable is Singapore to external economic shocks?

In recent years, the world economy has been turbulent. The 2008 global financial crisis
plunged industrialized countries into recession. The euro debt crisis in peripheral European
countries such as Greece, Portugal, Ireland, Italy, and Spain has increased the risk premium
of these debt instruments to historical levels and caused the euro to fall unprecedentedly since
the creation of the universal currency. In 2011, the rating agency Standard & Poor's lowered
the US credit rating from AAA to AA+.

TRADE

In terms of trade and investment inflows, Singapore’s economy is one of the most open
economies in the world. Compared with other countries, Singapore has the highest degree of
openness at 297%. This is because Singapore rarely imposes tariffs on trade, and the capital
flowing into Singapore is free. Openness has always been the centre of Singapore's economic
development strategy due to its small scale and extremely limited resources. The comparative
advantage compared with other countries and the competitive advantage among industries
have contributed to Singapore's long-term success.

Singapore’s industrial policy aims to maintain growth and competitiveness. To avoid direct
competition with more cost-effective Asian countries (such as China), Singapore has
developed from a specialized manufacturing industry to a knowledge-based value-added
industry over the years. In addition, Singapore’s financial assistance system and other
industrial policies are designed to help domestic exporters.
Although Singapore’s high degree of openness is beneficial to the economy and sustainable
development in a globalized world economy, it is particularly vulnerable to global economic
shocks. The 2008 sub-prime mortgage crisis resulted in a fall in global consumption and
demand. From 2008 to 2009, domestic exports of Singapore’s goods experienced a relatively
sharp decrease in almost every industry. Exports of services also dropped from S$109 Billion
in 2008 to S$100 Billion in 2009. The reason for the relatively gentler decline in services
could be Singapore’s higher competitiveness in terms of the service and knowledge-based
industries.

That being the case, Singapore had to be prepared to ease the impacts of such economic
shocks and downturns. In its defence, Singapore’s government and government-related
organizations actively seek to aid Small Medium Enterprises (SMES) and trade-related
industries in terms of financial assistance and actively promote overseas business operations.
At the same time, it is also pro-active in seeking Free Trade Agreements with countries to
promote trade with less restrictions and risks.

In summation, government and trade policies may as a whole act as a protective measure for
Singapore, in the event of a global economy shock. However, being competitive to the
highest extent can only serve as easing the threats but not preventing them. This is because in
the current global economy, countries like Singapore, practice high interactivity in terms of
trade and financial activities (which will be elaborated on in the next section). In this regard,
there is no way Singapore would be able to prevent economic downturns from affecting its
domestic economy. Looking into the future, for Singapore to sustain its growth, it should
investigate domestic consumption, in order to further ease fluctuations in global demand and
supply. This way, Singapore would not be extensively vulnerable to external shocks. A good
example would be to increase its population through promoting immigration or internal
population growth.

THE SINGAPORE FINANCIAL SECTOR

With a correlation of 0.81 in stock market returns compared to the United States S&P 500
from year 2000 to 2007, it is not difficult to tell that Singapore’s financial sector is very much
affected by the United States. This is due to fundamental reasons such as the high financial
exposure Singapore has to the United States. As of June 2018, Singapore’s financial exposure
to the United States stands at 192.2% of Singapore’s GDP.

Other than the high financial exposure that Singapore has to the United States leaving
Singapore vulnerable to the United States, measures taken by their Federal Reserve (FED)
also affects us. This can be seen from the quantitative easing measures taken by the FED
from January 2009 to April 2010 and November 2010 to June 2011. During these 2 periods,
the Singapore Interbank Offer Rate (SIBOR) as well as the Swap Offer Rate (SOR) fell
constantly, reaching negative territories most recently. The cause of the falling SIBOR and
SOR is due to the excess liquidity overflowing from United States into Singapore.

Not only does the excess liquidity cause the falling of the SIBOR and SOR, it also causes
asset prices in Singapore to escalate as capital inflow increases. With a lower SIBOR and
SOR, domestic investors would be more willing to invest in the various asset classes, thus
further inflating asset prices. This can be seen by the following charts, which show the
increase in both the stock market and property prices in Singapore during the period of
quantitative easing.

Such increases in asset prices is highly likely to form an asset bubble and is by no means
healthy to the Singapore economy. Should the asset bubble burst, both foreign and domestic
investors would pull out of the market, causing asset prices to free fall. Investors who
borrowed money would not be able to finance their loan, and as a result default on their
mortgages. This would result in banks having a higher number of non-performing loans that
would hit their balance sheet. With banks reporting lacklustre performances, investors’
confidence is bound to drop further causing yet another round of a fall in asset prices.

MONETARY POLICY

Since 1981, Singapore’s monetary policy has been focused on managing the Singapore dollar
exchange rate. The goal of monetary policy can be defined as price stability or low inflation.
The most used monetary policy tool is the exchange rate. In the context of Singapore’s open
capital account, the choice of exchange rate as the focus of monetary policy will mean that
domestic interest rates and money supply are endogenous (see the next section on the
exchange rate policy of the Monetary Authority of Singapore). This is based on the
Impossible Trinity Principle, also known as the Open Economy Trilemma, which states that a
country is pursuing a monetary policy (interest rate (or currency) supply) to achieve domestic
goals.

In addition, MAS’ money market business aims to ensure that the banking system has
sufficient liquidity to meet the banks’ demand for reserves and settlement balances. Interest
rate fluctuations can happen overnight, as banks try to meet reserve requirements or
settlement balance requirements by funding shortages or clearing excess accounts. For
example, the Bank of Singapore must maintain a reserve requirement or MCB with a MAS
equal to 3% of its debt base. In addition to the need for additional reserves, banks will also
provide more funds as a buffer to facilitate the settlement of inter-bank transactions.

MAS also provides many ways to reduce interest rate volatility. One example is the end-of-
day liquidity financing, which is a later financing tool that banks can use to make up for net
debit positions that may arise at the end of the day. According to the bank’s requirements,
MAS can provide loans through SGS overnight and repurchase agreements. Other facilities
are intraday liquidity facilities to ensure that there is sufficient liquidity for settlement
purposes. This function enables the primary dealer appointed by MAS to borrow intraday
funds from MAS through intraday repurchase at an interest rate set by MAS every day.

This refinancing tool provided makes the supply curve less steep or more sensitive to interest
rates, resulting in lower interest rate volatility. The implementation of these financial services
functions should consider broader macroeconomic objectives, including sustained medium-
term non-inflationary economic growth, financial and monetary stability, and the
development of the financial services sector.

CURRENCY EXCHANGE POLICY

Since the 1981, the SGD exchange rate has been on an appreciating trend against both the
main global currencies and regional Asian currencies. This has curbed both imported and
domestic inflation. A basic philosophy underlying this policy is to preserve the purchasing
power of the SGD while maintaining confidence in the currency and preserve their value of
workers’ savings (e.g. CPF).

There are four main features of the exchange rate system in Singapore.

1. The Singapore dollar is managed against a basket of currencies of our major trading
partners and competitors. The composition of this basket is periodically revised.
 2. The MAS operates a managed float regime for the Singapore dollar, allowing it to
fluctuate within an undisclosed policy band.
3. The band is periodically reviewed to ensure it is consistent with the underlying
fundamentals of the economy.
4. This policy implies that the domestic interest rate is not under the control of MAS.

GDP OF SINGAPORE

Gross Domestic Product of Singapore grew 0.7% in 2019 compared to 2018. This rate is 27
-tenths of one percent less than the figure of 3.4% published in 2018.

The GDP figure in 2019 was $372,044 million, Singapore is number 34 in the ranking of

GDP of the 196 countries that we publish. The absolute value of GDP in Singapore
rose $7,905 million with respect to 2018.

The GDP per capita of Singapore in 2019 was $65,977, $1,398 higher than in 2018, it

was $64,579. To view the evolution of the GDP per capita, it is interesting to look back a few
years and compare these data with those of 2009 when the GDP per capita in Singapore
was $38,927
This entry shows where production takes place in an economy. The distribution gives the
percentage contribution of agriculture, industry, and services to total GDP, and will total 100
percent of GDP if the data are complete. Agriculture includes farming, fishing, and forestry.
Industry includes mining, manufacturing, energy production, and construction. Services
cover government activities, communications, transportation, finance, and all other private
economic activities that do not produce material goods.

GDP IMPACT DUE TO COVID

The Singapore economy contracted by 42.9% in the second quarter of 2020 compared to the
previous quarter on an annualized, seasonally adjusted basis. The estimate, computed largely
from data in April and May, had shown the economy shrinking by 41.2% in the second
quarter compared to the prior three months.  On a year-on-year basis, the country’s gross
domestic product shrank by 13.2% in the quarter ended June 30, according to the ministry.
That is worse than the earlier estimate of a 12.6% year-over-year contraction and 0.3% on-
year dip recorded in the first quarter.
 The fall in GDP was due to the Circuit Breaker (CB) measures implemented from 7 April to
1 June 2020 to slow the spread of COVID-19 in Singapore, as well as weak external demand
amidst a global economic downturn caused by the COVID19 pandemic.

 Manufacturing shrank by 0.7% year-over-year.

 Accommodation and food services plunged 41.4% on-year.

 Transportation and storage dived 39.2% from the previous year.

 Wholesale and retail trade fell 8.2% year-on-year.

 Finance and insurance grew 3.4% over the same period — the only sector that
registered growth.

REVISED FORECAST

The Ministry of Industry and Commerce revised its full-year forecast for Singapore,
believing that Singapore’s economy will decline by 5% to 7% by 2020. Previously, it had
predicted that the country’s GDP would fall by 4% to 7%.

The 3 main causes for worsening Outlook were:

The weak external environment will put pressure on transportation, storage, and wholesale
industries. The reopening of the international borders is expected to be gradual than
previously expected, which will put pressure on sectors that rely on tourism and travel.

Departments that rely on foreign workers to live in dormitories took longer than expected.
These workers account for more than 90% of the cumulative confirmed cases in Singapore.

SINGAPORE DEBT TO GDP RATIO

Debt is the entire stock of direct government fixed-term contractual obligations to others
outstanding on a date. It includes domestic and foreign liabilities such as currency and money
deposits, securities other than shares, and loans. It is the gross amount of government
liabilities reduced by the amount of equity and financial derivatives held by the government.
Because debt is a stock rather than a flow, it is measured as of a given date, usually the last
day of the fiscal year.

Singapore debt to GDP ratio for 2019 was 109.20%, a 5.88% increase from 2018.

Singapore debt to GDP ratio for 2018 was 103.32%, a 3.71% increase from 2017.

Singapore debt to GDP ratio for 2017 was 99.61%, a 0.16% increase from 2016.

Singapore debt to GDP ratio for 2016 was 99.45%, a 8.38% decline from 2015.

FOREX RESERVES OF SINGAPORE

Singapore's Foreign Exchange Reserves was measured at 318.6 USD bn in Jul 2020,
compared with 309.8 USD bn in the previous month. Singapore's Foreign Exchange
Reserves: USD mn data is updated monthly, available from Apr 2000 to Jul 2020. The data
reached an all-time high of 318.6 USD bn in Jul 2020 and a record low of 73.1 USD bn in Jul
2001. CEIC calculates monthly Foreign Exchange Reserves as the sum of Foreign Currency
Reserves and Other Reserve Assets, which include other financial instruments denominated
in foreign currency. The Monetary Authority of Singapore provides Foreign Exchange
Reserves in USD.

Singapore has official foreign reserves (OFR) of almost US$300 billion. 

 In absolute terms, this is the eleventh highest stock of OFR in the world. 
 As a percentage of GDP and on a per capita basis, it is the third highest in the world.
 Singapore's OFR sit on the balance sheet of the Monetary Authority of Singapore
(MAS), the central bank and integrated financial regulator.

Besides the OFR, there are two other pots of national reserves in Singapore:

 The Government of Singapore Investment Corporation (GIC), a fund management

company, manages on behalf of the Singapore Government a diverse portfolio of
foreign assets - well more than US$100 billion.
 Temasek Holdings, an investment company wholly owned by the Singapore
Government, holds equity stakes in a variety of domestic and foreign corporates,
amounting to more than US$200 billion.
Changes in the Official Foreign Reserves (OFR) were influenced by the following
factors:
(a) Foreign exchange intervention operations involving the purchase or sale of USD for the
purpose of implementing the exchange rate policy.
(b) Transfer of assets that are in excess of what MAS deems necessary to maintain
confidence in Singapore’s exchange rate-centred monetary policy to the Government for
longer-term investment.
(c) Realised investment gains or losses on the OFR.
(d) Currency translation effects.
(e) Changes in the stock of FX swaps, as part of MAS’ money market operations to manage
liquidity in the banking system.
(f) Foreign exchange transactions with the Government as part of MAS’ function as a banker
to the Government.

Role of Central Bank

The Monetary Authority of Singapore (MAS) is the Central Bank of Singapore, established in
the year 1970 by Act of Government, beginning operations as the country’s Central Bank,
and financial regulatory authority, on 01st January 1971. Prior to its introduction,
the monetary functions of Singapore’s central bank were performed by separate government
departments. As the complexity of modern banking increased, however, and Singapore’s
financial profile grew, the inefficiencies of coordinating between financial departments
became evident – creating a need for coherence and uniformity which only a centralized
administrative body could provide. Following the Monetary Authority of Singapore Bill
(passed on 2 September 1970) MAS was brought into existence.

Steps taken by MAS to manage the crisis:

Fiscal measures
Singapore’s Central Bank took unprecedented easing steps to support the country’s trade-
reliant economy which was severely hit by the rapid spread of the Coronavirus.

The MAS used its exchange rate as its main policy tool rather than a benchmark interest rate,
lowered the midpoint of the currency band and reduced the slope to zero rate of appreciation.
This was done in order to prevent the Singapore Dollar to strengthen against other currencies
and also to weaken its exchange rate.

In addition to the dual measure taken to prevent downfall in the economy, MAS, along with
The Ministry of Finance, the Inland Revenue Authority and the Enterprise Singapore,
announced a package to aid those who had cash-flow constraints, working hand in hand with
finance companies to enhance the already existing relief measures for landlords affected by
Covid-19 Amendment Bill.

There were various fiscal support measures announced (February 18, March 26, April 21,
May 26, and August 17) worth Singapore $100 billion. In was done to support the households
through cash payouts to all Singaporeans. Higher payouts were given for families with
children under 20 years of age, people belonging to lower income group and unemployed
people.

Support was given to all demographics, including businesses, by providing wage subsidies,
support to cover rental costs, an enhancement of financing schemes and additional support for
the self-employed and industries that were most directly affected (aviation, tourism,
construction, and transportation). Seeing the unimaginable increase in the spread of virus,
MAS in collaboration with the authorities have increased the contingent funds which might
be required for unforeseen expenditures and also set aside a loan capital of Singapore $ 20
billion to help businesses and individuals facing cash crunch with loan obligations and
insurance premium payments.

Monetary and Macro Financial Measures taken by MAS

On February 14, the MAS welcomed the announcements from banks and insurers in
Singapore to support their customers facing financial difficulties due to the impact of the
Covid-19 outbreak, while adhering to prudent risk assessments.

On March 19, a swap facility worth US$ 60 billion was announced by the MAS with the US
Federal Reserve, in order to provide USD liquidity to Singapore banks through weekly
auctions and over a period of time this facility was extended uptil March 2021.
On March 31, MAS and the financial industry announced a detailed package of measures to
help individuals and SME’s facing temporary cash flow difficulties. The package had three
components:

 Help individuals meet their loan and insurance commitments

 Support SME’s with continued access to bank credits and insurance cover
 Ensure inter-bank funding markets remained liquid and well-functioning.

A second package announced on April 30 had its scope extended for the relief of individuals
to a broader set of loan commitments

On April 7, the MAS announced that selected regulatory requirements would be adjusted and
supervisory programs were to be held to enable financial institutions to better deal with issues
related to the pandemic and later on a package worth Singapore $125 million was provided to
FinTech services.

Implications of Negative Interest Rates:-

When the economy is in crisis, Central Banks take the center stage. Central Banks are in-
charge for keeping the prices stable and ensuring economic growth among other
responsibilities. To tackle that they have a range of tools, that help them control the supply of
money, setting interest rates and regulating private lenders.

With Central Banks around the world cutting interest rates and spending big on the economic
stimulus, the common cost of borrowing in some countries is hovering around negative
territory. In Singapore, a key lending rate is barely above 0 and never has dipped below 0.

Lower borrowing cost means we pay less interest on all our loans. This leaves more cash to
spend to resuscitate economic growth. It also means that the deposit rates will be just as low.
Banks could even charge customers for saving. With low borrowing cost and deposit rates,
companies and businesses will be encouraged to spend more. With negative Interest rates, a
country’s currency will weaken as it becomes less attractive to foreign investors and that in
turn makes the exports cheaper and more attractive.
In Singapore, no interest rate is set by the Central Bank, instead the Monetary Authority
manages the Singapore $ against a basket of currencies with key trading partners like USA.
With regards to Singapore it means that the borrowing costs in Singapore track those in the
USA. Speculation, the negative interest rates in USA plus the pumping of liquidity, have
pushed borrowing cost in Singapore, lower. The Singapore Overnight Rate Average is
currently 0.015%, which is down by around 7% as that of January 2020 and at its lowest
since July, 2005. The Overnight Swap Offer Rate last week was at -0.045%, it being the 2 nd
time this year when it has dipped below 0, after reaching around -0.6% in late March.

Impact on Treasury Yields due to Covid Crisis

A plot of the yields on bonds with different maturities, but the same risk, liquidity and tax
considerations is called a Yield Curve.

Singapore Government Securities bonds pay a fixed rate of interest and have maturities
ranging from 2- 30 years and are available both at a primary auction and in the secondary
market. SGS Bonds are fully backed by the Singapore Government, with a Sovereign Credit
Rating of “AAA” and interest is paid either at a fixed rate or on a semi-annual coupon basis.
Interest payment happens every 6 months, starting from the month of issue and is paid on first
business day of the month. Singapore Bonds cannot be redeemed earlier, but can be sold in
the secondary market at face value. There is no capital gains tax in Singapore.

 For individuals, interest income earned on SGS is tax exempt.

 Non-Residents without a permanent establishment in Singapore do not have to pay
taxes on interest income.
 The Singapore 1 Year Government Bond Yield is expected to be 0.325% by the
end of December 2020.
 The Singapore 2 Years Government Bond Yield is expected to be 0.199% by the
end of December 2020.

 The Singapore 5 Years Government Bond Yield is expected to be 0.549% by the

end of December 2020.
 The Singapore 10 Years Government Bond reached a maximum yield of 2.684%
(17 May 2018) and a minimum yield of 0.678% (20 May 2020).
http://www.worldgovernmentbonds.com/country/singapore/

http://www.worldgovernmentbonds.com/country/singapore/