Reasons for SGD to ease and its implication

The Monetary Authority of Singapore (MAS) has hinted at a weaker Sinngapore Dollar in order to stimulate the economy. What are the effects and the implications due to this easing?

Singapore Dollar has appreciated not only against Malaysia Ringgit over the past decade, but it is also gaining strength against most of the world major currencies despite swimming in a world that is fuelled with liquidity over the past 10 years. However, this is going to change.

On 5 February 2020, Singapore's central bank, The Monetary Authority of Singapore (MAS) had given the signal that Singapore Dollar has enough room to accommodate an easing of the local currency, even as the monetary policy stance remains unchanged. The move serves as a pre-emptive move to support the economy due to the coronavirus outbreak.

In layman terms, it means the interest rate is not going down, while SGD will depreciate to boost the economy.

For your information, since 1981, monetary policy in Singapore has been centered on the management of the exchange rate instead of the interest rate as Singapore is a small and open economy. The primary objective of the monetary policy is to promote price stability and sustainable economic growth.

The recent outbreak of the coronavirus has impacted Singapore's economy, especially the tourism industry and sectors that are tied to Chinese demand (Manufacturing, shipping, etc). Besides the virus outbreak, the US-China trade war and a sudden drop in global demand have stir worries about the economic outlook in Singapore. At this juncture, maintaining a weaker currency helps in boosting the aggregate demand.

However, we think this might not bode well for both Singapore economy and also the property market of Iskandar Malaysia. Here's our reason.

1) Currency depreciation may help to boost growth when inflation is absent. The commodities prices are now at their historically low level and any uptick in commodities prices will drive up inflation in a short period of time. For a nation that relies on importing most of the products, this is not good.

2) A decrease in the exchange rate will increase export demand. However, this stance is telling the people that a storm is coming. The fall in consumer confidence may dampen aggregate demand.

3) The property market of Iskandar Malaysia is largely supported by foreign buyers, mainly Singaporean and Johorean who works in Singapore. The fall in the value of Ringgit Malaysia has helped the buyers to ease the repayment pressure despite not being able to get any tenants or buyers for their properties. This is going into a vicious cycle if Singapore Dollar starts to weaken. A similar scenario is seen in the year 1998 where Johor Bahru property prices drop the most and took the longest time to recover.

Despite all the negatives, this also presents an opportunity for Malaysia investors to start investing in Singapore REITs. I am still bullish on Singapore Dollar in the long term and the temporary setback in its currency strength is definitely a good time for us to pick up Singapore. REITs. Having a consistent dividend income in SGD by owning prime properties in a land-scarce and well-governed city-state, helps you to reduce your overall financial risk to a large extent.

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