Published: April 1st, 2020
Singapore’s central bank threw its weight behind the country’s recession-bound economy this week with a significant programme of quantitative easing designed to prop up the Singapore dollar.
With the city-state on track for its worst recession in years due to the rapid global spread of the coronavirus, The Monetary Authority of Singapore (MAS), re-centred the currency band downwards and reduced the dollar’s slope to zero.
MAS uses the exchange rate as its primary policy mechanism instead of a benchmark interest rate. The dual moves pushed the dollar up by 0.4 percent at one stage to 1.4214 against the greenback.
Singapore’s central bank typically makes major policy decisions twice a year on a fixed schedule. It rarely announces two significant currency actions at the same time.
MAS’s aggressive approach comes on the back of emergency measures announced by central bankers around the globe to support their economies as measures to halt the COVID-19 outbreak put the brakes on business activity.
Just a few days prior, Singapore’s Deputy Prime Minister Heng Swee Keat announced the country’s second fiscal support package in response to the outbreak: 48 billion Singapore dollars. The cash injection for businesses and consumers brought the total Coronavirus-related stimulus this year to more than 10 per cent of GDP.
The MAS’s approach to monetary policy is to measure the performance the S$ against a basket of currencies, and then manage the pace of appreciation or depreciation by altering the currency band at the slope, centre, and width. The central bank doesn’t make details of the basket public, clarify the band, or reveal the targeted pace of appreciation or depreciation.
MAS brought forward its announcement from the usual April timing.
Elsewhere in the southern hemisphere, the coronavirus pandemic made its presence felt by pushing the South African rand to its lowest level ever against the US dollar. Global markets reacted sharply to Moody’s downgrade of the country’s last remaining investment-grade credit rating.
Moody's lowered South Africa’s sovereign credit rating to noninvestment grade, blaming the country's rapidly diminishing fiscal strength, along with lack of progress on structural reforms to the economy.
In the US, the flash IHS Markit PMI report for March indicated that manufacturing and services (accounting for ca. 11 and 68 percent of US GDP respectively) would post their worst declines since the global financial crisis.
Amid widespread capacity reduction and cost-cutting, the Markit PMI numbers also how drastically US firms are slashing jobs. That trend is expected to intensify as the country’s expanding COVID-19 lockdown continues.
The US recorded a record-smashing surge in jobless claims last week, beating even the most pessimistic market estimates. For traders, it portends the incredible headwinds that will likely batter the US and global economies for the. Recession risk stands to grow exponentially in the current quarter and beyond.
As redundancies and lay-offs grow, not even the enormous $2 trillion coronavirus stimulus bill will be able to compensate for lost employment income. The problem extends well beyond disposable income, with many in the growing unemployment lines likely struggling to cover basics like rent, utilities, and food.
The last time the central banker lowered its currency’s band centre was in 2009 – at the height of the global financial crisis. It's also the first time in almost two decades that the MAS has introduced two primary policy measures at the same time.
Singapore has allowed the Singdollar to appreciate in recent years against the MAS’s basket of currencies. By effectively moving the mid-point of its currency band downwards, MAS policymakers are signalling tolerance for a weaker exchange rate that will better support the city state’s exports.
The move by MAS will help businesses access badly needed credit by calming the exchange rate and helping smooth deteriorating economic conditions at home and abroad.
Along with other global financial markets, the Singapore dollar has seen notable volatility in the previous 3-4 weeks.
The Singdollar sank to a low of 1.4650 against the greenback on 23 March, before rebounding to 1.4267 last week.
The S$ traded somewhat lower against the US dollar after the policy statement, then recovered to around 1.4260 – up 0.04 per cent from the previous close.
The MAS move can be seen as part of a wave of global central bank interventions, with major monetary policy announcements and actions happening in every region to try and calm volatile financial markets.
In a statement, MAS said that the COVID-19 pandemic is pushing Singapore’s economy into a severe contraction due to a combination of measures that are dampening commercial activity: travel restrictions, supply chain disruptions, and a sharp decline in demand for products and services across the board.
The Singapore economy will undoubtedly enter a recession this year, it said, with negative GDP growth projected at -1 to -4 percent.
MAS said its aggressive stance also reflects the central role fiscal policy plays in minimising the economic impact of COVID-19.
Given the fast deterioration of the economic outlook, Singapore announced combined supplementary budgets totalling close to $55 billion in March.
The government said the added stimulus would help preserve jobs, while MAS’s money market capabilities will ensure much-needed liquidity in the financial system.
Monetary policy will complement direct efforts to keep the economy afloat as well as promoting medium-term price stability.
For the year-to-date, Singapore’s dollar has depreciated more than 8 percent against the US dollar. During the 1997-98 Asian financial crisis, the S$ weakened by more than 10 per cent – the only time this has ever occurred.