Singapore is an island nation and global city-state situated in Southeast Asia. As a nation, Singapore is cosmopolitan and culturally diverse and is home to 5.5 million residents. Singapore is a global hub for financial services (including equity, bond and foreign exchange markets). Singapore is also a leading center for oil refining, IT products, consumer electronics, pharmaceuticals, and port facilities (ranked third-busiest globally by cargo tonnage) (Gaspar 338). Singapore’s free market economy exists in an open and corruption-free environment that fosters the capacity to maintain high per-capita GDP and stable prices. For the previous decade, Singapore has consistently enjoyed an AAA sovereign rating from the leading credit rating agencies such as Moody’s, S&P, and Fitch. Singapore also enjoys a high social progress and human development index rating including education, life expectancy, healthcare, housing and quality of life.
Singapore has topped World Bank’s ease of doing business rankings for the previous ten years. Singapore is a leader in such spheres as management of government spending, monetary freedom, protection of investors and payment of taxes. The government of Singapore has continuously created rules that foster efficiency within the marketplace without undermining the private sector. Singaporean society exhibits low tolerance for corruption since the rule of law strongly underpins all aspects of economic development (Gaspar 164). Singapore enjoys a favorable corruption perception index (CPI) ranking. In 2014, Singapore was ranked number 7 out of 175 countries and territories with a score of 84, which was a slight dip of two points compared to the 2013 score.
The Singapore dollar (coded as SGD and nicknamed Sing) is the official currency of Singapore. The Singapore dollar, which equals to 100 cents, is mainly abbreviated with the dollar sign $ or S$ in order to differentiate the currency from other dollar-based currencies. The SGD was originally issued in 1965 after the collapse of the monetary union between Brunei and Malaysia. In the 1960s and 1970s, the SGD was pegged to the British pound sterling and later the US dollar. However, with the growth of the economy and diversification, Singapore started to peg its currency to a fixed and unspecified trade-weighted basket of currencies. However, during the previous three decades, Singapore embraced a more market-based exchange regime, delineated as a monitoring band. Under the new regime, the SGD is allowed to float (in a secret bandwidth of central parity), which is periodically monitored (semi-annually) by the Monetary Authority of Singapore (MAS) against an undisclosed basket of currencies of Singapore’s core competitors and trading partners including Japan, the USA, and Malaysia (Khor, Lee, Robinson, and Supaat 7).
The Singapore dollar draws the bulk of its strength from its ‘safe haven’ status acquired through the provision of capital inflows during currency turbulence such as during the Mexican peso crisis. Singapore dollar qualifies as a firm currency since it is readily exchangeable for other currencies. SGD serves as a stable and reliable store of value based on its long-term steadiness of purchasing power. Singapore’s sound political and fiscal condition and outlook coupled with the sound monetary policy of the MAS reinforces SGD’s firm currency status (Khor, Lee, Robinson, and Supaat 9). As of 2012, the estimated total currency (notes and coins) in circulation equaled to S$29.1 billion. The most frequently used coins are S$1, S?5, S?10, S?20 and S?50, while the most commonly used banknotes are S$2, S$5, S$10 and S$50.
The Monetary Authority of Singapore (MAS) came into action after the passage of the Monetary Authority of Singapore Act (1970). Initially, the bulk of the monetary policy functions were undertaken by the various government departments and agencies, which were largely inefficient and sometimes biased. However, as the Singaporean economy advanced, the authority was streamlined to foster the establishment of a highly dynamic and coherent policy. The above-mentioned act gave MAS authority to manage Singapore’s foreign reserves (which as of June 2014 equaled to more than US$277.9 billion) and serve as banker and the financial agent of the government (Monetary Authority of Singapore). MAS adopted the central bank’s responsibilities of currency issuance after the merger with the Board of Commissioners of Currency in 2002.
The mission of Monetary Authority of Singapore is related to fostering a stable non-inflationary economic growth. As a central bank, the MAS regulates the banking system to ensure adequate liquidity within this system (Khor, Lee, Robinson, and Supaat 8). The Monetary Authority of Singapore is obligated to preserve security, integrity, quality and confidence of the Singapore currency. The MAS closely enforces the band policy to ensure it remains within the bounds. The market-based exchange regime affords the Singapore’s authorities the flexibility needed to tackle excess speculation or volatility. In theory, the managed floating system avails more tools to keep domestic inflation low and stable (Khor, Lee, Robinson, and Supaat 7). The MAS keeps a watchful eye on the influence of the exchange rate to ensure that Singapore’s exports retain a competitive advantage. Such targeting subordinates the interest rate policy to the exchange rate policy.
The choice of the exchange rate system favors Singapore due to its small size and high level of openness. The use of spot or forward foreign exchange transactions allows the central bank to mop excess volatility within the market. To this end, the MAS disallow swaps for amounts bigger than S$5 million, and loans totaling over S$5 million to non-residents need authorization. The Singapore’s central bank acts in a forward-looking manner by considering the expected developments within the domestic economy and the rest of the global economy.
In the early 1980s, the MAS maintained a well-defined distinction between non-residents and residents, which allowed the authority to isolate the financial activities of the financial institutions. The policy of non-internationalization of the SGD functioned as a narrow mode of capital control anchored in the restrictive utilization of the SGD for non-residents, as well as restrictive circulation of the SGD within the Singapore’s geographical boundary. The unprecedented growth of the local economy coupled with the increased strength of indigenous financial institutions paved a way for gradual relaxation of the non-internationalization policy. Today, residents and non-residents can purchase or sell Singapore dollars within the foreign exchange market. Singapore’s stature as an international financial center has contributed to the establishment of a large offshore banking sector and dollar market denominated in foreign currencies (Gaspar 337).
The table below highlights the exchange rates for the SGD compared to major global currencies. The values in the exchange rate columns outline the amount of foreign currency units, which can be purchased using 1S$ as per the exchange rates as of 3rd November 2015 at 19:41 UTC. The Value of the SGD is derived from the currency’s representative exchange rate as weighted against the USD and reported by the issuing central bank (International Monetary Fund).
|Major Global Currencies||1 S$||Inverse 1 S$|
|US Dollar (USD)||0.716182||1.396294|
|Australian Dollar (AUD)||0.995929||1.004088|
|Canadian Dollar (CAD)||0.934766||1.069786|
|British Pound (GBP)||0.464419||2.153226|
|Swiss Franc (CHF)||0.709996||1.408459|
|Chinese Yuan Renminbi (CNY)||4.536549||0.220432|
|Japanese Yen (JPY)||86.747897||0.011528|
|Special Drawing Rights (SDR)||0.513477000||1.947510|
The stock market is a crucial component of a capital market since it channels savings into the productive use. The stock market provides investors with liquidity and a platform for industrial and commercial enterprises to raise equity capital. The Stock Exchange of Singapore (SES) came into power in 1973 after the termination of currency interchangeability between Singapore and Malaysia. On 1st December 1999, SES merged with the Singapore International Monetary Exchange (SIMEX) to create the Singapore Exchange Limited (SGX). The products traded by the Singapore Stock Exchange include equities, business trusts, infrastructure funds, depository receipts, exchange-traded funds, real estate investment trusts and bonds, loan stocks and debentures.
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SGX is a prominent member of both the World Federation of Exchanges and the Asian and Oceanian Stock Exchanges Federation. SGX owns and controls Singapore’s sole incorporated securities exchange and derivatives exchange as well as their linked clearing houses. As of November 2015, the Singapore Exchange had 776 listed companies with a combined market capitalization of over $769 billion. The companies listed on the SGX are featured on the SGX Mainboard and the SGX SESDAX. The revenue of SGX mainly comes from the securities market (75%) and the derivatives market (25%). Singapore’s stock market index reached 3040.48 index points on Wednesday, November 4, 2015 at 17:10 SGT. From 1999 till 2015, Singapore Stock Market averaged 2523.94 index points attaining an all-time high of 3875.77 index points in October of 2007 and dropped to a record low of 1213.82 index points in March of 2003 (Monetary Authority of Singapore).
Singapore successfully avoided the structural and institutional shortcomings that had fuelled the Asian economic crisis. Since the 1960s, Singapore has been undertaking structural reforms to deliver good governance, the rule of law and transparency. Most importantly, Singapore has carried out changes in the banking and financial sectors to improve information and data accessibility to the market and enhance the quality of corporate disclosures. Singapore’s economy is a global leader in terms of openness, pro-business, and incorruptibility (7th least corrupt). The favorable CPI ranking implies that Singapore does not suffer from political failures and resource misallocation fuelled by corruption (Gaspar 164). However, the People’s Action Party (PAP) that has ruled Singapore since its independence in 1965 robustly supports economic liberalization and international trade. The party is accused of restricting some civil liberties such as freedom of speech and freedom of assembly and drowning oppositional voices. As such, more governance reforms are needed to shake off Singapore’s nominal democracy tag.
Singapore is a global Foreign Direct Investment (FDI) outflow financier. However, the country has equally benefited from the inward flow of FDI from global institutions and investors thanks to its highly attractive investment climate and steady political environment. The Monetary Authority of Singapore (MAS), which operates as Singapore’s central bank and financial regulatory authority, enjoys the exclusive authority over monetary policy, issuance of currency, supervision of financial services and management of Singapore’s foreign reserves (Khor, Lee, Robinson, and Supaat 7). The MAS policy reforms have played a considerable role in creating a more conducive operating environment. Indeed, the MAS continue to implement the right combination of policies to preserve sound economic fundamentals.
The absence of control over capital flows between the domestic banking system and the Dollar Market has eased the capacity of holders of Singapore dollars to convert their funds into foreign currency and vice versa. The simplification of the non-internationalization policy was welcome since it was undermining the globalization of the Singapore’s economy and maturation of the financial sector. Gradual internalization of the SGD played a fundamental role in transforming the SGD into a firm currency widely accepted globally. For instance, since 2012, Singapore Exchange has been allowing the dual currency trading of securities including bonds, stocks, and other listed investments in two denominations, the USD and S$ (Khor, Lee, Robinson, and Supaat 8). Nevertheless, the lack of capital limitations implies that speculative attacks on the SGD could undermine the functioning of the exchange rate-based monetary policy. After the progressive relaxation of the non-internationalization policy, which limited the international usage of the domestic currency, Singapore became exposed to speculative attacks. Indeed, Singapore no longer enjoys the safeguards that could thwart a buildup of offshore currency deposits, which could be utilized for speculative purposes. In the light of such a backdrop, sustaining export competitiveness is of greater significance.
Singapore enjoys global admiration for its efficient, honest and pragmatic governance and civil service. Singapore’s central bank (MAS) enjoys high credibility derived from its track record of sustaining low inflation. Some of the factors that foster strength and stability of the S$ include Singapore’s political stability, sound economic fundamentals and developed infrastructure. Moreover, the SGD is more than fully backed by foreign reserves.
Singapore’s central bank utilizes the SGD market and foreign exchange rates as its core policy tool rather than interest rates. Singapore’s monetary policy has been largely successful by all standards in keeping inflation low and minimizing output volatility without any significant losses to real GDP growth. Hence, the exchange rate targeting, unfashionable as it might be, has in practice lived up to its billing. Since Singapore’s economy is mature, it is high time for Singapore to give up the secrecy enveloping the formulation and execution of the monitoring policy, especially the values of the precincts of the policy band. The increased transparency would not deprive the MAS of the right to defer the sharing of information or some class of transactions during crises. However, Singapore registers one of the highest per capital incomes globally, while income inequality remains stubbornly high, which implies that Singapore’s economy is far from perfection. Indeed, there is a need to minimize state’s involvement in key sectors so as to weed out the remaining inefficiencies, as this is pertinent to the achievement of greater economic freedom.