What is the US currency watch list and why is Singapore on it?

Currency exchange rates are displayed on a board at a Money Exchange kiosk in New York City, US, November 15, 2018. — Reuters pic
Currency exchange rates are displayed on a board at a Money Exchange kiosk in New York City, US, November 15, 2018. — Reuters pic

SINGAPORE, May 31 — Other than knee-jerk reactions in the financial markets, economists said that there would likely be no short-term impact on Singapore for being on the United States’ watch list for currency practices.

Eight other nations — China, Germany, Ireland, Italy, Japan, Malaysia, South Korea and Vietnam — are on the monitoring list, based on the US Treasury’s latest twice-yearly report to the US Congress.

Selena Ling, OCBC Bank’s head of treasury research and strategy, said what it does imply is that Singapore may be more heavily scrutinised by the US, even if the countries are not outrightly being accused of being a currency manipulator.

In a note on Wednesday (May 29), OCBC said: “The report also stated that any economy added to the monitoring list will remain there for at least two consecutive reports to ensure any improvement is durable and not due to temporary factors.

“This means that Singapore, like the other new additions to the list, will probably stay there until the next report due later this year.” 

Responding to the development, the Monetary Authority of Singapore (MAS) stated that it does not manipulate the Singapore dollar for export advantage, or to achieve a current account surplus.

It also said that its monetary policy framework, which is centred on the exchange rate, has always been aimed at ensuring medium-term price stability, “and will continue to do so”.

“MAS does not and cannot use the exchange rate to gain an export advantage or achieve a current account surplus. A deliberate weakening of the Singapore dollar would cause inflation to spike and compromise MAS’ price stability objective,” the central bank said.

TODAY breaks down the rationale for setting up the watch list and why Singapore is on it.

What is the watch list about?

American news site CNBC reported that a 1988 law requires the US Treasury Department to report to the US Congress every six months on whether any countries are manipulating their currencies to gain trade advantages over the US.

If deemed to be a currency manipulator, US could impose trade sanctions.

Simply put, it means that a country is artificially weakening its own currency by selling its own currency in exchange for a foreign currency, usually the US dollar. This would have the effect of making its own exports cheaper, thereby gaining an unfair trade advantage over another country’s exports.

US had accused three economies of being currency manipulators in the past, the latest being China 25 years ago.

Japan was stamped with that label in 1988 and Taiwan, in 1988 and 1992.

Why is Singapore on the list?

There are three criteria the US Treasury looks at in placing a country on the watch list:

  • Significant trade surplus with the US
  • A large current account surplus
  • Persistent, one-sided intervention in foreign exchange markets

Countries that meet two out of the three criteria will be placed on the watch list.

A current account surplus means that a country is exporting more than it is importing, is bringing in income from investments abroad and has donated or lent money to other countries.

For the first time, Singapore was placed on the watch list based on the following two criteria:

  • It has a current account surplus of US$63.5 billion (RM265.8 billion), which is 17.9 per cent of the city-state’s gross domestic product (GDP) in 2018.
  • The US Treasury estimates that Singapore made foreign exchange purchases of US$17 billion in 2018, which amounted to 4.6 per cent of its GDP.

Instead of a trade surplus, Singapore has a trade deficit with US of about US$5.9 billion in 2018, based on figures by the US Census.

However, economists pointed out that the inclusion of Singapore came about because US revised the thresholds for two criteria after the Trade Facilitation and Trade Enforcement Act of 2015.

Another reason Singapore came to the attention of the US Treasury Department was because the latter expanded its coverage from 12 of its largest trading partners, to economies whose trade with US exceeds US$40 billion annually. This revision brought 21 trading partners into the fold.

Singapore is now the US’ 16th largest trading partner with about US$60.4 billion worth of bilateral trade in 2018, the US Census stated.

The report said that Singapore “should undertake reforms that will lower its high saving rate and boost low domestic consumption, while striving to ensure that its real exchange rate is in line with economic fundamentals, in order to help narrow its large and persistent external surpluses”.

Ling from OCBC said that being on the watch list is “subjective to a certain extent”, as it largely depends on how the US sets its coverage parameters and the threshold it sets for the three criteria.

Is it a cause for concern?

Economists interviewed by TODAY said that there would be little to no immediate impact on Singapore in the short-term, although Ling said “there may be some market uncertainties about the potential impact on the Singapore economy and monetary policy stance in the medium term”.

Philip Wee, senior currency economist with DBS, said that the market is more concerned about the growth risks arising from unresolved trade tensions between the US and China, rather than currency risks.

Song Seng Wun, an economist with CIMB Private Banking, said that Singapore being a major financial centre and export hub, it is no surprise that the amount of goods and services exported from the country is higher than its imports.

For example, Singapore imports crude oil, refines it and sells it for a higher value overseas.

Interventions in the forex market is also “par for the game”, Ling noted, as MAS monetary policy is centred on the exchange rate, so that the Singapore dollar is traded within the policy band.

Song said that the inclusion of Singapore came about due to a “blind” following of metrics — given that the city-state has consistently run a trade deficit with the US.

“It defies logic that (Singapore is taking advantage of its weaker currency), only to run a trade deficit and not a surplus with the US”, he said.

“Singapore must be the worst currency manipulator, to manipulate currency that works against us,” he added.

In its note, OCBC said the large current account surplus that amounted to 17.9 per cent of Singapore’s GDP last year is unlikely to be reduced drastically even with a cyclical slowdown amid the global economic headwinds.

“Our high savings rate is also unlikely to unwind quickly, but the ageing population may mean that consumption will rise over time and the current account surplus may normalise somewhat. In addition, the saving grace is that Singapore runs a steady bilateral goods deficit with the US,” it said.

The MAS’ announcement this month that it will start disclosing the net forex purchases on a six-month aggregated basis from the second half of this year, with a six-month lag, will also help.

Ling said: “This would contribute to greater transparency of the actual intervention amounts. If the released data is hypothetically less than 2 per cent of GDP (compared to the US estimates of around 4.6 per cent of GDP), this may help to address the third criteria of persistent, one-sided intervention in forex markets.” — TODAY

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