SINGAPORE: Singapore was on Tuesday (May 28) added to a United States watchlist for currency practices for the first time, subjecting its exchange rate policies to scrutiny.
In a semi-annual report to the US Congress, the US Treasury Department said that no major trading partner had met its currency manipulation criteria, but that Singapore - along with eight other countries - required close attention because of its large current account surplus and foreign exchange intervention operations.
Here's what you need to know:
1. Why was Singapore added to the list?
Basically because the Treasury tightened its monitoring criteria to include not just America's 12 largest trading partners but any country with more than US$40 billion in bilateral goods trade.
It also lowered the current account surplus threshold from 3 per cent of GDP to 2 per cent - implying more countries will be in breach - and lowered the threshold for persistent net purchases of foreign currency.
As a result, "more Asian economies were included due to a tightening of the monitoring criteria", said CIMB Private Banking economist Song Seng Wun.
In the Treasury's report, it said that Singapore had hit two of the three criteria.
"Singapore runs one of the largest current account surpluses in the world as a share of GDP at 17.9 per cent in 2018," said the Treasury report.
It also estimated that last year, Singapore made net foreign exchange purchases of at least US$17 billion, equivalent to 4.6 per cent of GDP - more than the 2 per cent of GDP the Treasury uses as a watchlist threshold.
Rajiv Biswas, APAC chief economist at IHS Markit, believes that the US Treasury’s decision to place Singapore on the currency watchlist lacks economic substance.
"It is complete nonsense on stilts, utterly lacking economic substance, notably because Singapore runs a large trade deficit with the US.
"The US Treasury argument for putting Singapore on the US currency watchlist seemed to be based on ill-founded economic generalisations, notably about Singapore’s large current account surplus with the world and a misconception about Singapore’s approach to the conduct of monetary policy, which is centered on the exchange rate," he added.
2. What are the implications of Singapore being put on the watchlist?
Probably not much in terms of sanctions or penalties, according to analysts.
"Nobody is going to be placed on a sanctions list, nobody is going to be penalised for trading with the US, or placed on any sanctions list, or doing anything," said Mr Song. "So in that sense, it’s just a list that exists because the US says it can."
However being added to the monitoring list could imply greater scrutiny from the United States, said Ms Selena Ling, head of treasury research and strategy at OCBC Bank.
"Once added to the monitoring list, it does imply greater scrutiny from the US," she 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."
She added that the worst-case scenario would be that the US Department of Commerce could consider imposing anti-subsidy duties on products from countries that have undervalued currencies.
3. What is currency manipulation?
Currency manipulation occurs when a country manipulates the rate of exchange between their currency and another (for example, the US dollar) to gain a competitive advantage.
As set out in the Treasury report, one of the US administration's aims is to combat “unfair" currency practices that "facilitate competitive advantage, such as unwarranted intervention in currency markets".
The Monetary Authority of Singapore (MAS) said on Wednesday that it "does not manipulate its currency for export advantage".
Singapore conducts monetary policy not by targeting interest rates, but by managing the Singapore dollar nominal effective exchange rate (S$NEER) within a policy band, it said.
As part of this, MAS may intervene in the foreign exchange market to prevent excessive fluctuations in the Singapore dollar exchange rate.
"Intervention in the FX market is par for the game to manage the SGD within the S$NEER band," said Ms Ling.
But MAS does not and cannot use the exchange rate to gain an export advantage or achieve a current account surplus, the central bank said. This is because a deliberate weakening of the Singapore dollar would cause inflation to spike and compromise MAS’ price stability objective, it added.
4. Why is currency important to trade?
Broadly, a country can use its currency to be more competitive - that is, if a country has a weaker currency, the goods that it sells can therefore be cheaper, said Mr Song.
He gave this illustration: "Let's say Singapore and Malaysia both produce a screw and we export this, and both our currencies are the same (US$1 equals RM1, US$1 equals S$1). From the US standpoint, it doesn’t matter who they buy the screw from.
"If you want to boost your exports, you weaken your currency. So US$1 buys you RM2 - that screw that used to cost US$1 is now 50 cents. The US (could) say, 'you have devalued your currency to be more competitive for no other reason than that you just manipulate your currency itself.'"
5. How do we know if a country has manipulated its currency?
This can be seen in data, said Mr Song. "One of these can be whether you’re accumulating foreign reserves," he said, pointing out that one way to manipulate currency is to sell your currency or buy lots of another.
"If you want to push the value of the Singapore dollar down, the central bank (can) sell lots of SGD. If I don’t want this stuff, the value of the stuff will drop. That is one way (to) track."
Singapore is "very unlikely" to be labelled a currency manipulator, Mr Song added, pointing to its trade deficit with the United States.
"Singapore is very unlikely to be labelled a currency manipulator because of one important condition, and it defies the logic of a currency manipulator - Singapore runs a large trade deficit, not surplus, with the US," he said.