How The Weaker Singapore Dollar Affects Our Life?

By now, most of us would have realised that the Singapore dollar is weakening especially against the US dollar. 2 years ago, the exchange rate for USD/SGD is $1 US dollar to $1.22 Singapore dollar. Today, it is close to S$1.40 per US dollar. In laymen terms, this means we who are in Singapore, would require more money to buy the same US goods 2 years ago.

It was reported last week in the news that the Singapore dollar outlook is worst since the Asian Financial Crisis. The Asian financial crisis in 1997 was one which many people in Asia would remember. Stock markets plunged, currencies devalued to extremely low levels and jobs were lost. So how will the weaker Singapore dollar affect us this time? Will we see another Asian financial crisis?

When I was in University taking my degree in Economics, I had to research and write on how MAS conducts its monetary policy in Singapore. Currency movements certainly have impacts in our economy and it will surely affect our lives as we use money every single say. The depreciating of the Singapore dollar definitely signifies that something is happening. How bad and how long is still unknown.


An Asian Financial Crisis all over again?

The Asian financial crisis was triggered by the depreciation of the Thai Bhat and it quickly affected other major currencies in Asia including Korea, Indonesia, Malaysia and also Singapore. In the chart below, it shows the USD to SGD exchange rate. As we can see, the Singapore dollar depreciates against the US dollar during all major financial crisis. The 1997 Asian financial crisis was the worst as seen by the spike followed by the 2008 global financial crisis and also the recently sovereign debt crisis which saw the European region having trouble.

Chart of USD/SGD from tradingeconomics.com

Fast forward to now, it seems like the Singapore dollar is depreciating at a much faster rate than the 2012 sovereign debt crisis and almost similar to the 2008 global financial crisis now. The depreciating of the Singapore dollar just means that more people are selling the currency than buying it. This was partly driven by the data showing the slowdown in China, Singapore's largest trading partner. Investors confidence in the Asian region is shaken.


Why the Singapore dollar is depreciating?

The Singapore dollar has been strong for the past few years in an effort to combat inflation. Singapore adopts an exchange rate policy instead of an interest rate policy. This has been the case since 1981. The primarily objective of this policy is to maintain price stability and sustainable economic growth. The appreciation of the S$ dollar in the past has made it more expensive for foreigners to buy Singapore’s assets and at the same time increase export prices thus slowing down the economy and bringing down inflation.

Inflation has slowed down significantly and MAS said in January that it will slow down the appreciation of the Singapore dollar too. This has led to the Singapore dollar depreciating to what we see now. However, we have to note that our neighbours currencies are depreciating at a faster rate than us. Malaysia and Indonesia both have their currencies weakening for the past few months. If our currency stays strong, we'll lose our export competitiveness as goods in neighbouring becomes cheaper for international buyers.


How the depreciating of the Singapore dollar affects us? 

A strong local currency indicates a strong economy with high productivity growth and high savings rate. A weaker local currency indicates the opposite. The US economy is recovering and money is definitely flowing back into the US now. Apart from all the economic theory, let us take a look at how a weaker Singapore dollar will affect us directly?

Higher prices of import goods

With a weaker currency, importing goods from other countries especially the US would become more expensive. Singapore's top few largest trading partners includes China, Malaysia and United States. While our currency has depreciated against the Yuan and the US dollar, Malaysian Ringgit has depreciated at a much faster rate than the Singapore dollar.

A lot of us in Singapore also like to go online to buy stuff and some are businesses based overseas. A lot of these online shopping websites which are based overseas use the US dollar as their base currency. It'll be more expensive for us to do online shopping now.


Property Price Drop

Property prices in most Asian countries have been rising over the past few years. Singapore too was one of the hot property market places. When the market was bullish on Asia and bearish the U.S. dollar, the Singapore dollar did exceptionally well. Now, its the opposite. 

Property prices will drop mainly due to the increase in interest rates. The spike in interest rates is attributed to expectations of further currency weakness. Think of it this way, when Singapore's currency is expected to weaken, it reduces the attractiveness for people to buy Singapore government bonds. Interest rates need to be pushed higher since investors need more incentive to hold onto the local currency. 

During the Asian financial crisis in 1998, property prices dropped about 40% over a one year period. The government of Singapore also took drastic measures to cool the property market in May 1996. If those cooling measures were not implemented prior to the crisis, it could have been worse. Currently, the Singapore government has also implemented cooling measures to cool the hot property market. I would be expecting property prices to drop further as its only the beginning now. 

Interest rates have been rising but still at a low currently. As seen below, the increase in interest rates has always been accompanied by a drop in prices of properties. Interest rates (3 month SIBOR) have risen above 1% as at 24th March 2015.

No matter what happens, we can always be prepared for any situation which is to come. Being prudent in our finances, having emergency funds set aside and not taking on too much debt would ensure that we do not get into serious financial problems. 

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All About Oil Prices - Who Suffers or Benefits?

The recent drop in oil prices has caused the market to become volatile again. Oil prices have dropped from a high of $100+ to a low of $40+. That's more than 50% drop so far. Those who drive will notice that petrol prices are cheaper now. Instead of seeing the digit $2/litre, we start to see it at $1+/litre.

Crude oil is the most important natural resource of the industrialized nations. It can generate heat, drive machinery and fuel vehicles and air planes.  Its components are used to manufacture almost all chemical products, such as plastics, detergents, paints, and even medicines.

The drop in oil prices seems good for most of us. Petrol prices become cheaper, electricity will become cheaper also. To know which countries will benefit and which countries will suffer because of the drop in oil price, we have to look into which are exporters or importers of oil. Those countries who import most of their oil will benefit while those countries who export most of their oil will suffer.

The 1970s Oil Shock (Price Increase)

Right now we're seeing a drop in oil prices but what if the opposite happens? In the early 1970s, oil prices more than doubled from about $4 to $10 and caused chaos in some countries. One such country was Japan. Japan imports almost all of its oil for consumption and they were badly affected. The government even made a statement that their country would run out of oil in 4 days during that time. The whole country had to save electricity by turning off lights on the streets and buildings also shut down every alternate lifts they had.


The 1980s Oil Shock (Price Decrease)

Fast forward 10 years later, from 1980 to 1986, oil prices declined from a high of $39 to a low of $12. That is a 70% drop in oil price. The rise of Asian economies was evident during the late 1980s and the 1990s as lower oil prices increased industrial production. Saudi Arabia, which is one of the largest exporter of oil, suffered because of the falling oil prices. They did cut their oil production back then but this lead to 16 years of budget deficits that left the country deeply in debt.

Crude oil price chart

What is happening to oil prices now and how it affects our investments?

It seems like history is repeating itself that oil prices have dropped more than 50% now. As investors, we will want to know what is happening so we can better position ourselves in allocating our investment capital.

Let's take a look at some net oil exporters countries which will likely be affected by the fall in oil prices:

Russia

Russia's economy is heavily dependant on oil exports. In fact, oil and gas accounts for 70% of its export income. Russia's currency, the Ruble, has fallen more than 50% against the US dollar. This prompted the central bank to increase rates to 17% in order to limit the negative effects of the depreciating currency.

Malaysia

Malaysia derives 30 percent of state income from energy exports. Malaysia currency (Ringgit) has also fallen substantially. Most of us who live in Singapore will know the exchange rate of the Ringgit and a lot of people have went on to exchange more Ringgit to spend in Malaysia.

Saudi Arabia

Saudi Arabia has the world's largest crude oil production capacity and is the largest exporter of total petroleum liquid in the world. Recently, the previous king of Saudi Arabia passed away and caused a spike in oil prices as investors bet on a change in the country's policy to reduce production of oil which can lead to an increase in the price of oil again. This is how powerful its production capacity and exports are.


Now, let's take a look at some net importers of oil. These are the countries who will most likely benefit from the decline of oil prices:

Japan

Japan is the third largest net importer of oil behind China and the US. Previously, Japan suffered badly when oil prices rose substantially during the 1970s to 1980s. In 1985 when the oil price started to decline and crashing in 1987, Japan still could not recover due to its strong YEN that stalled its economy.

Today, Japan has embarked on an aggressive monetary policy, dubbed Abenomics. This has caused their currency to depreciate  which lead to a boost in exports. With oil prices falling, this will benefit the country as they can import oil at a cheaper rate. Of course, the depreciating currency will offset some decrease in oil prices but I think overall it should still be good for the Japanese economy.

I've invested substantially in the Japan market since last year. You can read my previous post here: The Japan story - Croesus retail trust and Saizen Reit 

China

China may be the largest or second largest net importer of oil before or after the US. It was said that the decline in oil prices now is partly due to the decreased demand of oil from China. It is hard to know what exactly is happening in China. Recently, its stock market also slumped more than 7%. That is a scary decline. I'll choose to stay out of any investment in China until I know what is happening.

European Union

The European Union has been suffering slow growth ever since the sovereign debt crisis in 2012. With the EU importing most of its oil, lower prices will certainly lead to an increase in economic output.

India

India imports 75% of its oil. With its account deficits, lower oil prices will help to ease it. India has also been going through many economic reforms to spur growth.


Industries that will benefit from lower oil prices

Industries that rely heavily on oil for transportation will benefit from the lower oil prices. Airlines and Shipping industries are two examples of it. Previously, airlines and shipping companies have suffered a prolonged period of slow or even negative growth for the past few years when oil prices were above $100. There may be a turn around soon for these companies.

Oil affects all of us and affects the profits of various companies. Having a little knowledge of oil will help us in our investment decisions in times like this. There are also opportunities that we can look out for in the oil and gas industry. Stocks of companies in the oil and gas industry have fallen significantly for the past few weeks. This is a good time to accumulate good companies at undervalued prices. But before you invest in these companies, make sure the company's balance sheet is healthy and they can ride out the tough times. Many companies will go bankrupt during bad times and the few strong ones will emerge out even more successful. Invest wisely and safely.

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