Downside of a strong Sing dollar

Business Times - 14 Aug 2008

Downside of a strong Sing dollar

THE stronger Singapore dollar may be helping to keep high inflation at bay - but it is also hurting the earnings of Singapore companies. The movements in the Sing dollar affect the competitiveness of local goods and services abroad as well as profits when foreign earnings are translated back into local currency.

Nothing illustrates this better than the results reported this week by some of Singapore's biggest companies. On Tuesday, Singapore Telecom, the largest listed firm here, said profit took a hit as the Sing dollar strengthened against regional currencies, shrinking earnings from its regional associates which have now become a key source of SingTel's profits. Net income for the three months ended June 30 fell 5.3 per cent to a two-year low of $878 million, missing market forecasts.

Another blue chip, Singapore Technologies Engineering (STE), also cited the strength of the Sing dollar as one of the key factors affecting its earnings, particularly at its aerospace arm - its biggest business unit. STE reported net earnings of $119.9 million for the quarter ended June 30, a 2.3 per cent dip from a year ago. A slew of smaller companies have issued profit warnings, with the strong currency a common refrain.

Last week, a report by a Ministry of Trade and Industry (MTI) researcher argued that the stronger Sing dollar has had a smaller-than-expected impact on manufacturers' profit margins, as the rising price of exports can be cushioned by the cheaper imported material. Nevertheless, there is no denying the strong dollar's impact on companies.

This should be one major consideration for the Monetary Authority of Singapore (MAS) as it reviews its monetary policy stance in its upcoming October meeting. While the Sing dollar exchange rate is the MAS's main tool in the fight against inflation as Singapore imports most of its essentials, the circumstances now are very different from what they were six months ago.

For one, the prices of oil and commodities are retreating, addressing one of the key causes for the surge in inflation worldwide. Oil steadied above US$113 yesterday, after falling a day ago to its lowest since May 2 in the wake of official data showing US oil use in its steepest dive in 26 years.

On the home front, the Singapore economy is also slowing, and growth has become as big an issue as inflation for policymakers. Concern here over price pressures will likely take a back seat to growth risks in the months ahead.

The Singapore economy grew just 2.1 per cent in the second quarter, while the official growth forecast for 2008 has been narrowed to 4-5 per cent from an earlier estimate of 4-6 per cent. Singapore companies will be hoping that these conditions will lead the MAS to consider slowing the appreciation of the Singapore dollar, at the very least, in the near future.

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