Stronger S'pore dollar won't hurt too much

The move by Singapore's central bank to address inflation is good as higher prices will make the country less competitive, say analysts.

SINGAPORE--Analysts and industry players are applauding a recent decision by the country's central bank to allow the Singapore dollar (SGD) to appreciate at a faster pace, in a bid to address a sharp rise in inflation in the country.

Dane Anderson, CEO and executive vice president of research at Springboard Research, noted that other currencies are also appreciating against the U.S. dollar (USD).

"If you compare the SGD with other currencies in Asia, its rise is not so much," Anderson said. "Maybe it would make the U.S. market more competitive for Singapore, but others are in same boat too."

Victor Lim, vice president for IDC's Asia-Pacific consulting operations, said the central bank's move will compel Singapore-based companies to look more closely at their profit margin mechanisms.

Commenting on local companies that charge overseas customers in Singapore dollars, instead of in their respective local currencies, Lim said: "In order to maintain their exports, Singapore companies could maintain local-currency pricing and protect their margins by trying to contain the costs relating to their Singapore overheads."

He noted that local IT services companies would likely be hit most by the rising SGD. "The key reason is that the bulk of the costs of services companies is on manpower, which is paid in Singapore dollars," Lim explained.

He said most multinational corporations (MNCs) operating in Singapore charge for exports out of the island-state either in USD or local currencies.

"As a result, they would not be affected unless they decide to raise their prices in the respective local currencies," he added.

A greater concern over the strengthening SGD is that manufacturers currently located in Singapore may feel compelled to move their lower-end operations to other countries, or even relocate their headquarters to those markets.

Lim said: "For example, research and development and product design could move back to the United States as the cost difference is now smaller, or companies could locate their staff to lower-cost countries and just maintain a slim organization in Singapore."

How serious this impact would be depends on how long the situation lasts, he said.

"Companies generally don't make strategic changes on short-term issues but if this becomes prolonged, it will have a noticeable impact," he added.

Still, Lim remains optimistic. "Given the growing economies in the region, a higher price--within limits--may not have an impact on Singapore-based companies, especially if they can demonstrate higher value-add to their clients through more superior solutions, better quality work and greater service and support reliability," he explained.

According to a Singapore-based IBM spokesperson, it would take a significant short-term change in global currency rates to force the company to move production out of Singapore.

"The reason for this is when we analyze sourcing of products at the various IBM plants around the world, we take into account numerous criteria affecting client demands, cost of products, and the long-term impacts on our clients and IBM," the spokesperson said in an e-mail interview.

"We also ensure we 'sensitize' the decisions to short-term fluctuations in global currencies," he told ZDNet Asia. "We are always studying production sourcing to ensure we are providing the most value to our customers and IBM."

Inflationary pressures
Singapore's central bank, the Monetary Authority of Singapore (MAS), said that since April 2004, it has maintained the policy of a modest and gradual appreciation of the local dollar at a "nominal, effective exchange rate policy band".

"The gradual appreciation of the SGD exchange rate over the past few years has helped to mitigate inflationary pressures," the MAS said in a policy statement released earlier this month.

It noted the recent sharp rise of inflation in Singapore, which rose from 0.8 percent in the first half of last year to 3.4 percent in the second half. It further accelerated to 6.6 percent in between January and February 2008.

According to the MAS, the escalation in global oil, food and other commodity prices has contributed--directly and indirectly--to the increase in consumer prices.

"Against this backdrop of continuing external and domestic cost pressures, an upward shift of the policy band at this point will help to moderate inflation going forward, while providing support for sustainable growth in the economy," the MAS said.

V. Anantha-Nageswaran, Asia and Middle-East chief investment officer and head research at Bank Julius Baer in Singapore, praised the move in a recent note.

"This underscores Singapore's long-term planning and vision," Anantha-Nageswaran said. "A city-state wanting to be a services leader in many areas cannot afford to have high inflation," he said.

He told ZDNet Asia in a phone interview that if the SGD were weaker, employees in Singapore would then require higher pay to offset rising costs.

"If global growth is going to slow down, their buying power in the global economy would also go down," he said.

Anantha-Nageswaran expects the Singapore dollar to rise to 1.30 against the USD by year's end. As at press time, it was at 1.36 against the greenback.