Wednesday, April 18, 2018

MAS To Allow Singdollar To Rise - How Does This Affect Our Investments And Life?

Singapore's monetary policy is a unique one and also well respected in the international space. Many countries, such as the US, adopts an interest rate policy where they increase or decrease interest rates to steer the economy into a certain direction. However, Singapore is different. We adopt an exchange rate policy where the Monetary Authority of Singapore (MAS) steer the Singdollar into a certain direction.

Just last week. MAS announced that they will will allow the Singapore dollar to rise in the first tightening of its exchange rate-based monetary policy in six years. This is in view of the stronger economy where MTI announced a 4.3% GDP growth for the first quarter of 2018. A stronger Singdollar will make exports more expensive and strengthens the purchasing power for us in Singapore. This is more to control any inflationary pressures due to the stronger economy.

The strengthening of the SGD will definitely affect our investments in terms of the earnings of different companies. It will also affect our personal life. Let's take a look at how a stronger SGD will affect us?

If you're interested to know how Singapore conducts its monetary policy especially what is the S$NEER policy band, you can read a previous article I wrote here: How MAS conducts its monetary policy in Singapore?

How does a stronger Singdollar affect our investments?

1. Lesser income for companies that has overseas businesses

A stronger Singdollar will affect the income of businesses who operate in Singapore and reports their financial results in Singdollar but have many businesses overseas. Let's take for example Singtel which has many subsidiaries and associates overseas. When they report their income in SGD and the SGD becomes stronger, its income from overseas business in other currencies will definitely drop when they convert it back to SGD. A case in point is where its share of revenue from its Australia Optus business was affected because the AUD depreciated against the SGD by quite a lot in recent years. Some companies do hedge against this risk though.

2. Lesser dividend payout from companies that has revenue in other currencies but pays dividend in SGD

A company that pays dividends in SGD but receives revenue in other currencies may give lesser dividends to shareholders as the SGD strengthens. Examples are some Reits which receive rental income in other currencies then distributes the income in SGD to shareholders. Watch out as their dividend yield may be affected. I say may be affected is because some of these companies actually fully hedge their distribution to a certain price of the SGD so it is not affected by the fluctuations of the SGD itself. As interest rates can be pegged and hedge to fixed rates, exchange rate can be hedged too.

3. Lesser business for export oriented businesses

For businesses which are export oriented, a stronger SGD will make exports more expensive to other countries and thus may decrease the demand of the goods which are being sold. Do watch out for your investments in companies which are based in Singapore but sells products to other countries. Their profits can be affected by the stronger SGD.

4. Stronger purchasing power for companies that buys overseas products and sells it here

Good news comes for businesses who buy products from overseas and sells it here. F&B businesses may benefit from this as their cost price for ingredients imported from overseas will be cheaper with a stronger SGD and thus increasing their profit margin.

How does a stronger Singdollar affect our life?

A stronger Singdollar is definitely better for consumers as a whole. It will moderate the increase of prices thus making things less expensive. Perhaps the most noticeable effect is when we exchange our SGD to travel overseas. A stronger SGD will allow us to have greater purchasing power in other countries. In fact, the SGD has appreciated against many other major currencies the past decade which is perhaps the reason why Singaporeans love to travel. Cheers to those who love to travel. It gets cheaper for Singaporeans again.

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1 comment:

  1. Good article. I will be dealing with many of these issues as well..