Singapore’s economy is now booming as a result of increasing exports. It achieved a 13.1 percent economic growth from the first quarter of 2009 to the first quarter of 2010. As we are all aware, this excellent economic growth has been taking place while the world is recovering slowly from the Great Recession. Such extremely high growth has its negative consequences on domestic inflation and exchange rate, and entails restrictive monetary and exchange rate policies to head off those unintended consequences.
The United States Congress attributes Singapore’s export boom, at least partly, to currency manipulation. Congress requires the White House to report by April 15 any country that it deems to be a currency manipulator in order to impose surcharges on its exports. Singapore announced its currency revaluation on April 15. Congress considers the Singapore dollar to be undervalued and that the Asian country has manipulated its currency to keep it undervalued to steal growth from other countries, particularly the United States. It has been demanding that Singapore, along with China, Hong Kong, Malaysia and Indonesia let their currency appreciate to help improve the deficit in American current account.
Singapore has been in a difficult situation to make a decision on its currency. From one side, it competes in the same export markets with the other four countries that are called currency manipulators. A unilateral action to revalue its currency should put is exports at a comparative disadvantage. On the other side, it is under threat by rising inflation expectations as a result of a booming economy and it must work against domestic inflation. Moreover, it’s being threatened by surcharges on its exports.
Despite Singapore’s small size, its currency revaluation action should have global implications. It has neutralized Congress’s action of imposing surcharges against its exports. It also signaled to Congress that it should wait on the other four booming Asian economies including that of China because they face the same situation. However, the rising superpower China takes economics and politics in account in its relationship with the United States. Its moves go beyond sheer economics. But now China is experiencing the same excellent growth like Singapore. Its economic growth is estimated at 12 percent. It experiences more inflationary pressures and bubbles than Singapore. It’s appreciation of its currency is coming and is dictated more by its economic realities than the U.S. Congress’s threats. This expected action has eased some of the political tensions between the two giant economies. This should be welcomed by the stock markets. It will be interesting to see how China will let its currency appreciate. Will China adopt a currency band with respect to the dollar instead of the single peg? It will be also interesting to see how the U.S. trade deficit will react to Asian currency revaluation. Most economists including this writer believe that the U.S demand for Chinese exports is inelastic, and thus will not be responsive to changes in exchange rates.
The upcoming currency revaluations should have a negative impact at least in the short run on prices of oil and industrial commodities which find the strongest growth in the East Asian economies. My view is that the income effects on China’s exports coming from the recovering world economies must be assessed in relation to the size of the currency band that China and other may adopt. A band between 5-10% will not have much effect on China’s inflation, U.S. trade deficit and prices of commodities. Higher bands may have negative impact on world trade.
China’s exchange rate actions should have a great relevance for the major oil exporting countries such as the GCC countries that are again experiencing an early stage of a strong oil boom. It is highly likely that oil price will exceed $100 a barrel in 2011 as the world recovery strengthens and retrenches. Oil prices are not very sensitive to available supply and are looking forward to the coming period when conventional crude oil will not be sufficient to match demand and the following period when this oil peaks. The GCC countries should experience inflationary pressures and early bubbles in 2011 and their exchange rates should also become strongly undervalued. Moreover, these countries are increasing their exports and imports with China and the other four currency manipulators and they should be aware if how the Asian countries are coping with consequences of booms.
If China succeeds in managing a currency band with respect to the dollar, the GCC countries should take notice and prepare their exchange rate policies accordingly. The coming months should be interesting to economists and the world. They may change a chapter or two in economics textbooks.
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