Singapore’s revaluation has many new implications for the world

Shawkat Hammoudeh

As a result of increasing exports, Singapore’s economy is booming, achieving 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 taken place while the world currently recovers from the Great Recession. Such extremely high growth has its negative consequences on domestic inflation and the exchange rate, and entails restrictive monetary and exchange rate policies to head off those 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 April 15. Congress considers the Singapore dollar to be undervalued and believes the Asian country has manipulated its currency to purposely keep it undervalued, thus stealing growth from other countries, particularly the United States. Singapore, along with China, Hong Kong, Malaysia and Indonesia have been demanded to let their currency appreciate in order to improve the current American deficit.

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 its 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 is being threatened by surcharges on its exports.

Despite Singapore’s small size, its currency revaluation action should have global implications. It has neutralized Congress’ action of imposing surcharges against its exports, and has signaled Congress to wait on the other four booming Asian economies, including China, because they face similar situations. However, China, a rising superpower, takes economics and politics into account in its relationship with the United States. China’s moves go beyond sheer economics, but now China is experiencing the same excellent growth, like Singapore, estimated at 12 percent. The country experiences more inflationary pressures and bubbles than Singapore. The appreciation of its currency is coming and is dictated more by its economic realities than the U.S. Congress’ threats. This expected action has eased some of the political tensions between the two giant economies, a fact that 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? Equally fascinating will be watching how the U.S. trade deficit will react to the Asian currency revaluation. Most economists, myself included, 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. Personally, I believe 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 others may adopt. A band between 5 and 10 percent will not have much affect on China’s inflation, U.S. trade deficit or prices of commodities. Higher bands may have negative impact on world trade.

China’s exchange rate actions should have a greater relevance for the major oil exporting countries such as the Gulf Cooperation Council, countries that are again experiencing an early stage of a strong oil boom. It is highly likely that oil prices will exceed $100 per barrel in 2011 as the world recovers, strengthens and retrenches. Oil prices are not very sensitive to available supply; in the coming period, conventional crude oil will not be sufficient to match demand and in the following period this oil will peak. The GCC countries should experience inflationary pressures and early bubbles in 2011 and their exchange rates should also become strongly undervalued. 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 upcoming months will be interesting to economists and the world, and may potentially change chapters in future economics textbooks.

Shawkat Hammoudeh is a professor of economics. He can be reached at

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