The Rise and Resilience of the Singapore Dollar

Sam Hei Tung, Dealing

Sam graduated from National University of Singapore with a Master of Science in Finance. He personally manages his own investment portfolio and does equity and economic research in his free time. Sam believes that education and information is essential to making good financial decisions.

Did you know that Singapore issued its own currency on 12 June 1967?

Read on to find out about the history of the Singapore Dollar (SGD), its transformation throughout the years, how the Monetary Authority of Singapore (MAS) regulates monetary policies and influences the SGD, monetary trilemmas and the future of the SGD.

Before currencies were introduced, history has it that physical goods and services were exchanged via a barter system where a transaction would only occur if a trader required what was offered by the seller. This resulted in a multitude of problems, since it was difficult to find a trader who offered the exact goods or services the other party wanted. Perishable products such as fruit and meat required timely deals, which posed as a huge challenge. Therefore, currencies were created to resolve these issues.

Currencies have been used throughout history, dating back as far as 770 BC in China and 600 BC where coins were made from a mixture of silver and gold stamped with pictures representing the denomination the coin represented [1]. The introduction of currency helped to resolve three key issues of the barter system. Firstly, currency was a great store of value, as it is usually made out of non-perishable material (metal, paper, plastic). Secondly, currency is a recognised medium of exchange which all traders could use, eliminating the need to search for a counter-party that wanted the goods or services offered. Traders could also use currency to purchase what they really wanted. Lastly, currencies are easily measured and divisible, making them a good unit for accounting, allowing more accurate pricing of goods and services.

Singapore currencies ranged from the silver dollar and the Straits Settlement dollar to the Malayan dollar and the Singapore dollar we use today. Singapore used to share the same currency as Malaysia, even after declaring independence in 1965. The Malayan dollar was used until 12 June 1967 when Singapore introduced its own currency. In 1971, the Monetary Authority of Singapore (MAS) was founded with sovereign power to undertake monetary policies [2].

Despite being devoid of natural resources, Singapore has an AAA sovereign credit rating, the highest grade rating agencies can give to a country, signalling the lowest probability of a default. This AAA sovereign credit rating is only given to 11 out of 137 countries by the Standard & Poor’s rating agency. Singapore is the only country in Asia to attain this credit rating [3]. Furthermore, Singapore as a nation has a significant current account surplus and high levels of foreign reserves, giving the Singapore dollar an edge over other currencies in the region as a “safe haven” currency [4].

Source : https://www.theglobaleconomy.com/rankings/credit_rating/

Singapore’s world-class financial centre status with business-friendly laws and an effective legal system have increased the reputation and status of the Singapore Dollar as a safe and trusted currency.  On the global stage, the Singapore Dollar in global forex (FX) ranks in the top 10 currencies [5]. This is an impressive feat considering Singapore dollar’s free float and relatively small economy compared to the heavyweights and pegged/controlled currencies like HKD and RMB [6]. 

MAS has a similar mandate to other central banks like the US Federal Reserve, where the mission is to promote sustained non-inflationary economic growth, and a sound and progressive financial centre [7]. While the Federal Reserve conducts monetary policy through buying and selling government bonds to influence the amount of money in the finance system and overall interest rates, MAS’s monetary policy framework focuses on exchange rates. As Singapore is a small nation that needs to import a majority of its basic goods like food, water and daily essentials, MAS believes that exchange rate management is a more effective way to maintaining price stability for better long-term sustainable economic growth. MAS’s monetary policy manages the exchange rate of the Singapore Dollar against a trade-weighted basket of currencies (mostly consisting of neighbouring countries that Singapore actively imports from and trades with). This is also known as the Singapore Dollar nominal effective exchange rate (S$NEER) [8].

Source: Monetary Authority of Singapore

Infographics Credits: MAS Gallery Zone B “How Does The Exchange Rate Affect Inflation”

With high inflation over 2022-2023, MAS tightened monetary policy by raising the slope of its exchange rate-based policy band to allow the Singapore dollar to appreciate at a faster pace [9]. As a major importer of essential goods like food, consumer staples and medicine, Singapore’s buying power is increased by the appreciation of the Singapore. However, the export sector suffers from a stronger Singapore dollar.

Below is a graph of the exchange rate of the Singapore dollar to the Malaysia Ringgit (SGD to MYR). We can see that the Singapore Dollar appreciated from 3.1MYR to 3.4MYR per SGD, a 9.68% increase in 2022.

Source: Google Finance – Singapore currency to Malaysia currency

As MAS has a good reputation on the international stage as a reliable central bank, every monetary policy statement is well respected by traders and market participants. This allows MAS to increase or decrease the strength of the Singapore dollar with relative ease. Market participants trade in line with MAS’ target exchange-rate policy.

All central banks around the world are forced to pick two out of the three points to form a side of the Monetary Trilemma triangle. As it is impossible to achieve all three, central banks have to weigh the pros and cons to determine which side of the triangle they would like to focus on. The Monetary Trilemma is shown below:

The three points of the monetary trilemma are: Free Capital Mobility, Fixed Exchange Rate and Monetary Autonomy. Central banks can only choose one of the sides and give up the opposite point. For example, a central bank may choose side A, which means that it will enjoy a fixed exchange rate (usually with a major currency like USD) and free capital mobility (no restrictions on movement of funds in and out of the country). However, the central bank will lose monetary autonomy as the central bank has to follow the pegged country’s monetary policy to maintain the exchange rate. Below are examples of how some countries have adopted each side of the Monetary Trilemma:

Singapore chose to give up a fixed exchange rate to maintain free capital mobility and monetary autonomy, similar to that of the US. As MAS owns the rights to produce and distribute the Singapore dollar, they gain significant advantage in terms of the freedom to adopt different kinds of monetary policies.  

Due to MAS’s disciplined commitment and track record of sound monetary policies, the Singapore dollar has been a stable currency in Asia and a good store of value. This has allowed Singapore to not only prosper but also become a regional and global financial hub. 

In conclusion, the currency of Singapore has come a long way to become what it is today, conducted policies to uphold its mission, segregating itself from political influence. As a result, the Singapore dollar has become a symbol of stability and a “safe haven” currency in the Asia Pacific region.

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[1] https://www.investopedia.com/articles/07/roots_of_money.asp#:~:text=First%20Official%20Currency%20Is%20Minted&text=In%20600%20BCE%2C%20Lydia’s%20King,pictures%20that%20acted%20as%20denominations.

[2] https://www.mas.gov.sg/who-we-are/mas50/history-of-money-in-singapore#:~:text=The%20introduction%20of%20Singapore’s%20own,as%20it%20deemed%20most%20appropriate.

[3] https://www.theglobaleconomy.com/rankings/credit_rating/

[4] https://asiatimes.com/2022/10/singapore-dollar-the-worlds-other-safe-haven/

[5] https://www.bis.org/statistics/rpfx22_fx.htm

[6] https://knoema.com/nwnfkne/world-gdp-ranking-2022-gdp-by-country-data-and-charts

[7] https://www.mas.gov.sg/who-we-are/about-us#:~:text=To%20promote%20sustainable%20non%2Dinflationary,sound%20and%20progressive%20financial%20centre.

[8] https://www.mas.gov.sg/monetary-policy/singapores-monetary-policy-framework

[9] https://www.channelnewsasia.com/business/explainer-how-does-mas-monetary-policy-work-help-tame-inflation-2625381

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