Singapore added into US currency manipulation watchlist: what you need to know

The United States (US) Treasury added Singapore, and other Southeast Asian countries Malaysia and Vietnam to a watchlist for currency manipulation on Tuesday, placing the countries’ exchange rate policies under scrutiny.

According to the Treasury, Singapore hit two of the three criteria, which meant it was placed on the monitoring list along with Ireland, Italy, Malaysia, and Vietnam. The countries joined China, Japan, South Korea, and Germany, which are already on the watch list.

More Asian economies were included into the list due to a tightening of the monitoring criteria, but some experts suggest that the move could be related to the US-China trade talks, as those Southeast Asian countries on the list have close economic ties with China.

What is currency manipulation?

Currency manipulation occurs when a country manipulates the rate of exchange between its currency and another - for example, the US dollar - to gain a competitive advantage.

An agenda on the US administration’s list is to combat unfair currency practices that facilitate competitive advantage, such as unwarranted intervention in currency markets.

The Treasury looks at three criteria when it places a country on the watch list: A significant trade surplus with the US, a large current account surplus, and a persistent, one-sided intervention in foreign exchange markets. Countries that meet two out of the three criteria are placed on the watch list.

Currency manipulation is an issue that can be embroiled into trade conflicts as it can impact the price competitiveness of exports.

How does a country manipulate its currency?

The way a country manipulates its currency can be observed in the data, for example, through accumulating foreign reserves, selling its own currency, or hoarding another country’s currency.

For example, to push the value of its own currency down, a country can sell lots of its own currency which would lower its currency price.

Singapore is very unlikely to be labelled a currency manipulator, says CIMB Private Banking economist Song Seng Wun, as the country has a trade deficit with the US.

"Singapore is very unlikely to be labelled a currency manipulator because of one important condition, and it defies the logic of a currency manipulator. Singapore runs a large trade deficit, not surplus, with the US," explained Mr Song.

Why was Singapore added to the list?

The Treasury tightened its monitoring criteria to include not just America's 12 largest trading partners but any country with more than US$40 billion in bilateral goods trade.

It also reduced the current account surplus threshold from 3% of economic growth to 2%, and lowered the threshold for persistent net purchases of foreign currency.

Singapore had a total current account surplus that stood at 17.9% of its Gross Domestic Product (GDP) in 2018, equivalent to 4.6% of GDP, which was more than the threshold set by the US Treasury of 2%.

In the semi-annual report, the US Treasury Department said that no major trading partner had met its currency manipulation criteria, but that Singapore was placed on the watchlist due to its large current account surplus and foreign exchange intervention operations.

Being added to the monitoring list could imply greater scrutiny from the US. If a country is deemed as a currency manipulator, the US could impose trade sanctions.

In the report, the Treasury said Singapore should undertake reforms that will lower its high saving rate and boost low domestic consumption, while striving to ensure that its real exchange rate is in line with economic fundamentals, in order to help narrow its large and persistent external surpluses.

The US central bank also welcomed Singapore’s pledge to report more intervention data, although it acknowledged that currency adjustments is the country’s main monetary policy tool.

What did Singapore say to the currency manipulation?

Singapore’s central bank the Monetary Authority of Singapore (MAS) said on Wednesday that it does not manipulate its currency for export advantage. The country's monetary policy framework has always been targeted at ensuring a medium-term price stability, it said.

Singapore conducts monetary policy not by targeting interest rates, but by managing the Singapore dollar nominal effective exchange rate (S$NEER) within a policy band, it said.

In part of that, MAS may intervene in the foreign exchange market to prevent excessive fluctuations in the Singapore dollar exchange rate.

But the MAS does not and cannot use the exchange rate to gain an export advantage or achieve a current account surplus, the central bank said.

“A deliberate weakening of the Singapore dollar would cause inflation to spike and compromise MAS's price stability objective," it added.

Some experts have deemed that the US-China trade tensions may have influenced the Treasury’s latest move. As the countries added in the watchlist, such as Singapore, Vietnam and Malaysia have close economic ties with China, indicative that the US is continuing to pressure China on the trade deal.