Overview of Monetary and Financial Developments

It has been observed that large capital inflows often give rise to increases in money supply and domestic liquidity, appreciation of both nominal and real exchange rates, and acceleration in asset prices. Hence, a country experiencing excessive capital inflows usually has to face the challenges of inflationary pressures, loss of a competitive exchange rate (which could undermine the international competitiveness of its manufacturing sector) and misallocation of capital into unproductive projects. In what follows, we provide a series of charts that give an overview of monetary and financial developments in Singapore since 1990. Specifically, Figures 7 to 12 depict the trends in Singapore's monetary aggregates, short-term interest rates, nominal and real effective exchange rates, consumer price and wage inflation, asset price indices, loans to key sectors of the economy, and value added for the key sectors of the economy, respectively.

It is clear from Figure 7a [ PDF 39.4KB | 1 pages ] that domestic liquidity has been growing since the 1990s. The monetary aggregates rose steadily until quarter one of 2006,⁷ after which they exhibited a sharp acceleration. Indeed, over the last two years, the year-on-year (y-o-y) monetary growth rates (see Figure 7b [ PDF 39.4KB | 1 pages ]) have exceeded the y-o-y nominal GDP growth, which has averaged 10% only over the same period.

The various short-term interest rates—overnight, 1-month, and 3-month inter-bank rates—moved in tandem, staying low at below 4% after the temporary spike during the crisis (see Figure 8 [ PDF 39.5KB | 1 pages ]).

Turning to exchange rates, we see from Figure 9 [ PDF 39.5KB | 1 pages ] that the Singapore nominal and real effective exchange rates (NEER and REER, respectively) exhibited an upward trend before the crisis, reflecting the Balassa-Samuelson effect. The NEER leveled off after the weakening of the currency during the crisis. Nonetheless, an appreciation in the NEER is discernible in the most recent period, reflecting a return of the Singapore dollar to an appreciation path against its major trading partners. By comparison, the REER continued its depreciation path for some time after the crisis, reflecting deflationary trends in domestic wages until the most recent period. Correspondingly, Figure 10 [ PDF 37.8KB | 1 pages ] shows that while the consumer price inflation stayed low, growth rates of unit labor cost have frequently been negative post-crisis.

By contrast, stock prices have risen rapidly since 2003 (see Figure 11 [ PDF 37.8KB | 1 pages ]) in tandem with the increase in portfolio inflows to the local stock market (see Figure 4 [ PDF 28.6KB | 1 pages ]). A similar surge in property prices is seen in Figure 11, but this started only in the more recent period, with rising foreign investor interest in the high-end residential segment of the property market.

Concomitantly, we observe a pickup in the trend for loans to the construction sector in the recent period. Meanwhile, loans to the commerce and financial sectors also registered a rise in the corresponding period. However, loans to the manufacturing sector mostly remain steady (see Figure 12 [ PDF 42.2KB | 1 pages ]).

As for the real economy, the FDI inflows into the various sectors of the economy have boosted the growth of these sectors. It is evident from Figure 13 [ PDF 42.2KB | 1 pages ] that the manufacturing, financial, and commerce sectors all exhibited relatively faster growth rates in recent years, no doubt benefiting from direct investment flows into their industries.

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