Singapore/Malaysia: A scenario for currency stress

March 30, 2001

Download powerpoint show (88K)

INTRODUCTION: The way events are unfolding on the currency front, this scenario may no longer be unrealistic. Keep your fingers cross that it does not materialize. If it does, here is a script suggesting how events will unfold. A scenario in which the Ringgit come under stress will have a direct impact on Singapore and vice-versa. The source of the Ringgit troubles, we have already posted to this site in our March 29 piece, “Malaysia: Just buying time”. In this map, we want to show how the weakening Singapore dollar can add pressure to the pegged Ringgit, and what it means for policy makers in Singapore. (Fig 1)In the face of weakening Asian currencies, it is natural but unfortunate that Mahathir has to publicly reaffirm that the ringgit would not be re-pegged to the US dollar at cheaper rate. If rumors circulating cannot be exorcised, then the vicious reinforcing loop could appear, i.e., Box 1 and Box 2. It would pressure the government to respond with emergency measures (box 3)	How to Read Maps Maps Investment Maps Business Maps Experts Maps Other Maps Local Interest
(Fig 2) The first intervention in the markets is always a government statement (box 4). But would it be sufficient? For a government that is losing credibility (box 5), it probably is not.
(Fig 3) Sledge hammer measures would be needed at this point (box 6). What could these be? Devaluing the currency is not an option as it will become a self-fulfilling prophecy of capital flight. Cutting interest rates when confidence has flagged would also be counter productive. Instead you may be forced to do exactly the reverse. Further measures to stoke growth and putting money into consumers hands to spend would be the likely outcome. The details of how this can be achieved, we can only guess since the authorities may turn out to be quite creative.
(Fig 4) But the Singapore dollar is also weakening, which would also put the value of of the ringgit under pressure. Singapore as a major investor and trading partner to Malaysia, the economic relationship will go off balance if this happen. Therefore a weakening Sing dollar could potentially create a vicious cycle as in Box 1 and Box 2. We put the ringgit as Box 2 since it is the pegged currency, whilst Box 1, the SGD is floating. Therefore it is the SGD movement which will pressure the ringgit. Currency traders if they bet that the ringgit to be re-pegged lower will likewise weaken the SGD.
(Fig 5) The vicious cycle between Box 1 and Box 2 is a dangerous source of instability. The MAS will definitely try to nip such a loop in the bud (box 3). Suggestions that the Sing dollar will get to two dollars on the US dollar would appear over done. The problem is that a weakening yen could drag a the Sing dollar along with currency intervention offering little respite. However at that point, Singapore -Malaysia would not be the only stress point. Many other economies may have hit crisis by then. Watch out for the Singapore government taking pre-emptive measures for such a scenario (box 4). Because to try and persuade the market on the strong fundamentals of the currency when the crisis has hit would be futile. On the other hand, it is extremely hard to figure out a strategy that the market to buy into. There is not enough time for Singapore to leap frog the region, and diversity more broadly its economic relationships At this moment, the MAS is probably under intense pressure on how to respond. To allow the currency to run away, it would no longer be possible to reign in back. The nightmarish possibility of a vicious loop between Box 1 and Box 2 may arise.