BAF3009 Financial Institutions & Markets Tutorial

TUTORIAL 12: MAS & SPECIALISED FINANCIAL INSTITUTIONS

Question 1

Monetary Policy in Singapore has been centred on the management of the Singapore
Dollar (SGD) exchange rate. The primary objective is to promote the stability of the SGD
exchange rate.

Briefly explain the four (4) main features of the Singapore exchange rate system.

• The SGD is managed against a basket of currencies of its major trading partners
and competitors. The various currencies are given different weights, depending on
the extent of our trade dependence with that particular country.
• The MAS operates a managed float regime for the SGD. The trade-weighted
exchange rate is allowed to fluctuate within an undisclosed policy band, rather than
kept to a fixed value.
• The exchange rate policy band is periodically reviewed to ensure that it remains
consistent with the underlying fundamentals of the economy
• The choice of the exchange rate as the intermediate target of monetary policy
implies that MAS gives up control over domestic interest rates (and money supply).
Interest rates in Singapore are largely determined by foreign interest rates and
investors expectation of the future movements in the SGD.

Question 2

Discuss the possible reason(s) for MAS not to manage the Singapore Dollar (SGD) using
either the floating or the fixed exchange rate regime.

Floating regime is too unstable

If there is a floating system, because Singapore is an export oriented open economy, it is

highly possible that inflation will occur (because the interest rate will rise and fall very
easily), if it does, it will cause the cpf earnings being eroded due to inflation.

If it is a fixed rate system, the Central Bank will have to keep ‘buying’ to prevent the
money from dropping too much! The cost here is big.

Why not floating exchange rate?

• Advantage of a floating exchange rate regime
o the ability to pursue an independent monetary policy
o ability to affect domestic interest rate and consumption
• With its open economy, Singapore aims to promote price stability
o Price stability is difficult with a floating regime

Why not fixed exchange rate?

• Fixed regime  cost resulting from the adoption of the anchor country’s monetary
policy
o may be a result of a divergence in business cycle of the two economies
• E.g., Hong Kong pegs its currency to the USD
o Hong Kong’s business and economic cycle has become increasingly aligned
with that of China
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Early 1990s; Hong Kong economy was growing rapidly  warranted tighter
o
monetary conditions
o its interest rates fell in line with those of the US’  contributed to an asset
price bubble#
*Us was experiencing an economic slowdown
# occurs when speculation in a commodity causes the price to increase  producing
more speculation  price of the good then reaches absurd level

Question 3

Refer to the article:

“Can you afford to retire?” Straits Times dated 18 December 2004

(a) How much savings per person would be needed at age 62 for the person to
maintain a ‘reasonable’ living standard for 20 years?

$1 million in the bank

• It works out to $36,000 per year or $4,000 a month, or $2,000 each if shared by a
couple,

In a more recent article, ‘Dream or nightmare, ST dated 23 April 2006” the amount quoted
was S$250,000 (not just adjusted for inflation) per person
• It works out to be S$18,000 per year or S$1,500 monthly

(b) Discuss the retirement issues highlighted in the article

Key retirement issues

More people may be working past the age of 65 as they currently lack the retirement
funds. According to CPF Board, most Singaporeans have difficulty meeting the minimum
sum of $84,500 when they turn 55.

Circumstances have changed to alter people’s ability to generate sufficient wealth to retire
comfortably

• Returns on their investment have not been up to their expectations – stock markets
have been affected by events like Asian Financial Crisis, bursting of Dot.com
bubble and September 11 attacks.
• SARS outbreak in 2003 adding pressure on Singaporeans as the national economy
undergoes structural changes. This resulted in people losing long-held job, wages
freeze or cuts and reduction in CPF contributions.
• Many home owners were negatively affected when the value of their homes fell
from their 1996 peak value. Many will not be able to realize capital gains from
selling their homes.

Many Singaporeans have not actively started building their retirement funds and the
concept of financial planning only caught on here recently.

• Previously, many tended to just leave their money in savings account which
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struggles to keep up with inflation, much less add value to personal wealth

In addition, they will have to take into consideration:

• Rising medical cost (huge medical expense would wipe off a large portion of your
savings)
• Longer life expectancy (It is prudent to plan for at least 25 years of retirement
instead of 20 as about 40% of more people are likely to live beyond 82)

Faced with these issues, working well beyond the mandatory retirement age of 62 may
become the new norm for many Singaporeans as it buys them time to get their finances in
order.

(c) Suggest any 2 ways on how to bridge the retirement gap between the level of
retirement funds a person needs and the person’s ability to achieve that sum.

Suggestions’ on bridging the gap

• Spend less during your working years and save more (invest your savings)
• Retire later
• Revise your expectations for retirement and reduce your retirement income (to
reduce the sum required)
• Put your money in more aggressive investments (bear in mind that investment
returns may be volatile)
• Extra suggestions: Buy an annuity as it offers a lifetime of guaranteed monthly or
annual income, no matter how long you live.

*Taken from article ‘Dream or nightmare’, ST dated 23 April 2006.

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