Singapore's competitiveness 'deteriorating'

The country's Real Effective Exchange Rate has been rapidly appreciating over the past 2-3 years.

According to DBS, Singapore’s slowdown is not driven entirely by the external environment. Domestic policies have played a part too, especially those affecting competitiveness.

Here's more from DBS:

This was best reflected by the significantly faster appreciation of the Real Effective Exchange Rate (REER) versus the average REER for Asia-8 countries over the past 2-3 years. This came after a shift in policy stance to an appreciation of the Sing dollar Nominal Effective Exchange Rate (NEER) in Apr10.

On an individual country basis, Singapore’s REER has appreciated against most of the regional peers except for the Chinese yuan and the Philippine peso. Overall, a stronger exchange rate is likely to have diluted Singapore’s export competitiveness and contributed to its weak export and industrial growth. 

A tighter Sing dollar policy was engineered back in 2010 to cool an economy expanding at a 14.8% rate. However, the appreciation in the REER is not entirely driven by a stronger Nominal Effective Exchange Rate (NEER). The REER, which incorporates inflation differentials between Singapore and its trading partners, was also driven higher by above-average domestic inflation.

Indeed, Singapore’s inflation has always been lower than the Asia-8 until mid 2010. And Singapore’s inflation in recent years has predominantly been driven by domestic factors. This explains why the gap between REER and NEER has narrowed significantly in the last two years. This also happens to be the time when domestic price pressure overtook imported inflation to become the key driver.