Singapore losing export competitiveness as external surplus heads south

Current account surplus to GDP ratio has been falling.

According to DBS, latest current account surplus as of 4Q13 stands at SGD 17.4bn. While this is still exceptionally high at 20.9% of the GDP, it has been falling for the last 3 years.

This is about 24% lower than the recent peak of SGD 22.8bn or 30.9% of GDP in Dec10. This is also the longest stretch of decline in the current account to GDP ratio since the Asian financial crisis. 

DBS noted that the crux of the issue lies in export competitiveness.

Here's more:

The Eurozone debt crisis, a slow recovery in the US and comparatively slower growth in China all play a part in this decline. But weak external demand alone is not all there is to it. Usually weak external demand will be accompanied by weak import demand.

This is especially true for trade dependent economies like Singapore. The reason is weaker export sales bring slower growth and fewer demand for imports – the net impact on the current account balance tends to be minor. 

Decline in export competitiveness

So why the persistent decline in current account to GDP ratio? The crux of the issue lies in export competitiveness. Singapore’s real effective exchange rate (REER), a proxy for export competitiveness, has been appreciating vis-a-vis the average REER of the Asia-9 (ex-SG) economies. The appreciation of the Sing REER has lowered Singapore’s export competitiveness and stimulated imports. 

The REER is a function of relative domestic costs and the nominal effective exchange rate (NEER). When the SGD appreciates against regional currencies, or Singapore’s costs go up relatively faster, the REER rises / competitiveness falls. 

Exchange rate or relative costs?

Is the exchange rate or relative cost differentials mainly responsible for the higher REER? Both play a part. The Sing NEER has appreciated steadily against the regional currencies since 2004. It reflects both the exchange rate policy stance of a gradual ap-preciation of the Sing NEER employed by the Monetary Authority of Singapore (MAS) as well as the perceived strength of the economic fundamentals of the economy.

Moreover, the gap between the Sing NEER and the Asia-9 (ex-SG) NEER widened whenever risk aversion in the external environment rose. That occurred during the periods of the US financial crisis in 2008-2009 and the Eurozone debt crisis in 2010-2012. While this underscores the “safe haven” status of the Singapore economy, the appreciation in the Sing NEER has been a pain for local exporters.

Relative higher inflation also underlies higher REER. Local inflation had long been lower than the average of the other eight Asia countries until mid-2010, when Singapore’s prices began to rise faster than elsewhere.

Apart from dearer transport and rental costs, curbs on foreign labour have pushed costs up and put a strain on enterprises. Unit labour cost has been rising steadily over the past few years.