Certificate of Entitlement (COE), is a license issued by the Singapore Government to own a car in Singapore. Each COE is good for 1 car, and is generally used as a gauge for the economic well-being of Singaporeans as it is sold via auction format.
Case in point, during the Financial crisis not too long ago, COE was at a measly 2 SGD (Nov 2008), making current record high of $92,100 SGD a staggering 4,605,000% absolute gain, or around 16,637% annualized gain. If COE was freely tradable, this would be Singapore’s “Tulip Mania” moment.
To rub salt into the wound, COE is a depreciative sunk cost, as each COE is valid for 10 years, at the end of which the market value for a COE becomes ZERO. Furthermore, in case it hasn’t been pointed out before, this license to own a car DOES NOT include the actual car itself, adding a car into the mix, a car owner have to put up with approximately 150,000 SGD (122,000 USD) just to own a 1,600 CC car, and equivalent to a Ford KA or Fiesta.
Why is this important then? Well, towards the end of 2012, many analysts believe Singapore is heading towards a recession, and that could be off the mark with property prices hitting new highs in Dec, and now Jan COE prices hit new highs too. Even if the economic fundamentals might be weak, consumer confidence must be at an all time high.
What does this mean for the SGD then? Well, if we assume that fundamental demand is the driving force for the rise in property prices and COE, and not purely due to speculation, current trend may continue into 2013. The Government might be called in to stem inflation risks, as there have already been murmurs within social circles regarding dissatisfaction torwards high cost of living. All this add onto pressures for the MAS to actively appreciate the SGD in response to the spiraling inflation. When all was doom and gloom during Oct 2012, MAS choose not to weaken SGD to many surprises, resorting to minor selling of SGD via agent banks during that few months rather than changing the reference price band of SGD outright. If inflation continues to worsen, MAS might be forced to do the unthinkable and strengthen SGD, something that has not been attempted since 1997 Asian Currency Crisis.
MAS next monetary policy announcement will be in April 2013.
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