CROSS-CURRENCY FINANCING, COST OF CAPITAL AND CORPORATE INVESTMENT IN SINGAPORE.

Abstract

This paper examines firm investment decisions in response to exchange rate fluctuations. To study exchange rate fluctuations’ effects is to study monetary policy transmission on Singapore’s economy, because the country controls exchange rate as a vehicle of monetary policy. We find that, for firms with USD-denominated debt, domestic currency depreciation positively affects investment decisions. The reasons behind this result is: (i) dominance of exporting firms and (ii) price elasticity for goods in the tradable sector. We find that there is little evidence that devaluations cause a positive impact on non-tradable firms, even though data suggests firms in this sector have a significant currency mismatch. However, analysing USD-denominated debt composition reveals the currency mismatch to be unimportant to non-tradable firms’ investment decisions, due to a sharp decline USD-denominated debt as a portion of total debt for nontradable firms since the 2008 Global Financial Crisis.