May 19 (Bloomberg) -- Singapore raised its growth forecast for 2011 after the island’s economy expanded the most in Southeast Asia last quarter, sustaining pressure on the central bank to allow the currency to appreciate.
Gross domestic product will increase 5 percent to 7 percent this year, from an earlier forecast of 4 percent to 6 percent, the trade ministry said today. The economy expanded 22.5 percent in the three months through March from the previous quarter, compared with a preliminary estimate of 23.5 percent.
Singapore’s expansion has fueled a surge in the cost of living that helped propel opposition parties to a record share of the vote in this month’s election. The report spurred a third straight day of gains in the local dollar, bringing the advance against its U.S. counterpart to 13 percent over the past year as policy makers use currency appreciation to temper inflation.
“Domestic and external demand remains strong and we’ll probably continue to see more gains in the Singapore dollar this year,” said Kit Wei Zheng, a Singapore-based economist at Citigroup Inc. “Consumer price inflation may have peaked but pressures in the pipeline will remain elevated.”
The Monetary Authority of Singapore said last month it would allow further gains in the currency in the third tightening of monetary policy in a year. Global central banks are raising interest rates, removing excess cash from their financial systems or allowing their currencies to appreciate as rising oil and commodity prices fuel inflation.
The Singapore dollar is the best performer in Asia outside Japan in the past 12 months. The currency rose 0.5 percent to S$1.2377 against its U.S. counterpart as of 9:49 a.m. local time.
The island’s expansion came even as the GDP of Japan, the island’s seventh-biggest trading partner, shrank at a more-than-estimated 3.7 percent pace in the first quarter, according to a government report today.
Singapore’s government has boosted financial services and tourism to reduce its reliance on exports. Companies from Singapore Airlines Ltd. to hotel operator Shangri-La Asia Ltd. have benefited from record tourist arrivals. Genting Singapore Plc, one of the two casino operators in the city, turned to a first-quarter profit of S$305.4 million ($247 million) in the three months ended March 31 as sales almost tripled to S$922.6 million.
While Japan’s GDP is shrinking, economies from Germany and China to Brazil have sustained their economic rebounds. Singapore’s trade ministry said today advanced economies “remain on a path of modest recovery,” citing an improving labor market in the U.S., rising exports and household spending in the European Union and “healthy” growth in emerging Asia.
“The global recovery story remains largely intact and Singapore is a beneficiary of that expansion,” Selena Ling, head of treasury research at Oversea-Chinese Banking Corp. in Singapore, said before the report. “While inflation has probably peaked, the economic environment may get a bit more challenging in coming quarters.”
Singapore, located at the southern end of the 600-mile (965-kilometer) Malacca Strait, benefited from improving overseas demand for manufactured goods as the global economy recovered from the 2009 slump.
The Southeast Asian nation’s economy grew a record 14.5 percent in 2010. Singapore’s economic performance will probably stay at “high levels” for the rest of 2011, spurring inflationary pressures even as the island tightens monetary policy, the central bank said last month.
A “tight” labor market will add to business costs, the trade ministry said today. Cost pressures may build up further and impact business activity, Kwek Mean Luck, a deputy secretary at the Ministry of Trade and Industry, said in Singapore today.
Prime Minister Lee Hsien Loong’s government is distributing cash to its citizens and giving out utility rebates to limit the effect of price increases. The country held elections this month, and the ruling People’s Action Party was returned to power with the smallest percentage of popular votes since independence in 1965 as citizens complained about the rising cost of living.
Inflation may have peaked and a stronger currency has helped damp price gains, central bank Managing Director Ravi Menon said yesterday. Singapore’s monetary policy remains appropriate and the central bank still expects inflation to average 3 percent to 4 percent this year, Ong Chong Tee, deputy managing director at the Monetary Authority of Singapore, said at a press briefing today.
Central banks in Vietnam, India and Malaysia raised borrowing costs this month to curb price increases. Malaysia reported yesterday that inflation accelerated to a two-year high.
In Singapore, where demand for private homes and mortgages has boosted earnings for companies including lender DBS Group Holdings Ltd. and real-estate developer City Developments Ltd., policy makers have introduced measures to curb property speculation.
The revised economic expansion in the first quarter compares with the 22 percent median forecast of nine economists in a Bloomberg News survey. Compared with a year earlier, the economy grew 8.3 percent last quarter, the ministry said. That’s higher than the growth rates of Malaysia, Indonesia, Vietnam and the Philippines, and exceeds the 2.7 percent pace estimated for Thailand in a Bloomberg News survey.
Singapore’s manufacturing will be bolstered by new plants in the chemicals industries and higher production by biomedical companies, while economic growth will spur lending and insurance, the trade ministry said in a statement today.
Risks to growth include “continued concerns of sovereign debt sustainability in Europe, further increases in global oil prices arising from the political turmoil in the Middle East and North Africa region, and a prolonged disruption of industrial activities in Japan,” it said.
Neighboring Malaysia, Singapore’s biggest trade partner, reported yesterday growth slowed to 4.6 percent last quarter as manufacturing and services moderated.
“Local manufacturers could be affected should the disruption supply from Japan persist into the second half of 2011,” the Singapore trade ministry’s Kwek said.
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