Singapore May Ease Currency Gain as Growth Slows: Southeast Asia

Singapore May Ease Currency Gain as Growth Slows
Singaporean dollar bank notes are arranged for a photograph in Singapore. Photographer: Munshi Ahmed/Bloomberg

The Monetary Authority of Singapore will probably slow the pace of appreciation in the local dollar as moderating price pressures provide scope for measures to support economic growth, according to a survey of analysts.

Officials will curb gains in Singapore’s currency when they meet Oct. 12 by decreasing the slope of its trading band, according to 17 of 23 financial companies surveyed by Bloomberg News. Two said there’s a chance the MAS will widen the band in addition to reducing its slope. Five predict no change, while one projected a shift to a zero slope, the poll showed.

Recent data have shown bigger-than-forecast declines in manufacturing and exports, leading economists and investors to flag the risk of a technical recession. Singapore cut its 2012 growth forecast in August, and a report last month indicated the slowest pace of inflation in almost two years. That means the MAS has room to spur the economy by stemming gains in the exchange rate, its main policy tool, according to analysts.

“The Singaporean economy has largely underperformed the MAS’s expectations,” Frances Cheung, a Hong-Kong based strategist at Credit Agricole CIB, wrote in an e-mail Oct. 3. “The balance of risk has clearly shifted from inflation to growth.” Cheung predicted the MAS will announce a reduction to the Singapore dollar’s trading band slope.

Singapore’s central bank uses the exchange rate rather than borrowing costs to conduct monetary policy, adjusting the pace of appreciation or depreciation against an undisclosed trade-weighted band of currencies by changing the slope, width and center of the band. A flatter slope allows slower appreciation or depreciation over time.

Policy Stance

The local currency has soared 45 percent against the U.S. dollar during the past decade as the Singaporean economy more than doubled in size. Gains in the exchange rate hurt exporters while making imports cheaper, moderating inflation pressures.

The MAS maintained the Singapore dollar’s pace of gains and increased the slope of its trading band at its last review in April. “This policy stance will help anchor inflation expectations” and “keep growth on a sustainable path,” it said in an April 13 statement on its website.

Since then, evidence of a slowdown has accumulated. Prime Minister Lee Hsien Loong said in August that Singapore’s gross domestic product will expand this year between 1.5 percent and 2.5 percent, compared with an earlier projected range of 1 percent to 3 percent.

Export Figures

Non-oil domestic exports figures released Sept. 17 by the trade promotion agency showed a 10.6 percent drop in August from the same period in 2011, exceeding all 15 estimates in a Bloomberg survey, where the median was for a 4 percent drop. The Economic Development Board said last month industrial production declined 2.2 percent in August from the previous year, stumping economists who predicted a 1 percent increase, as companies reduced the output of electronics.

Currency strength has compounded the effects of slower growth. The Singapore dollar bought S$1.2302 as of 9:22 a.m. local time and has advanced 5.4 percent versus its U.S. counterpart since Dec. 30, making it the best-performing major Asian currency after the Philippine peso.

It reached S$1.2176 per dollar on Sept. 14, the strongest level in a year. The currency will probably be at S$1.24 by year-end before strengthening to S$1.21 by June 30, 2013, according the median projection of the 23 economists polled.

While the island nation is trying to boost its economy, it must also contend with an inflation rate that is one of the highest among its Southeast Asian peers.

Above Average

Singapore’s consumer price index rose 3.9 percent in August from a year earlier, the statistics department said on Sept. 24.

While that was the smallest increase since November 2010, it exceeds the average rate of 2.4 percent in the past 10 years. It compares with 1.4 percent in Malaysia, 3.6 percent in the Philippines and 3.4 percent in Thailand, according to the latest available data compiled by Bloomberg. Consumer prices rose 4.3 percent last month in Indonesia and climbed 6.5 percent in Vietnam.

“There aren’t enough concerns about growth to divert the attention of the authorities away from inflation that’s on the high side,” Tim Condon, Singapore-based head of Asian research at ING Groep NV, said in an Oct. 1 phone interview. Condon said he sees no change to MAS policy this month.

The World Bank said this week that growth in Asian emerging markets will probably be the lowest in 11 years in 2012, dragged down by China’s slowdown. This week the International Monetary Fund cut its forecasts for global economic expansion.

Recession Risk

Data due on Oct. 12 may show Singapore’s GDP fell an annualized 1.5 percent in the third quarter from the previous period, when it dropped 0.7 percent, according to the median estimate of economists surveyed by Bloomberg.

The MAS will need to “strike a balance” between inflation and the weaker global outlook, according to Gerard Teo, head of strategy & currency at Fullerton Fund Management, which oversees about S$10 billion ($8.1 billion) and is wholly-owned by state investment company Temasek Holdings Pte.

There’s a risk “the country may be slipping into a technical recession,” Teo wrote in an e-mailed response to questions. “We are marginally less sanguine about the global macro outlook.”

Company          Policy             SGD End-’12     SGD Mid-’13
ANZ              Decrease slope         1.23            1.22
Barclays         Decrease slope         1.22            1.20
BNP              Decrease slope         1.24            1.22
BofAML           Decrease slope         1.24            1.20
CIMB             Decrease slope         1.29            1.30
Citi             Decrease slope         1.25            1.27
Commerzbank      Zero slope             1.23            1.24
Credit Agricole  Decrease slope         1.24            1.21
Credit Suisse    Decrease slope         1.24             --
DBS              Decrease slope         1.26            1.24
Deutsche Bank    Decrease slope         1.23            1.20
Goldman          No change              1.22            1.20
HSBC             No change              1.23            1.21
ING              No change              1.238           1.22
JPMorgan         No change              1.21            1.19
Maybank          Decrease slope         1.24            1.23
Mizuho           Decrease slope         1.27            1.21
OCBC             Decr. slope &          1.243           1.211
                 widen band
OSK-DMG          Decr. slope &          1.25             --
                 widen band
RBS              No change              1.25            1.24
Stanchart        Decrease slope         1.22            1.21
UOB              Decrease slope         1.24            1.23
Westpac          Decrease slope         1.24            1.21
Median:          Decrease slope         1.24            1.21
Respondents: 23
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