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Singapore Maintains Currency Stance as Economic Growth Slows

Singaporean Dollar
The Singapore dollar was little changed at S$1.2487 against its U.S. counterpart as of 7:53 a.m. local time today. The currency has strengthened more than 1 percent this year. Photographer: Munshi Ahmed/Bloomberg

Singapore’s central bank maintained its pace of currency appreciation, seeking to support growth while guarding against inflation as the economy expanded less than analysts estimated last quarter.

Gross domestic product rose an annualized 0.1 percent in the three months through March from the previous quarter, when it expanded 6.1 percent, the trade ministry said in a statement today. The median estimate in a Bloomberg News survey of 14 economists was 0.4 percent. The central bank, which uses the island’s dollar to manage price pressure, said it will maintain a modest and gradual appreciation of the currency.

Singapore’s slowing growth underscores the risk that Asia’s economic outlook will be damped by an uneven global recovery, with the International Monetary Fund this month cutting its forecast for worldwide expansion in 2014 and urging emerging markets to prepare for flows of capital back to advanced economies. The island is also grappling with a labor crunch as a move to reduce reliance on cheap overseas workers and boost productivity has raised wage costs.

“It does suggest that the year starts off on a fairly tepid tone,” Selena Ling, a Singapore-based economist at Oversea-Chinese Banking Corp., said in a Bloomberg Television interview with Angie Lau. “We do see some of the manufacturing and export recovery coming through for Asia, but it’s on a fairly weak tone.”

The Singapore dollar fell 0.2 percent to S$1.2512 against its U.S. counterpart as of 10:08 a.m. local time. The currency has strengthened almost 1 percent this year.

‘Moderate’ Pace

Quarterly growth was the slowest in six quarters, based on data compiled by Bloomberg. The economy expanded 5.1 percent in the first quarter from a year earlier, after growing 5.5 percent in the previous three months, the trade ministry said today. The median estimate in a Bloomberg survey was for a 5.4 percent gain. The government has forecast expansion of 2 percent to 4 percent this year.

Singapore’s growth will be capped by supply-side constraints, particularly in the labor market, the central bank said today. Trade-related sectors should expand “at a moderate pace,” while domestic-oriented activities are expected to “stay resilient, supported by construction of transportation, housing and social infrastructure,” it said.

The central bank guides the local dollar against a basket of currencies within an undisclosed band and adjusts the pace of appreciation or depreciation by changing the slope, width and center of the band. A flatter slope allows slower appreciation or depreciation over time.

Price Gains

All 23 analysts surveyed by Bloomberg said the Monetary Authority of Singapore, which uses the exchange rate rather than borrowing costs as its main policy tool, would let the local dollar stay on a “modest and gradual” appreciation path.

Singapore’s inflation eased to 0.4 percent in February, the slowest pace in more than four years. A central bank survey of economists and analysts released last month forecast consumer-price gains to quicken to 2.8 percent this year from 2.4 percent in 2013.

The central bank today lowered its forecast for overall consumer-price gains in 2014 to 1.5 percent to 2.5 percent from 2 percent to 3 percent, mainly reflecting the “weaker outlook for imputed rentals over the rest of the year.”

Singapore is nearing the midpoint of a 10-year economic transition strategy to move away from dependence on cheap overseas workers while attracting new industries such as research and development. Prime Minister Lee Hsien Loong’s government has tightened the hiring of foreigners in recent years, after an influx led to voter discontent over infrastructure strains and increased competition for jobs, property and education.

Exports Gain

Exports rose 9.1 percent in February, the biggest gain in two years. Non-oil domestic exports will probably rise 1 percent to 3 percent this year, according to the trade promotion agency.

“The Singapore economy is expected to grow at a moderate pace in 2014, supported by the cyclical uplift in the industrialized economies,” the central bank said in a statement. “The level of economic activity should stay on a broad upward trajectory for the rest of the year,” it said, adding that inflation is expected to pick up in coming months.

Singapore’s manufacturing grew 4.5 percent in the first quarter from the previous three months, compared with 10.4 percent in the fourth quarter of 2013, data showed today. Construction expanded 10.7 percent, while services fell 1.8 percent in the same period.

Today’s advance GDP estimates for the first quarter are computed largely from data in the first two months of the year, and are subject to revision, the trade ministry said.

“If Singapore really fails to benefit fully from the external demand pickup, then I think the Singapore dollar cannot really appreciate because of the concern over export competitiveness,” said Frances Cheung, the Hong Kong-based head of Asian rates strategy at Credit Agricole CIB. “The focus is definitely on containing inflation expectations.”

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