Singapore Adopts 2008 Crisis Policy as Growth Grinds to Halt

Singapore 1Q GDP Rises 1.8% on Year
  • Central bank moves to zero appreciation stance on currency
  • Gross domestic product stagnant as services industry contracts

Singapore’s central bank unexpectedly eased its monetary stance, adopting a policy last used during the 2008 global financial crisis, as economic growth in the trade-dependent city-state ground to a halt.

QuickTake Currency Wars

The Monetary Authority of Singapore moved to a neutral policy of zero percent appreciation in the exchange rate, causing the local dollar to slide and dragging down currencies across Asia-Pacific. The surprise announcement came two days after the International Monetary Fund warned of the risk of negative shocks to the global economy.

“The MAS is delivering a strong message by returning policy to the post-Great Financial Crisis settings,” Sean Callow, a Sydney-based currency strategist with Westpac Banking Corp., said by e-mail. “The surprise move indicates a gloomy outlook for regional trade.”

As Asia’s financial hub, Singapore is feeling the effects of the global downturn and China’s weakening economy. Monetary easing follows an expansionary budget announced by Finance Minister Heng Swee Keat last month, indicating how severe authorities view the slowdown as businesses shut and growth in bank loans contract.

“The Singapore economy is projected to expand at a more modest pace in 2016 than envisaged in the October policy review,” the central bank said. “Core inflation should also pick up more gradually over the course of 2016 than previously anticipated.”

Dollar Slides

Gross domestic product posted zero expansion on an annualized basis in the first quarter compared with the previous three months, the trade ministry said in a separate report Thursday. That was in line with the median forecast of 12 economists surveyed by Bloomberg. 

“It seems that Singapore is using both fiscal policy and the exchange rate to address the situation,” Weiwen Ng, an economist with Australia & New Zealand Banking Group Ltd., said by phone from Singapore. “We may not be at the end of the easing cycle.”

The Singapore dollar fell 0.9 percent to 1.3627 per U.S. dollar as of 6:20 p.m. local time on Thursday.

The policy change may have a wider effect, causing central banks across the region to reassess their stance, said Trinh Nguyen, an economist with Natixis SA in Hong Kong.

“This is going to have an impact, although probably not an overt one,” she said. “People are reading into the fact that Singapore is a big trade center, kind of like the port of Southeast Asia, and people think that MAS has more information about the state of the regional economy than other people have.”

IMF Warnings

Indonesia’s central bank, which is due to announce its monetary policy decision next week, is among those that may be influenced by Singapore’s move, said Nguyen. Earlier on Thursday, Bank Indonesia lowered its daily reference rate for the local currency, the rupiah, by the most in two months.

The last time the MAS shifted its currency policy to zero appreciation was in October 2008, when the economy was in a recession. Thursday’s move was the bank’s second unexpected decision in less than 16 months, following an emergency policy change in January last year to combat the threat of deflation. Typically, policy decisions are made twice a year, in April and October.

The IMF warned on Tuesday that a prolonged period of slow global growth has left the world economy more exposed to negative shocks. The fund is predicting 1.8 percent expansion for Singapore this year, compared with the government’s projection of 1 percent to 3 percent.

Deflation Spiral

Singapore’s services industry, which makes up about two-thirds of the economy, contracted an annualized 3.8 percent in the first quarter from the previous three months, the first decline since the first quarter of 2015. Manufacturing and construction rebounded strongly in the quarter, expanding 18.2 percent and 10.2 percent respectively.

“The economy remains mired in an extended spell of deflation and steadily lower growth,” Andrew Wood, an economist with BMI Research in Singapore, said by e-mail. The central bank needed to adjust the currency because “Singapore’s competitiveness has taken a hit,” he said.

Citigroup Inc. economist Kit Wei Zheng said in a report last month that the decline in net new businesses for the first time since 2009 signals a possible recession. In the past two decades, the only times that business closures exceeded openings came during contractionary periods -- in 2009, 2001 and 1995 to 1997, he said.

More evidence of a sluggish economy comes from inflation and the housing market. Consumer prices fell 0.8 percent in February from a year earlier, declining for a 16th consecutive month to post the longest slump since the 1970s. Home prices dropped 0.7 percent in the first three months of the year, the 10th straight quarter of declines in Asia’s second-most expensive housing market.

Compared with the first quarter of 2015, GDP rose 1.8 percent, slightly better than the 1.7 percent median estimate in a Bloomberg survey.

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