Singapore Allows Currency Gains as GDP Beats Estimates

Singapore’s central bank maintained its commitment to currency appreciation after the economy shrank less than estimated last quarter, forgoing stimulus as labor shortages and record home prices fuel inflation.

Gross domestic product fell an annualized 1 percent in the three months through September from the previous quarter, when it expanded a revised 16.9 percent, the trade ministry said in a statement today. The median in a Bloomberg News survey of 13 economists was for a 4 percent contraction. The central bank, which uses the island’s dollar to manage inflation, said it will maintain a modest and gradual appreciation of the currency.

Singapore has resisted monetary easing since October 2011 as curbs on foreign workers led to a tight labor market, and car and home prices surged. Inflation risks from China to Indonesia have added to the challenge for Asian nations as they confront slowing growth, with the International Monetary Fund cutting its global outlook for this year and next and the U.S. fiscal policy deadlock threatening the world economy.

“Inflation remains a slightly higher priority,” said Enrico Tanuwidjaja, an economist at Nomura Holdings Inc. in Singapore. “The current course is pretty much optimal. The MAS may not need to alter policy unless there is material change in the growth or inflation outlook as structural adjustments in the economy may affect growth in the short term.”

The Singapore dollar was little changed at S$1.2456 against its U.S. counterpart as of 5:05 p.m. local time today. The currency has weakened about 2 percent this year.

No Adjustment

The Monetary Authority of Singapore was predicted by 19 out of 21 analysts to keep the current stance of a “modest and gradual” appreciation in the Singapore dollar and refrain from adjusting the trading band today. At its last review in April, it stuck to the policy of allowing gradual gains in its dollar.

The economy expanded 5.1 percent last quarter from a year earlier, after growing a revised 4.2 percent in the previous three months. The median estimate in a Bloomberg survey was for a 3.8 percent gain. The government forecasts economic growth of 2.5 percent to 3.5 percent this year, and the central bank said today the expansion is “unlikely to be significantly different in 2014.”

Bank of America Merrill Lynch raised its estimates for Singapore’s GDP growth after today’s report, predicting 2013 expansion of 3.5 percent and 2.8 percent for next year.

“This policy stance is assessed to be appropriate, taking into account the balance of risks between external demand uncertainties and rising domestic inflationary pressures,” the central bank said. “The Singapore economy should continue to expand for the rest of 2013 and into 2014, although some volatility in growth rates is likely. There are short-term uncertainties in the external environment.”

Cost Pressures

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 separate report today showed Singapore’s retail sales dropped more than economists estimated in August from a year earlier. Elsewhere in the region, China’s exports unexpectedly fell from a year earlier in September and inflation jumped on food prices, signaling constraints on the nation’s recovery as Premier Li Keqiang seeks to sustain growth without adding monetary stimulus.

India said wholesale-price inflation quickened last month, while a report showed euro-area industrial output increased in August from July.

Inflation Gains

Singapore’s inflation accelerated to a five-month high of 2 percent in August on food and housing, after earlier easing from more than 5 percent in mid-2012. Inflation may be at the upper half of the forecast range of 2 percent to 3 percent this year, the central bank said today.

“Barring a significant deterioration in global demand conditions, the labor market will remain tight, and exert further upward pressures on MAS core inflation as firms pass on accumulated costs to consumer prices,” the central bank said.

International finance chiefs last week warned that failure by U.S. lawmakers to resolve their debt spat would hurt the global recovery. A political stalemate has closed the U.S. government since Oct. 1, raising concern the standoff could end with the world’s largest economy unable to cover its bills and returning to recession.

U.S. Impasse

Singapore’s central bank said last week it closely monitors all market developments including the ongoing U.S. debt impasse and will take action if needed to safeguard the purchasing power of its reserves. The monetary authority held about $81.5 billion of U.S. Treasuries as of July.

The trade-dependent economy cut its exports outlook for this year in August as a slowdown in China hurt demand for goods. Non-oil domestic exports may be unchanged or rise 1 percent this year, compared with a previous forecast of 2 percent to 4 percent, according to the trade promotion agency.

Manufacturing fell 3.4 percent last quarter from the previous three months, when it grew 33.5 percent. The services industry expanded 1 percent in the same period, while construction contracted 8.8 percent.

(To receive this column daily, click SALT ECOCOL.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE