Singapore Says Neutral Policy to Stay as Economy Shrinks

  • Manufacturing plunges 17.4%, services industry declines 1.9%
  • MAS says growth not expected to pick up significantly in 2017

Is Singapore on the Verge of a Recession?

Singapore’s central bank signaled it will stick to its neutral currency policy for an extended period of time after the economy contracted the most in four years, sending the local dollar to a seven-month low.

After easing twice in 2015 and again in April, the Monetary Authority of Singapore, which uses the currency as its main policy tool, said Friday its stance of not seeking appreciation in the exchange rate will be needed for some time.

Singapore’s economy is more volatile than larger counterparts, and more closely tied to trends in global trade -- which has seen subdued expansion in recent years. That may prompt policy makers to resume monetary easing next year or turn to fiscal measures to shore up the economy, joining Asian central banks from India to Indonesia that are adding stimulus to counter sluggish global demand.

“The main thing for them is the global risks,” said Philip Wee, a senior currency economist at DBS Group Holdings Ltd. in Singapore. “Singapore is keeping its powder dry. At the same time the global trend is moving away from monetary toward fiscal policy as well. ”

The MAS said Friday it will maintain a policy of zero-percent appreciation in the exchange rate, in line with expectations of 21 of 24 economists surveyed by Bloomberg. It also said growth in the city state won’t pick up significantly next year, after a report showed gross domestic product shrank an annualized 4.1 percent in the third quarter from the previous three months, worse than the most pessimistic forecast in a Bloomberg survey.

Currency Slides

The Singapore dollar fell 0.5 percent to S$1.3879 against its U.S. counterpart as of 2:50 p.m. local time, after earlier dropping to as low as S$1.3917, its weakest level since early March.

The central bank guides the local dollar against a basket of its counterparts and adjusts the pace of its appreciation or depreciation by changing the slope, width and center of a currency band. It doesn’t disclose details on the basket, or the band or the pace of appreciation or depreciation. The MAS has two scheduled policy announcements a year, one in April and the other in October.

The central bank’s statement was “dovish” and signals it would be comfortable with a weaker currency, Australia & New Zealand Banking Group Ltd. analysts Khoon Goh and Weiwen Ng said in a note. The MAS’s comment that the current policy band provides some flexibility for the currency to accommodate the near-term weakness in inflation and growth is “a clear hint as to the direction they want” the trade-weighted exchange rate to head toward, they said.

Manufacturing Slump

The government has said it’s confident the economy will avoid a recession this year, taking some pressure off the central bank to act after it eased policy in April. It also turns the focus to fiscal policy to help cushion the economy, said Brian Tan, a Singapore-based economist with Nomura Holdings Inc.

“Next year we should see a bit more fiscal support,” Tan said. “There’s definitely room for greater spending.”

The manufacturing industry plunged an annualized 17.4 percent in the third quarter from the previous three months, weighed down by the transport engineering, biomedical and general manufacturing sectors, the trade ministry said. The services industry, which makes up about three-quarters of the economy, contracted an annualized 1.9 percent.

“Growth in the Singapore economy weakened and is not expected to pick up significantly in 2017,” the MAS said. GDP growth for the year will be closer to the lower end of the 1 percent to 2 percent forecast range, and only slightly higher in 2017, it said.

Consumer prices have declined every month since November 2014, reflecting the effect of lower oil costs and a weaker property market, and dropped 0.3 percent in August. The MAS said inflation has “troughed” and is expected to come in at 0.5 percent to 1.5 percent in 2017. The core inflation measure, which excludes the costs of accommodation and private road transport, will “rise only gradually next year,” it said.

“With underlying growth decelerating and the MAS gloomy on regional trade volumes, there remains the risk that inflation does not make much headway back to target,” said Sean Callow, a senior strategist at Westpac Banking Corp. in Sydney. The central bank is set to lower the center of the band when it next decides on policy in April “if the economic outlook softens again into early 2017,” he said.

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