Singapore prospects remain bright


AMID a rising interest rate environment, the Monetary Authority of Singapore (MAS) has tightened its monetary policy setting recently by re-centring the Singapore dollar nominal effective exchange rate (S$NEER) band to the predominant level and increasing the appreciation rate of the policy band. However, there is no change on the width of the policy band.

The MAS manages its monetary policy through exchange rate settings, rather than interest rates, because Singapore is a small and open economy, where gross exports and imports of goods and services are more than 300% of gross domestic product (GDP) and almost 40 Singapore cents (RM1.25) of every S$1 (RM3.12) spent domestically is on imports.

By adjusting the S$NEER, it let the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed band. It adjusts its policy via three levers: the slope, mid-point and width of the policy band to achieve its objective.

Historically, this is the first time in 12 years that the policymakers used these two tools concurrently in managing its policy.

Also, this tightening move came in for the third time since October 2021 after the ravaging effects of the pandemic. To recap, the MAS first tightened its policy setting in October by shifting the slope of S$NEER band to appreciation path from neutral.

The action was a pre-emptive move in making sure that the economy does not overheat over the short to medium term.

The backdrop of such decision was a local economy that is rebounding from the Covid-19 outbreak on the back of vaccination access, strong external demand, recovering manufacturing output and strong external demand despite some short-term disruptions induced by the Delta variant.

At the same time, the pace of rising inflation and core inflation was faster than what was initially expected due to the surging global commodity prices and also its net oil importer status, and volatile global oil prices that pose significant impact on the domestic price level.

Also, the higher wage costs have pushed inflation higher. According to data, the inflation rate in July was at 2.5% – the highest since November 2013.

The second time the MAS tightened its policy was in January 2022 when it steepened the appreciation slope in an out-of-cycle move to proactively fight inflation even as the strength of the economic recovery remained uncertain. By then, the inflation rate has already reached 4%, driven by the commodity prices, supply chain frictions, and tighter labour market.

Anchoring inflation

Meanwhile, the MAS’ latest move this week was to slow the inflation momentum, help maintain purchasing power and anchor inflation expectations as imported food and fuel costs surge.

Note that the domestic cost pressures are driven by the fallout from the Ukraine-Russia war, causing global commodity prices to surge on top of the previous upward drive and resurgence of supply chain disruption.

Interestingly, the decision came after an advance estimate showed that 1Q22 GDP grew 3.4% year-on-year (y-o-y), which is slower than the 6.1% y-o-y in 4Q21 and lower than Bloomberg’s consensus of 3.8% y-o-y.

The decision was within our expectations where we see the central bank recognising the risk of a continued upside on inflation and taking a proactive decision to cool it down as it could weigh on the overall economic performance by increasing the cost of businesses and eating into the consumers’ purchasing power.

The move allows flexibility for the central bank to navigate headwinds from the accumulating price pressures, while remaining sensitive to the recovery in the domestic and travel-oriented sectors as the city-state transitions to living with the endemic Covid-19.

More tightening

Thus, taking the current global economic condition into consideration, where the upside risks on inflation are fuelled by the ongoing geopolitical situation, the worsening global supply chain disruptions and elevated commodity prices, we expect more tightening to be executed by the MAS.

The next tightening should be during the next meeting in October. Unless the risks deteriorate, we may see the MAS taking out-of-cycle action just like what happened last January.

We are still positive that the Singapore’s economy will grow healthily this year albeit at slower pace resulting from the geopolitical tension.

Our projection shows a 3.1% year-on-year growth this year, within the MAS projection range of 3% to 5%, and lower than the 7.6% in 2021.

Strong demand

The local economy will benefit from the manufacturing sector due to the still-strong global semiconductor demand, reopening of borders which provide an upward drive for the low-hanging industries such as hospitality, food and beverage, and retail.

The construction sector should also improve from a low-base effect but it may be stifled by the shortage of foreign workers and rising costs of construction materials.

Highly dependent

But the downside risks may have heightened as of now. Despite the city-state holding little-to-no trade share with Ukraine or Russia, Singapore is highly dependent on the global supply chain and any disruptions will in turn, put pressure on its economy.

In addition, the snap Covid lockdowns implemented in key regions like Shanghai and Jilin in China due to Beijing’s zero-Covid policy, may dampen Singapore’s economic prospects.

Inflation-wise, we expect the Singapore economy to chalk up 3.3% in core and 5.3% year-on-year growth in headline inflation compared with the MAS’ projection of 2.5% to 3.5% and 4.5% to 5.5%, respectively.

Rising commodity prices, supply disruptions and worker shortages are deepening and complicating the inflation composition. Acting as a double-edged sword, the reopening of the borders will provide some relief in the labour market but will also possibly push wages up. For FX enquiries, please contact: ambank-fx-research@ambankgroup.com

For Fixed Income enquiries, please contact: bond-research@ambankgroup.com

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