Even a well managed country like Singapore have to bow down to slow down, what do you think of Malaysia?

Singapore to slow currency rise as economy shrinks

SINGAPORE, Oct 10 — Singapore’s central bank is expected to ease monetary policy on Friday by slowing the local dollar’s pace of appreciation, according to a Reuters poll, amid signs the economy contracted in the third quarter. The Singapore dollar, the world’s 12th most-traded currency, has gained around 5.4 per cent so far this year, helped by rising foreign investment in Singapore assets that are seen as a safe haven amid the turmoil in global financial markets. The currency’s strength has, however, increased pressure on manufacturers already reeling from weak global demand, and most forecasters predict the Singapore economy shrank sequentially in the third quarter. But the city-state may still avoid a technical recession, defined as two consecutive quarters of contraction in gross domestic product, as Prime Minister Lee Hsien Loong has said second-quarter GDP may be revised upward to show a positive number. Singapore’s economy contracted a seasonally adjusted and annualised 0.7 per cent in April-June, surprising the majority of economists who had forecast a slight expansion. Meanwhile, inflation remains high by historical standards, even though the pace of price increases slowed to a nearly two-year low in August, forcing the Monetary Authority of Singapore (MAS) to find a balance between stimulating the economy and keeping cost pressures in check.

“Given the fact that inflation is still fairly high, and to anchor inflation expectations, we think that the central bank is unlikely to shift to a completely neutral policy,” Credit Suisse said in a note to client. Credit Suisse is one of the 17 forecasters polled by Reuters that expect MAS to ease policy. Four others, HSBC, ING, Nomura and Royal Bank of Scotland, predicted the central bank will stand pat, given still-strong inflationary pressures. “The economy remains at the risk of persistent high inflation fuelled by imported low short-term interest rates from the US Inflation has been on the high side among Asian countries and we expect that MAS will look through the activity slowdown and maintain the current policy,” said ING economist Prakash Sakpal. Singapore manages monetary policy by letting its dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band. At its April policy announcement, MAS reiterated its bias for a “modest and gradual appreciation” of the Singapore dollar and increased the slope of the policy band slightly, indicating it will let the currency appreciate at a faster pace to help lower inflation expectations. The central bank also narrowed the policy band, indicating it will allow less fluctuations in the local currency. MAS had, in previous recessions, let the Singapore dollar fall in value by re-centering the exchange rate policy band downwards — the equivalent of a one-off depreciation — and adopting a zero per cent appreciation path.

Intervention The Singapore dollar was trading at around 1.23 per US dollar early today. Analysts believe it has been at the top end of the policy band for most of the past few months, even hitting the upper end of the band several times. MAS has been intervening to keep the Singapore dollar within the policy band, traders said, with the aim of not only keeping the currency within prescribed limits but also putting a floor under interbank rates, which are linked to Singapore dollar forwards. A deluge of cheap cash pumped by central banks in the developed world and the surge in foreign companies seeking to raise Singapore dollar loans and debt that are subsequently swapped into another currency has depressed yields, and traders said MAS’s intervention in the swap market were the main reason interbank SIBOR rates were not further depressed. The one-year SIBOR has stayed around 0.57 per cent since April. MAS’s forward book shows it has long foreign currency positions totalling US$109 billion (RM327 billion), evidence of its intervention to soak up Singapore dollar liquidity from the spot market.

Other measures Singapore’s purchasing managers’ index (PMI) slipped deeper into negative territory last month, dropping to 48.7 points from August’s 49.1 and staying below the 50 level that separates expansion from contraction for the third straight month as new manufacturing orders shrank. But unlike in previous recessions, the job market remains tight due to government measures to make it harder for firms to hire cheaper foreign workers, and businesses continue to face other rising cost pressures such as rent. Singapore’s Association of Small and Medium Enterprises said a recent survey showed four-in-five members are struggling with rising costs and that three quarters expect costs to continue rising in the next three months. Francis Tan, an economist with United Overseas Bank, said Singapore’s headline inflation will remain above the 10-year average for another two to three quarters and authorities will have to introduce more administrative measures to keep prices in check instead of just relying on “very blunt FX tool”. — Reuters

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