Singapore In Recession, Loosens Monetary Policy

UNCLAS SECTION 01 OF 02 SINGAPORE 001110 TREASURY FOR SSEARLS SIPDIS E.O. 12958: N/A TAGS: EFIN ECON ETRD EINV SN SUBJECT: Singapore In Recession, Loosens Monetary Policy ¶1. (U) Summary. Singapore officials announced October 10 that third quarter GDP growth was a negative 0.5 percent, which on top of negative second quarter numbers placed the country into a technical recession. Analysts blamed the poor performance on declining industrial production and falling export figures. The Monetary Authority of Singapore (MAS),Singapore's central bank, announced a looser monetary policy, preventing the appreciation of the Singapore dollar in order to boost exports and support the economy in the midst of a global demand slowdown and financial crisis. If conditions continue to deteriorate, MAS may be forced to take a more aggressive policy stance before its next scheduled review. End Summary. ¶2. (SBU) The Ministry of Trade and Industry (MTI) released preliminary GDP estimates for the third quarter October 10 that showed Singapore in a technical recession, defined as a contraction of the economy on a seasonally-adjusted basis for two consecutive quarters. On a year-on-year basis, GDP contracted by 0.5 percent in the third quarter on the back of a broad-based slowdown in economic activities in the manufacturing and services sectors. Seasonally adjusted, GDP growth was negative 6.3 percent for the third quarter, building on a 5.7 percent drop in the second quarter of 2008. ¶3. With prospects of a domestic recession running parallel to possible recessions in the U.S., U.K. and Euro economies, the government downgraded its 2008 GDP forecast to 3.0 percent from 4.0-5.0 percent previously, and market participants similarly revised downwards their real GDP growth forecasts (see Table 1 below). In its Monetary Policy Statement, MAS predicted that economic growth would be below potential for the next few quarters, with a recovery dependent on economic conditions among its major trading partners. Table 1. Singapore's Real GDP Growth Forecasts -------------- - (Percent change) 2008 2009 Old Forecast New Forecast -------------- -------------- -------------- Government 4.0-5.0 3.0 na Citigroup 2.8 2.2 -1.2 Credit Suisse 3.9 3.2 2.8 Goldman Sachs 3.4 2.0 2.9 HSBC 3.8 3.0 4.8 JP Morgan 3.3 2.0 1.5 Standard Chartered 3.0 2.0 2.0 -------------- -------------- Source: Ministry of Trade & Industry and various bank reports ¶4. Analysts blamed the poor GDP growth figures on a sharp contraction in industrial output and exports. Manufacturing was off 11.5 percent in the third quarter, worsening from a 5.2 percent drop in the second quarter. Pharmaceuticals led the decline in both production and exports, followed by the sizable electronics sector. Domestic retail sales have also moderated, and falling visitor arrivals have hit the tourist market. Non-oil domestic exports continued their year-long decline, posting a 13-percent drop in September. Inflation vs. Growth -------------- ¶5. (U) On the same day as the MTI announcement, the MAS announced it would loosen monetary policy by halting the appreciation of the Singapore dollar against a trade-weighted basket of currencies. The action reverses MAS's tighter monetary policy made in April when rising inflation was the primary concern. At that point, inflation had accelerated from 2.1 percent in the whole of 2007 to 6.6 percent on a year-on-year basis in the January-February period of 2008 -- its highest level in more than 25 years. With inflation moderating, MAS sees the balance of risks shifting from inflation to growth. Analysts believe inflation peaked in June at 7.5 percent and has been moderating since, while GDP growth has suffered. For the remainder of the year, market analysts as well as the MAS expect inflation to continue to moderate, given the deflationary impact of the current financial crisis, and falling prices for oil, food and other commodities. Nevertheless, MAS is projecting inflation will remain elevated at approximately 6-7 percent for 2008, but will likely temper in 2009 to 2.5-3.5 percent as global economic growth continues to slow. Table 2. Singapore's Inflation -------------- Consumer Percentage Change Price Index Year-on-year -------------- -------------- 2002 97.8 -0.4 2003 98.3 0.5 2004 100.0 1.7 SINGAPORE 00001110 002 OF 002 2005 100.4 0.5 2006 101.4 1.0 2007 103.5 2.1 -------------- -------------- January 08 108.0 6.6 February 08 108.6 6.5 March 08 108.5 6.7 April 08 109.8 7.5 May 08 110.0 7.5 June 08 102.0 7.5 July 08 111.0 6.6 August 08 111.2 6.4 -------------- -------------- Source: Department of Statistics, Singapore Unique Monetary Policy Instrument -------------- ¶6. (U) MAS uses the exchange rate as its primary tool to fight inflation, rather than the interest rate as in most countries. As a small, open economy, Singapore operates on the premise that most inflation will be imported from overseas. By appreciating the local currency MAS makes imports cheaper and tempers inflation; conversely, depreciating the currency boosts exports and therefore GDP growth. Technically, MAS controls the exchange rate by intervening in the foreign exchange market to keep the rate within an undisclosed band verses a trade-weighted average nominal exchange rate, known as the Singapore dollar nominal effective exchange rate (S$NEER). MAS does not disclose the exact weights of the currencies used in the S$NEER, the currencies in the basket or the width or slope of the band of allowable changes for the Singapore dollar versus the S$NEER. MAS uses its twice annual policy statements to describe the general trend of its currency policy and any changes it intends to make to the intervention band. MAS To Halt Singapore Dollar Appreciation -------------- ¶7. (U) The MAS's policy statement on October 10 was considered dovish, opting for an easing of its exchange rate policy to prevent further appreciation of the Singapore dollar, rather than a bolder shift in the trading band of the dollar. Although the market had anticipated that the MAS would announce a looser policy, the Singapore dollar nevertheless weakened immediately, and analysts expect it to soften further by year-end. According to Citigroup, some participants in the market had expected a more aggressive move by the MAS. The analysts believe that the current policy stance may not be effective should global economic conditions continue to deteriorate sharply, and said MAS may need to take a more aggressive policy stance before its next scheduled review in six months. Comment -------------- ¶8. (SBU) The change in monetary policy was welcomed by most analysts in the face of a global demand slowdown and financial meltdown. MAS's policy shift is in line with the action taken by central banks around the world in the face of the financial turmoil. Although the market appears to be focused exclusively on the role of monetary policy at the moment, as the recession deepens fiscal policy could play an increasing role. Singapore is one of the few economies in Asia with the scope to use its large fiscal surplus to mitigate the effects of an economic downturn. In the medium to longer term, Singapore could benefit from a more permanent countercyclical program to support the economy as well as its citizens. The question is whether they have the political will to spend more aggressively and systematically than in the past. HERBOLD