SINGAPORE KEEPS MONETARY POLICY UNCHANGED AS ECONOMY

UNCLAS SECTION 01 OF 02 SINGAPORE 000994 STATE PASS USTR SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EINV SN SUBJECT: SINGAPORE KEEPS MONETARY POLICY UNCHANGED AS ECONOMY CONTINUES RECOVERY REF: 08 SINGAPORE 1110 ¶1. (SBU) Summary: Singapore's GDP tallied up 14.9 percent growth in the third quarter compared to the previous quarter, its second consecutive strong quarter of double digit growth. The government revised upward its official estimates of 2009 GDP growth, predicting a contraction of between 2.0 and 2.5 percent. Manufacturing showed the strongest recovery (after showing the most serious decline earlier in the year),but growth in services is also returning as tourism and global trade improves. The central bank announced at its semi-annual review that it would make no changes to its monetary policy, declining to tighten the reins on the economy while the external economic environment remains uncertain. GDP growth is likely to moderate over the next couple quarters, but Singapore appears to be returning to the path of steady economic growth. End Summary. Manufacturing Recovery Drives Strong Growth -------------- ¶2. (U) Singapore's economy continued its rebound out of recession with another quarter of double digit growth. The Ministry of Trade and Industry (MTI) released advance GDP estimates October 12 showing GDP up 14.9 percent quarter-on-quarter, and up 0.8 percent year-on-year, the second consecutive quarter of growth after four quarters of consecutive decline. MTI revised GDP growth in the second quarter to 22 percent. The last two quarters have seen the largest six-month rise in GDP since Singapore began tallying the quarterly series in 1975, but the gains are tempered by the previous two quarters that witnessed Singapore's largest six-month decline. MTI revised its forecast for 2009 GDP growth from a range of -4.0% to -6.0% to a new range of -2.0 to -2.5%. Earlier in the year MTI had projected a possible contraction of as much as nine percent. ¶3. (U) The quarterly expansion built on a recovery in the manufacturing sector that had been hit hard by the slowdown in economic growth and trade. Manufacturing was up 35% in the third quarter following on a 59% upward spike in the second quarter. Much of the expansion was in the volatile pharmaceutical and biomedical sector, but Singapore also saw strong growth in electronics production and financial services. Trade-related and tourism sectors, including wholesale and retail trade, transport and storage, and hotels and restaurants, improved as tourist arrivals and global trade returned. MAS Cautious on Recovery, Keeps Policy Steady -------------- ¶4. (SBU) The Monetary Authority of Singapore (MAS) announced the same day that it would not change its current monetary policy and would maintain the Singapore dollar on a zero appreciation path. (Note: Due to its small size and external orientation, Singapore sets monetary policy by managing the value of its currency rather than setting interest rates (reftel).) Although MAS noted the strong rebound in economic growth, it pointed out that final demand in Singapore's export markets had yet to see full recovery. Noting "continuing weakness and uncertainties" in overseas markets, MAS saw no need to tighten the reins on the economy and risk pulling the rug out from under the recovery. ¶5. (SBU) MAS's policy statement warned of a risk of higher inflation in the medium term, and analysts expect the central bank to begin tightening monetary policy at its next policy review in April 2010. MAS predicts that domestic costs will be contained, but external factors, particularly oil and food prices, will drive inflation into 2010. Barclays Capital noted in an October 12 report that weather-related damage to food production could result in higher rice prices in the region. The global rise in fuel prices has also driven up electricity rates quicker than expected. MAS estimates inflation will hit one to two percent in 2010, though local analysts told us inflation would likely peak higher. Growth To Moderate -------------- ¶6. (SBU) MTI said in its announcement that the modest global recovery underway would support Singapore's economic growth in the near-term, but cautioned that economic activity would remain below pre-crisis levels until developed markets could work through surplus capacity and tight credit conditions. Nevertheless, the Ministry considers a return to recessionary conditions unlikely. Local investment banks have been more optimistic than the government this year and for the most part have adjusted GDP estimates for the year above or at the top of MTI's projected range. However, on balance the banks agree with MTI that growth will begin to moderate from its SINGAPORE 00000994 002 OF 002 rapid recovery and revert to closer to its long-term growth path. Growth in the fourth quarter will likely be flat in quarter-on-quarter terms, but banks are looking for 2010 growth to hit between six and seven percent for the year. SHIELDS