Singapore, in Recession, Ends Currency Gain Policy

By Shamim Adam

Oct. 10 (Bloomberg) -- Singapore fell into its first recession since 2002 and the central bank ended a policy favoring gains in its currency to help support the economy.

The Monetary Authority of Singapore, which relies on the currency rather than interest rates as its main policy tool, said today it's shifting to a ``zero-percent appreciation'' stance. Gross domestic product contracted an annualized 6.3 percent in the third quarter from the previous three months, after shrinking a revised 5.7 percent between April and June, the trade ministry said in a separate statement.

Central banks around the world are loosening monetary policy and cutting interest rates as an escalating global credit crisis that's toppled banks in the U.S. and Europe saps growth. Singapore, which manages its dollar against a basket of currencies, wants to support exporters such as Venture Corp. as global demand slows.

``The whole world has gone on an easing policy and Singapore is no different,'' said Song Seng Wun, an economist at CIMB-GK Securities Pte in Singapore. ``We are likely to face a prolonged period of slow growth or recession, maybe for the next two years. This downturn is unlike previous downturns.''

The trade ministry said today the city's economy will grow about 3 percent in 2008, from an earlier estimate of as much as 5 percent. The economic contraction in the third quarter compares with the median forecast of an annualized 0.3 percent growth in a Bloomberg News survey.

Inflation Peaks

Inflation, which reached a 26-year high earlier this year, has peaked, the central bank said. Consumer prices will increase between 6 percent and 7 percent this year, and gains will ease to between 2.5 percent and 3.5 percent in 2009, it predicted.

``Against the backdrop of a weakening external economic environment and continuing stresses in global financial markets, the growth of the Singapore economy is expected to remain below potential in the period ahead,'' the monetary authority said. ``Inflation is expected to trend down in 2009 as the global and domestic economies slow.''

The Federal Reserve, European Central Bank and four other central banks lowered interest rates on Oct. 8 in an emergency coordination that was followed in Asia by China, Taiwan and South Korea. The Reserve Bank of Australia cut its key rate by one percentage point on Oct. 7, the most since a recession in 1992.

The cuts may not be enough to avert a global downturn stemming from the worst financial meltdown since the Great Depression. The International Monetary Fund this week forecast the world's advanced economies will expand next year at the weakest pace since 1982, stifling growth in emerging nations.

Exports Slump

Singapore's $161 billion economy declined 0.5 percent last quarter from a year earlier, compared with a revised 2.3 percent gain between April and June.

Growth has deteriorated as a slump in export demand forced factories to cut production, tourist arrivals faltered and a real-estate boom ended.

The island's manufacturing industry, which accounts for a quarter of the economy, contracted 11.5 percent last quarter from a year earlier, compared with a revised 4.9 percent drop in the previous three months, according to today's report.

Singapore's government expects exports to decline as much as 4 percent this year, and the island's shipments of electronics goods have fallen for 19 consecutive months.

Financial Services

Services climbed 6.1 percent in the third quarter from a year earlier, slowing from a 7 percent pace in the previous three months. The city-state will probably miss a government target of 10.8 million visitors in 2008, the tourism board said on Sept. 23, after visitor arrivals dropped 7.7 percent in August.

``The financial services sector is likely to see slower growth in the coming months as the ongoing global financial crisis has heightened uncertainties for sentiment-sensitive segments such as stocks trading and fund management activities,'' the government said in today's report.

The construction industry grew 7.8 percent, easing from a revised rate of 19.8 percent in the previous quarter.

The figures today are computed from data for July and August. Revised numbers will be released next month.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net