Singapore May Weaken Currency in Recession, UBS Says

By Patricia Lui

Nov. 18 (Bloomberg) -- Singapore, facing a slump in exports amid a recession, may change its exchange-rate policy to favor a weakening currency in April or sooner, according to UBS AG.

The Monetary Authority of Singapore, after ending its policy of encouraging gains in the local dollar last month, may be open to depreciation to help revive the $161 billion economy, wrote Ashley Davies and Nizam Idris, currency strategists at the world's second-biggest foreign-exchange trader. The U.S. Federal Reserve, the Bank of Japan, the Bank of England and the European Central Bank have all cut interest rates to combat recessions.

``Following the aggressive policy moves elsewhere, it now seems unobjectionable for Singapore to ease monetary policy via a weaker currency,'' Davies and Nizam wrote in a research report yesterday. ``While our base case is for a change in policy at the next meeting in April, it could happen earlier should pressure on reserves mount.''

Singapore's dollar traded at S$1.5243 to the U.S. dollar as of 9:08 a.m. local time, according to data compiled by Bloomberg. It earlier touched S$1.5283, the lowest level since September 2007. The currency has declined 7.3 percent in the past three months.

It may drop to S$1.5400 in three months due to ``sustained dollar strength and persistently elevated global aversion,'' the Singapore-based strategists said.

Guiding Currency

Singapore's central bank conducts monetary policy by guiding the currency within an undisclosed band based on a weighted basket of major trading partners' currencies. Policy adjustments are made by adjusting the band.

The MAS, at its last meeting on Oct. 10, said it was shifting to a ``zero-percent appreciation'' stance as the economy slipped into a recession in the third quarter.

Overseas sales last month posted the biggest decline in more than six years as recessions in the world's biggest economies hurt demand for the electronic goods and medicines manufactured in the city. Non-oil exports slid 15 percent from a year earlier, after dropping 5.7 percent in September, the trade promotion agency said yesterday.

Singapore's recession will last about a year and it may take several years of slow growth before the economy returns to normal, the Straits Times reported yesterday, citing Prime Minister Lee Hsien Loong.

Shrinking Economy

Gross domestic product contracted an annualized 6.3 percent in the third quarter from the previous three months, after shrinking 5.7 percent between April and June, economists said in a Bloomberg survey before a government report on Nov. 21.

``One potential date being mentioned in the market for a policy change could be this Friday when the third quarter GDP numbers are finalized,'' Davies and Nizam wrote, adding ``the number could be revised lower.''

Singapore's central bank ``may be forced to move earlier than the April meeting,'' as defending the currency from a slide would drain local funds, ``which may not be desirable given falling asset prices and generally tight liquidity conditions,'' according to UBS.

To contact the reporter on this story: Patricia Lui in Singapore at plui4@bloomberg.net