By Patricia Lui
March 30 (Bloomberg) -- The Monetary Authority of Singapore may devalue the city’s currency and allow it to drop 4 percent against the U.S. dollar by June 30 to aid exporters and lift the economy out of the worst recession since independence in 1965.
The central bank will shift the mid-point of the Singapore dollar trading band at a twice-yearly review in April, according to 15 of 17 economists surveyed by Bloomberg News. The currency is “extremely and ridiculously overvalued,” Patrick Bennett, Asia foreign-exchange strategist at Societe Generale SA in Hong Kong, said last week.
Singapore’s exports fell for a 10th month in February as global demand for electronics and drugs tumbled and the government forecasts gross domestic product will shrink as much as 5 percent this year. Exporters are losing out to regional rivals after the currency weakened 6 percent in the past six months, compared with losses of 17 percent in the Indonesian rupiah and 12 percent in South Korea’s won.
“The central bank’s objective is to restore a measure of competitiveness,” said Wei Zheng Kit, a Singapore-based economist at Citigroup Inc., the world’s fourth-biggest currency trader. “A one-off depreciation will achieve this objective.”
Kit said the MAS may not allow much weakness in the currency after the devaluation because it wants to avoid damaging investor confidence. The central bank conducts monetary policy by adjusting the center, slope or width of an undisclosed band in which the Singapore dollar is allowed to fluctuate against a basket of currencies.
‘Sophisticated Mix’
Singapore’s dollar traded at S$1.5187 to the U.S. currency as of 11:04 a.m. local time. The median estimate of 17 economists for the spot rate by the end of the second quarter was S$1.5820 and the forecast range was S$1.65 to S$1.49. The content of the currency basket isn’t disclosed.
“It is time for a more appropriate mix of policy response,” said Bennett at Societe Generale, France’s third- largest bank. “We are looking for a re-centering, a potential band widening and an indication of a more sophisticated mix of interest rates and exchange-rate policies.”
The central bank focuses on currency policy rather than interest rates because trade is so important to the economy. Total exports are equivalent to 191 percent of GDP.
The MAS opted for faster currency appreciation over a six- month period in October 2007. It announced a one-off strengthening in April last year that caused the currency to jump 1.9 percent against the dollar in a single week. It stopped seeking gains in October 2008. It has yet to set a date for this year’s meeting aside from stipulating the month.
No Adjustment
United Overseas Bank Ltd., Singapore’s second-largest lender, said there have been no signals that the MAS plans a policy adjustment in the currency markets.
“Despite the pressure from exports and growth data, there hasn’t been any indication in the price action in the market that the central bank is heading the way of a band re- centering,” said Penn Nee Chow, an economist at UOB.
The Singapore dollar rose 2.6 percent in March, the first monthly gain this year, even as a government report showed non- oil domestic exports dropped 24 percent in February.
The risk of deflation may also spur the central bank to weaken its currency, boosting import prices, said Wai Ho Leong, a Singapore-based economist at Barclays Capital Plc, the world’s third-biggest currency trader.
‘Easing Bias’
“The objective is not to use the exchange rate to save exports as this is likely to be futile in this environment,” said Leong. “Weakening the currency may limit price declines so it doesn’t become self reinforcing or enter a negative wage price spiral.”
Inflation slowed to a 20-month low in February due to the weaker economy. The consumer price index rose 1.9 percent from a year earlier after gaining 2.9 percent in January, the Department of Statistics said on March 23.
The central bank will maintain a neutral stance, in which it seeks neither gains or losses, after the one-off depreciation, said 15 of the 17 economists surveyed.
“There has never been an easing currency policy bias in the history of the MAS,” said Leong at Barclays. “An easing bias will trigger capital flight, importers will suffer and construction costs will go up.”
Singapore’s GDP contracted an annualized 16.9 percent in the fourth quarter compared with the previous three months, when the economy shrank 5.1 percent. The government will release advance first-quarter estimates the same day that the MAS meets.
“Singapore has one of the highest exposures to weakness in external demand,” Enoch Fung, a Hong Kong-based economist at Goldman Sachs Group Inc., wrote in a research note on March 19. “The MAS is likely to weaken the currency by shifting the policy band lower.”
Firm April Policy Bias Mid-Year SGD Year-End SGD
UBS Re-centre Neutral 1.5900 1.6000
HSBC Re-centre Neutral 1.6000 1.6200
Citigroup Re-centre Neutral 1.5800 1.5000
UOB No Change Neutral 1.5700 1.5500
OCBC Re-centre Ease 1.5820 1.5800
Goldman Re-centre Neutral 1.6400 1.5800
Barclays Re-centre Neutral 1.5600 1.5000
RBS No change Ease 1.6000 1.5900
Sumitomo Re-centre Neutral 1.5850 1.6550
Societe-
Generale Re-centre Neutral 1.6200 1.7400
Mitsubishi
UFJ Re-centre Neutral 1.5000 1.6500
Nomura Re-centre Neutral 1.5500 1.5200
Merrill Re-centre Neutral 1.4900 1.4600
Calyon Re-centre Neutral 1.6500 1.5400
Stanchart Re-centre Neutral 1.5700 1.4800
DBS Re-centre Neutral 1.5600 1.5200
Macquarie Re-centre Neutral 1.6000 1.5200
Median 1.5820 1.5550
To contact the reporter on this story: Patricia Lui at plui4@bloomberg.net
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