Singapore Cuts Growth Forecast, Eases Policy

By Shamim Adam - Oct 14, 2011 1:12 PM GMT+0700

Singapore cut its growth forecast and said it will slow currency gains, the first monetary policy easing since 2009, as a weakening global economy undermines demand for electronics exports and financial services.

Gross domestic product may increase 5 percent this year, compared with an earlier forecast range of 5 percent to 6 percent, the trade ministry said in a statement today. The central bank, which uses the island’s dollar to manage inflation, said it will reduce the pace at which the currency strengthens and continue with a modest and gradual appreciation.

Singapore’s dollar rose the most in Asia today after the central bank refrained from halting currency gains in an economy where inflation has reached the fastest since 2008. Electronics exports by companies such as Venture Corp. slumped 19.4 percent in August from a year earlier as the European debt crisis and a faltering U.S. recovery hurt demand, and the government said this week said it would increase spending in the next five years as the island’s expansion slows.

“They are concerned about the growth outlook going into next year, but at the same time inflation remains an issue so the central bank wants to be prudent about keeping the Singapore dollar on an appreciating trend,” said Kun Lung Wu, a Singapore-based economist at Credit Suisse Group AG. “This will help contain inflation pressures.”

Singapore Dollar

Elevated inflation is limiting the scope for monetary easing in Asian nations including China and India even as policy makers face growing pressure to protect growth. China’s consumer prices increased 6.1 percent in September from a year earlier, led by a jump in food costs, the National Bureau of Statistics said today.

The Singapore dollar, the fourth-worst performing Asian currency in the past month, rose 0.7 percent to S$1.2699 against its U.S. counterpart at 1:55 p.m. local time today. It had reached unprecedented levels since the central bank said in April it would allow further appreciation to tame price gains, trading below S$1.20 in July.

The risk of another global recession erased $10 trillion of equities worldwide last quarter and prompted officials from China to Indonesia to boost fiscal measures or cut interest rates. With a potential Greek default threatening to disrupt world financial markets, Singapore is trying to stimulate growth just six months after its last monetary tightening.

The island’s export-dependent economy may expand “more slowly” in 2012 and growth may be below its potential rate of 3 percent to 5 percent, the Monetary Authority of Singapore said.

‘Dry Gunpowder’

“There won’t be an easy solution or a quick rebound for Asia this time around because the European crisis may be long drawn, the U.S. economy is struggling and there are trepidations about China’s economy,” said Vishnu Varathan, an economist at Mizuho Corporate Bank Ltd. in Singapore. “Many in the region have tightened quite a bit and they now have dry gunpowder. The shift will unequivocally be towards loosening policy.”

Singapore’s GDP increased an annualized 1.3 percent last quarter from the previous three months, when it shrank a revised 6.3 percent, the trade ministry said. The $223 billion economy expanded 5.9 percent from a year earlier, after rising 1 percent the previous quarter. The expansions exceeded the median forecasts in a Bloomberg News survey of economists.

Retail sales grew 3.3 percent from a year earlier in August, the least in five months, as motor vehicle purchases dropped and spending at department stores and supermarkets climbed at a slower pace, a report showed today.

The Singapore monetary authority guides the local dollar against a basket of currencies within an undisclosed band. It adjusts the pace of appreciation or depreciation by changing the slope, width and center of the band. The central bank, which releases a policy statement every six months, tightened monetary conditions at each of its last three reviews.

Deteriorating Outlook

The island, located at the southern end of the 600-mile (965-kilometer) Malacca Strait, is among the first countries in the region to report third-quarter data. Asia’s growth has slowed since the second quarter, the International Monetary Fund said yesterday as it reduced forecasts for regional expansion this year and next.

“The outlook for the global economy has deteriorated sharply against the backdrop of increased uncertainty in financial markets,” the Singapore central bank said today. “Given the stresses and fragility in the advanced economies, the prospects for growth in Singapore’s major trading partners have deteriorated.”

Spain had its credit rating cut one level by Standard & Poor’s as rising default risks threaten efforts to stem Europe’s sovereign-debt crisis. The ranking slid to AA-, with a negative outlook, in the third reduction by S&P in three years.

Regional Moves

The global slowdown has prompted some Asian central banks to start cutting interest rates or refrain from increasing borrowing costs. Pakistan and Indonesia have lowered rates this month while the Bank of Korea left borrowing costs unchanged yesterday for a fourth straight month.

The MSCI Asia Pacific Index of stocks has slumped about 15 percent this year. Singapore’s benchmark Straits Times Index (FSSTI) has dropped about 14.4 percent in the same period, led by Neptune Orient Lines Ltd., Southeast Asia’s biggest container carrier, and CapitaMalls Asia Ltd. (CMA), an owner of shopping malls across the region.

Singapore’s economy will probably expand at a slower pace in the next few years and the central bank will continue “judicious management” of its currency to curb inflation and support growth, Finance Minister Tharman Shanmugaratnam said Oct. 11. The monetary authority will remain “vigilant” against a resurgence in inflationary pressures and price gains are expected to moderate toward the end of 2011, he said.

Inflation Forecast

Inflation will average about 5 percent this year and 2.5 percent to 3.5 percent in 2012, the central bank said today. Inflation in August accelerated to the fastest pace since 2008 as consumer prices rose 5.7 percent from a year earlier.

Core inflation, which excludes private road transport and accommodation costs, will ease to a range of 1.5 percent to 2 percent in 2012, from an average of about 2.1 percent this year, the monetary authority predicts.

“The ongoing slowdown in domestic economic activity will reduce tightness in the labor market and alleviate price pressures,” the central bank said. “Inflationary pressures emanating from abroad should also subside.”

Manufacturing Growth

Manufacturing rose 13.2 percent from a year earlier in the three months ended Sept. 30, after declining a revised 5.8 percent in the second quarter.

Singapore’s services industry grew 3.6 percent last quarter from a year earlier, after climbing a revised 4 percent in the previous three months. The construction industry expanded 0.4 percent, compared with a 1.5 percent increase in the quarter ended June.

“For the rest of the year, growth could be weighed down by the softening global economic conditions,” the trade ministry said today. “The electronics cluster is expected to remain weak due to the easing of global electronics demand. Sentiment sensitive activities within the financial services sector could also be dampened by heightened economic and financial uncertainties.”

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

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net