Lion City's roar turns into a miaow

Singapore's central bank signals monetary policy easing as the country becomes the first in Asia to fall into recession.
Singapore has fallen into its first recession since 2002 based on third quarter GDP data released on Friday, prompting the central bank to signal a loosening in monetary policy for the first time in five years.

The countryÆs central bank, the Monetary Authority of Singapore (MAS), which uses the exchange rate rather than interest rates as its policy tool, said in a statement that it was shifting to a "zero-percent appreciation" stance in the currencyÆs nominal effective exchange rate (NEER), in order to support the economy.

MAS, with about $170 billion of reserves, manages the Singapore dollar against an undisclosed trade-weighted basket of currencies. It last reined in appreciation in 2003 when the spread of the severe acute respiratory syndrome (Sars) virus brought the economy to a virtual halt.

The MAS will retain the band in which the currency is allowed to trade and said it will intervene to reduce "excessive volatility", according to the central bank's semi-annual policy review statement issued on Friday. By announcing that it is no longer going to allow the currency to appreciate, the MAS implied that a period of monetary tightening has finished.

Central banks around the world have been loosening monetary policy and cutting interest rates as the worsening global credit crisis threatens the global economy. The US Federal Reserve, the European Central Bank and four other central banks lowered interest rates on October 8 in a coordinated move that was followed in Asia by China, Taiwan and South Korea. Australia cut its key rate by one percentage point on the previous day, while Hong Kong reduced its benchmark rate by one percentage point before the concerted move and by another 0.5 percentage point the following day.

ôAgainst 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,ö said the central bank.

Singapore has become the first Asian country to fall into a recession since the current financial crisis started. But it is also the first country in the region to report quarterly gross domestic output data for the third quarter, and its heavy dependence on trade û non-oil exports make up about 70% of the economy û means that it is likely to be a good indicator of the effect of the crisis on other export-dependent Asian countries.

Gross domestic product contracted an annualised 6.3% in the third quarter from the previous three months (a year-on-year fall of 0.5%), after declining a revised 5.7% between April and June, according to an advance estimate from the Ministry of Trade and Industry. A recession is technically defined as two consecutive quarters of negative growth.

There was a broad-based slowdown in all major sectors with the contraction in manufacturing being the most severe, according to economists at Goldman Sachs. Manufacturing shrank 11.5% year-on-year while growth in construction halved from 19.8% year-on-year in the second quarter of 2008 to 7.8% in the third quarter. The services sector also grew at a slower pace of 6.1% year-on-year. Further downside in services is likely as domestic loan growth slows in tandem with trends in the property market, says the US bank.

SingaporeÆs trade ministry said the city-state's economy will grow by about 3% in 2008 from a year earlier, slower than a previous estimate of 4.5%-5%. That would be the weakest pace in seven years. Growth has stalled as a slump in export demand has forced factories to cut production, while the number of tourist visitors has declined and a property bubble has burst. The ministry expects exports to decline as much as 4% this year.

Economists at RBS Asia estimate a slightly weaker overall GDP growth figure of 2.8% and forecasts 2009 growth to average 2.8% with risks to the downside. Singapore, a $165 billion economy that is a centre for both Asian financial services and electronics manufacturing, faces a worsening slowdown as the global credit crisis spreads.

The MASÆs new policy marks a reversal of its position six months ago when it urged faster exchange-rate appreciation to curb rising prices. But inflation, which reached a 26-year high earlier this year has peaked, the central bank said, and consumer prices will increase between 6% and 7% this year and by just 2.5%-3.5% in 2009. The policy focus has now shifted from controlling inflation to promoting growth.

RBS Asia believes that this is not a one-off or a short-sighted move. ôKeeping a narrow trading band in the current tumultuous environment may not be a bad policy choice so as to retain control of the marketö, it says.

Goldman Sachs had thought that the MAS was likely to ease policy by reducing the pace of the Singapore dollar NEER appreciation from the 2.75% per year that it had previously estimated due to the deteriorating growth outlook. However, the US bank had thought that it might hold back from shifting to an outright neutral stance due to concerns about inflation.

But Goldman Sachs now believes that ôthe policy stance has undoubtedly shifted to an easing bias and further easing moves such as a downward re-centering of the band are possible, as we expect the Singapore dollar NEER to trade to the bottom of the band as we approach the next scheduled meeting [of the central bank] in April 2009ö.
¬ Haymarket Media Limited. All rights reserved.

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