Published October 13, 2009

Sing$ falls as MAS offers cautious take on economy

Final demand in S'pore's key export markets yet to recover decisively

By OH BOON PING

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(SINGAPORE) Amid uncertain domestic and international economic conditions, the Monetary Authority of Singapore yesterday retained its neutral policy stance and left the width of its undisclosed Sing-dollar trading bands unchanged.

The news drove the local currency to a four-day low against the greenback, after it had chalked up significant gains in the past week.

Explaining its decision, MAS said it sees continuing weakness in the global environment and 'while there could be some upward pressure on consumer prices emanating from higher global oil and food prices, underlying domestic cost pressures will be contained'.

The news came despite Singapore's GDP rebounding 0.8 per cent in the third quarter based on the latest figures from the Ministry of Trade and Industry.

GDP jumped 14.9 per cent quarter on quarter, returning to growth after three quarters of annual contraction.

But MAS reckons this pace of expansion is not sustainable, saying that while prospects for external economies have improved, final demand in Singapore's key export markets, such as for IT products, is yet to recover decisively.

'Significant challenges remain in the transition to private sector-driven growth as governments prepare to exit their expansionary policies,' it said.

'Household spending, particularly in the US, continues to be constrained by the weak labour market, sluggish income growth, and lower housing wealth. Businesses also remain cautious in their investment decisions.

'Against this backdrop, the Singapore economy is likely to settle at a more gradual pace of expansion. GDP growth in 2010 is expected to be slower than in previous post-recession periods.'

Soon after the MAS statement was released, the Sing dollar sank to 1.3996 per US dollar - down more than 0.25 percent from Friday's close of 1.3954. The local unit had advanced more than 3 per cent since the start of the year.

MAS reckons prices will be supported by external factors, especially higher oil and food commodity prices, for the rest of 2009 and into 2010. But still, it predicts Singapore's CPI inflation is likely to be zero this year and one to 2 per cent next year.

Barclays economist Leong Wai Ho said there appears to be a clear focus on the medium-term inflation risk, and MAS seems to be closely watching the impact of weather patterns on food prices.

OCBC economist Enrico Tanuwidjaja said any policy tightening will probably come only next April, if 'global economic and inflationary conditions demand'.

Mr Leong believes that as inflation pressure continues to build up, the Sing dollar should drift towards the top edge of the trading band.

MAS has eased monetary policy twice since 2003 - in October 2008 and in April 2009 - to support Singapore's export-dependent economy after it fell into recession for the first time in six years.

Although not unexpected, yesterday's decision to keep policy unchanged came amid market talk of imminent rate hikes in Asia, after Australia raised its key interest rate by 25 per cent basis points last week.

Indonesia's central bank kept interest rates unchanged for a second month on Monday, while the US Federal Reserve left the rate for overnight loans between banks at a record low of between zero and 0.25 per cent on Sept 24.