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MAS POLICY SURPRISE

S$ hits 4-year low; exports outlook still gloomy

Economists say anaemic exports affected more by structural factors
Thursday, January 29, 2015 - 05:50

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THE Singapore dollar weakened to its lowest against the US dollar since September 2010 on Wednesday after the Monetary Authority of Singapore (MAS) shocked markets by easing its pace of appreciation against trading partners' currencies.

Singapore

THE Singapore dollar weakened to its lowest against the US dollar since September 2010 on Wednesday after the Monetary Authority of Singapore (MAS) shocked markets by easing its pace of appreciation against trading partners' currencies.

While this may lift some competitive pressure off exporters, poor global demand will continue to cloud Singapore's exports outlook, economists said.

Reacting sharply, the Singapore dollar fell as much as 1.2 per cent to S$1.3548 per US dollar shortly after the 8am announcement. It was trading at S$1.3512 as at 7pm Singapore time on Wednesday, still 0.6 per cent lower than it was a day earlier.

Regional currencies reacted too. Malaysia's ringgit appreciated as much as 0.7 per cent to RM2.6680 for every S$1 just after 8am, and was trading at RM2.6780 at 7pm.

Indonesia's rupiah rose as much as 1.5 per cent to 9,189.71 rupiah per Singapore dollar just after 8am, and was trading at 9,259.86 rupiah at 7pm.

Analysts continue to expect the the Singapore dollar to weaken to S$1.40 against the greenback by the end of this year, due to the US economy's recovery and the strengthening of the US dollar.

OCBC currency strategist Emmanuel Ng said that if global markets come under further distress or if the broad US dollar story regains traction, the Singapore dollar nominal effective exchange rate (S$NEER) could move towards the lower end of the band within which MAS manages it.

Over the last three months, the trade-weighted S$NEER has fluctuated around the middle of the policy band, MAS noted in its policy statement on Wednesday.

Even though the SGD has depreciated against the USD, that was partly offset by the local unit appreciating against the ringgit, euro, and Japanese yen. Thus, movements in the S$NEER have been relatively muted compared to bilateral SGD movements against the major currencies, MAS said.

The SGD's appreciation against regional trading partners' currencies, in particular, has given rise to concerns of trade competitiveness among exporters here. Singapore's non-oil domestic exports contracted 0.7 per cent in 2014, but International Enterprise Singapore expects NODX growth of 1-3 per cent this year.

But given policymakers' choice of a measured slope calibration instead of an adjustment in the mid-point of the band, the intended policy impact on exports, if any, was meant to be incremental, said Mizuho Bank economist Vishnu Varathan.

It could alleviate some export pressures, especially in the context of tempering any fall in demand from euro countries and Malaysia, but that would be limited. "The bigger picture is that exports demand is still weighed down by weak global demand conditions, and so may be less elastic to Singapore dollar shifts," said Mr Varathan.

HSBC economist Joseph Incalcaterra too, expects any impact on exports to be limited. "We consider the issues facing certain export-focused industries to be structural in nature."

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