MAS to stick with current policy stance despite recent stronger data: economists

Singapore

FORGET the solid pace of Singapore's economic growth in recent months.

That's not enough to make Singapore's central bank think about tweaking its exchange rate policy any time soon, or even this year at all, said economists.

In fact, instead of a near-term monetary tightening, one of them even expects the Monetary Authority of Singapore (MAS) to ease the policy band even further - a move often seen as a response to weakening growth.

Said NatWest Markets' Vaninder Singh, who foresaw the last three MAS monetary policy decisions: "We are retaining our call for one per cent re-centring lower for the mid-point of the SG$NEER (nominal effective exchange rate) band in April 2017."

Song Seng Wun, economist at CIMB, said: "From where we are, I would say there's only a 30 per cent chance of tightening this year."

Economists' hesitation in calling for a tightening this year despite recent stronger growth numbers underscores a lack of confidence in Singapore's future growth prospects.

If their predictions come to fruition, the current period of weak growth is effectively extended for another year.

MAS uses the exchange rate as its main monetary tool to maintain price stability so that there can be sustained economic growth in Singapore.

It does so by adjusting the currency's pace of appreciation within the S$NEER band. It can target either the band's slope, width or level.

To tighten the band, MAS would have to make the slope steeper or raise its level. This makes the Singapore dollar stronger. Imports become cheaper, and for Singapore's trade-reliant economy, it tempers inflation.

A weaker currency will make exports cheaper, thus promoting growth.

MAS normally communicates its exchange-rate policy decisions twice a year - once in April and another in October.

But it kicked-off the current easing cycle with a surprise move in January 2015. It said that inflationary pressures were receding and global oil prices remained subdued.

MAS eased again in October 2015 and in April 2016, when the slope of the S$NEER band was put to zero.

MAS last said in October 2016 that this neutral policy stance was needed for an "extended period" of time.

The economic situation turned quickly thereafter, however. Fourth-quarter growth for 2016 came in stronger than expected - so much so that the full-year growth came in at 2 per cent, far beyond the government's forecast of one to 1.5 per cent range.

This manufacturing and export-led growth may continue into early 2017. Citi's Kit Wei Zheng expects Q1 2017 gross domestic product (GDP) to be 1.5 per cent higher than implicit forecasts in October last year.

This is enough to decrease some of the probability of a further easing move by MAS, said economists.

But even so, many economists are also not convinced that MAS will tighten in April. Maintaining the current stance is most likely, they said.

As for future moves this year, they do not see any signs of improvement to warrant a tightening.

For one thing, the jobs market is still quite weak, said Nomura's Brian Tan. Unemployment seems to be rising, and jobs creation seems to be slowing. This will weaken consumer sentiment and thus dampen inflation - a major consideration in MAS policy.

Private investment - needed for capital expenditure and capacity expansion - in Singapore also does not seem to be picking up. Economists noted that the government even had to pledge to bring forward S$700 million worth of infrastructure projects to prop up the construction sector.

The strong demand for Singapore's exports may not last too. Standard Chartered's Jonathan Koh does not see a broad-based pick-up in global demand for Singapore's electronics, which led the end-2016 growth spurt.

This is in part due to expected weak demand from China, Europe and the United States, and also due to geopolitical factors. The long negotiation process for the United Kingdom's exit from the European Union was just triggered; US President Donald Trump is said to be wanting to re-examine all 14 US free trade agreements, dealing global trade another blow.

"Heading into the middle of Q2, or by the second half, we're a bit more cautious about exports for Singapore," said Mr Koh.

This uncertainty over the prospects for trade has made NatWest Market's Mr Singh bearish enough to call for a monetary easing this year - putting him at odds with the general view of his counterparts.

Mr Singh expected this year's growth to come in at one per cent. Though he found it "impossible" to predict what US President Trump might do with regards to trade, he also noted in a March 31 report that "even a slight change in trade performance will produce an outsized move in overall GDP (for Singapore), given exports' 200 per cent share in output".

"A re-centring - the next available easing move - is a response to seminal moments when we either have an outright recession, or a severe downgrade to the economic outlook," he said. "Singapore's growth outlook fulfils these conditions."