Singapore monetary, fiscal policy 'appropriate' for now: MAS

SINGAPORE'S recently loosened monetary policy, and its fiscal policy, taken together, are "appropriate given current economic conditions", the Monetary Authority of Singapore (MAS) reiterated - giving a more short-term opinion than was stated earlier in the year.

The government's fiscal stance for 2019 is still expected to be "mildly expansionary", according to the MAS half-yearly macroeconomic review, released on Wednesday. But, while the Singapore Budget tends to be mildly stimulatory, the size of the expected boost has eased.

"This macroeconomic policy mix is assessed to be appropriate given current economic conditions," the central bank said in its latest biannual report, while re-affirming that, "should the outlook for inflation and growth weaken significantly, MAS is prepared to recalibrate monetary policy".

By stressing ongoing conditions, the MAS tacitly gazes closer into the crystal ball than it did in April, when policies were tipped to ensure "price stability and sustainable growth in the medium term".

The fresh, nearer-term assessment comes just weeks after the MAS pulled back on the pace of appreciation of the Singapore dollar in its first monetary loosening in three years.

Singapore's fiscal impulse, which measures how government spending affects the economy in the short term,( see amendment note) has been pegged at about 0.4 per cent of gross domestic product (GDP) for the year.

That figure still "implies a slightly more expansionary fiscal policy stance" than in 2018, but is lower than the estimate of 0.7 per cent in the April macroeconomic review.

That's even as, over the same period, the forecast for full-year GDP growth has been slashed to zero to 1 per cent - down from the range from 1.5 per cent to 3.5 per cent projected in April.

This year's expansionary fiscal impulse - which means that the government has taken out less revenue than it is spending, against the year before - follows initiatives from a "longer‐term sustainable growth" Budget that the MAS noted were meant to raise productivity and tackle social inequality.

Since then, though, the output gap "has turned slightly negative", as the MAS noted in its monetary policy statement earlier in October.

The output gap, which is expressed as a share of GDP, refers to the difference between the actual GDP and the level of economic activity that can be supported without leading to unhealthy inflation pressure.

In other words, the negative output gap points to an economy that is performing below its full potential. And the central bank expects the negative output gap to persist - weakening from a projected -0.46 per cent of potential GDP in 2019 to -0.66 per cent in 2020.

"While a slowdown in Singapore's trade‐related sectors was anticipated, the extent of the downshift in activity in the last six months turned out to be more severe than previously envisaged," the MAS noted in its October macroeconomic review report.

By and large, private-sector economy watchers have been keeping an eye on what support the upcoming Budget 2020 package could offer the ailing economy.

DBS senior economist Irvin Seah wrote in August, when the full-year outlook was officially downgraded: "The government can afford to keep its powder dry and be more calibrated on the policy front at the moment. The key is to be prepared should the situation deteriorates sharply."

Such a view was further cemented by MAS managing director Ravi Menon's remarks to Bloomberg last week that "it can't be that every slowdown, every risk or threat on the horizon has to be addressed by a loosening of monetary policy", as fiscal measures also have a role.

Indeed, according to historical data, the small estimated fiscal impulse for 2019 is a fraction of the last peak, clocked during the global financial crisis in 2008 and 2009, when the government pushed through a S$20.5 billion Resilience Package to jumpstart the economy.

Separately, besides monetary easing, some countries are already turning to fiscal stimulus to prop up growth, amid fears of a wider contagion from trade and manufacturing weakness, the MAS also noted.

Such fiscal measures include plans for climate change‐related spending in Germany, infrastructure investment in the Netherlands, a rebate on electronic goods in Japan, corporate tax cuts in India, and tax incentives for businesses and households in China.

Despite the turn to expansionary macroeconomic policy in economies elsewhere, the MAS has warned that "constraints such as policy space, debt sustainability and financial stability concerns could cap the stimulus to these economies".

Still, key differences between Singapore and other economies involve the central bank's use of the Singdollar exchange rate, rather than interest rates, in monetary policy, as well as its fiscal headroom in terms of its low debt constraints, ample reserves, and surpluses from previous national Budgets.

Amendment note: An earlier version of this article incorrectly described the term "fiscal impulse". It has been amended with the correct definition.