Sing$ 'to rise at slower pace'

Aug 13, 2008

Sing$ 'to rise at slower pace'

By Bonnie Oeni

STANDARD Chartered (Stanchart) economists have joined the market's biggest guessing game by tipping that the Monetary Authority of Singapore (MAS) will ease up on the Singapore dollar's appreciation at its October review.

They believe the MAS will tweak its policy course because inflation concerns are giving way to the more pertinent problem of soft economic growth.

The Stanchart team cites indicators pointing to a tightening of foreign exchange policies. These include the Government cutting its growth forecast from a range of 4 per cent to 6 per cent to 4 per cent to 5 per cent.

'Instead of expecting non-oil domestic exports to expand at 2 per cent to 4 per cent in 2008, the Government is now expecting them to contract by 2 per cent to 4 per cent, the first time since 2001,' says Stanchart.

The revised target follows a big drop in manufacturing activity due to poor demand from key export markets.

With manufacturing a key part of Singapore's economy, growth in other industries such as finance, marine engineering, construction and tourism is unlikely to make up the difference.

Stanchart's economists predict contractions in the second and third quarters, contradicting Trade and Industry Ministry expectations.

The ministry has said it is 'not unreasonable to expect' that inflation peaked in June, which means concerns will now be focused on economic growth.

Headline inflation is expected to keep falling in the coming months, following a decline in commodity prices.

Stanchart expects full-year Consumer Price Index inflation at 6.2 per cent, near the low end of the official forecast of 6 per cent to 7 per cent.

All these will prompt the MAS to ease up on the Singdollar, say Stanchart's economists.

The currency has already fallen in recent weeks, largely due to the US dollar's rebound, weak growth figures and soft inflation data.

Stanchart believes the MAS will most likely allow the rate of the Singdollar's appreciation to ease to 2 per cent per year from the current 3.25 per cent.

The aim will be to stimulate growth and keep exports competitive.

But Dr Subir Gokarn, the Asia-Pacific chief economist at Standard & Poor's, disagrees.

'It's just short-term volatility,' he says. 'If you think long-term, in the context of high inflation, the Singdollar will continue to appreciate in order to bring inflation down.

'It's the primary policy instrument used in Singapore to control inflation, and we're pegging inflation now to be around 6.4 per cent to 6.9 per cent at the moment.'

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