Singapore’s surprise currency shift
October 14, 2010 – 1:59PM
Singapore unexpectedly signaled it will allow faster currency gains to curb inflation even as the economy shrank, with slowing global growth hurting demand for drugs and electronics. The local dollar rose to a record.
The Monetary Authority of Singapore said today it will steepen and widen the currency’s trading band while continuing to seek a “modest and gradual appreciation.” Gross domestic product shrank at a 19.8 per cent annual rate in the third quarter from the previous three months after climbing a revised 27.3 per cent in April to June, a separate report showed.
“The implication is that Singapore is less worried about growth and more worried about upside risks to inflation,” said Robert Prior-Wandesforde, head of Southeast Asian economics at Credit Suisse Group AG in Singapore.
The decision follows pressure from the US and Europe on emerging-market nations to let their exchange rates appreciate to help rebalance demand in the global economy. It also comes as China, the country blamed by US Treasury Secretary Timothy F. Geithner this week for prompting other countries to restrain their currencies, starts allowing faster gains in the yuan.
Singapore’s dependence on overseas trade, with non-oil exports equivalent to more than half of GDP, makes it vulnerable to swings in global growth.
The island’s currency rose 0.8 per cent to $S1.2932 per US dollar as of 10:37 a.m. local time. It earlier reached $S1.2893, the strongest since 1981 when Bloomberg began compiling the data, and has gained 8.4 per cent this year, making it the third-best performing currency in Asia excluding Japan. Today’s climb of as much as 1.06 per cent was the biggest since June 21.
The Australian dollar was buying $S1.285 in recent trading.
Yuan forwards were near a two-year high today. Twelve-month non-deliverable forwards were at 6.4510 per US dollar, reflecting bets the currency will strengthen about 3.3 per cent from the spot rate over the next year, according to data compiled by Bloomberg. The forward contracts have risen 1.5 per cent this month.
The Monetary Authority of Singapore uses the currency rather than a benchmark interest rate as its main tool to manage inflation. All but one of 14 economists in a Bloomberg survey had expected the central bank to forgo a more aggressive strengthening in the Singapore dollar, a decision that may have helped support overseas sales by manufacturers including Hi-P International Ltd.
“Singapore is the most vulnerable Asian country to the slowdown in the global trade cycle,” Prior-Wandesforde said. “The widening of the band initially will be seen as hawkish but longer-term may actually be used in a more dovish direction as and when the economy slows quite sharply.”
At its April monetary policy review, Singapore’s central bank said it would shift the local dollar to a stronger range to trade in and sought an appreciation thereafter, the first such combined move in its history.
Singapore in August announced measures to cool the property market, including increasing down payments for second mortgages and imposing a stamp duty on property held for less than three years to curb speculation.
“Domestic cost pressures are rising, given the high level of resource utilization in the economy and tight labor market in particular, as well as the diminishing boost from the cyclical uplift in productivity seen earlier this year,” the central bank said today. “The balance of risks is weighted towards inflation going forward.”
The steeper slope will allow a faster pace of appreciation while the wider band will address the increased volatility in the market, said Kit Wei Zheng, a Singapore-based economist at Citigroup Inc. He said today’s policy change was “effectively a form of monetary tightening and reflects concerns about domestic inflation.”
In contrast, the Bank of Korea left borrowing costs unchanged for a third straight month today as an appreciating won threatens export growth in Asia’s fourth-largest economy.
Singapore’s inflation accelerated to an 18-month high of 3.3 per cent in August. The central bank forecasts price gains may quicken to about 4 per cent by the end of 2010 and “stay high” in the first half of 2011, it said today.
The island’s policy move contrasts with Asian nations from Thailand to Japan, which have taken steps in the past month to cool an appreciation in their currencies that is threatening exports. Japan intervened last month to ease gains in the yen and Thailand said this week it will remove a 15 per cent tax exemption for foreigners on income from domestic bonds, joining South Korea and Brazil in seeking to slow inflows as capital floods into emerging and Asian economies.
Singapore’s GDP rose a record 18.3 per cent in the first half, the trade ministry said. Prime Minister Lee Hsien Loong has said the economy may “moderate” in the coming months, citing risks from Europe and the US
“Singapore is typically a bellwether for the region’s export outlook and it is the first to show cracks as global growth slows,” Alvin Liew, an economist at Standard Chartered Plc in Singapore, said before the report. Threats to Asian growth include “the fading impact of stimulus packages, stubbornly high unemployment rates and austerity measures that are likely to crimp consumption in the West,” he said.
Singapore’s economy grew 10.3 per cent in the third quarter from a year earlier, compared with a revised 19.6 per cent expansion in the previous three months, the government said. The median forecast in a Bloomberg News survey of 24 economists was for a 10.8 per cent gain. The 19.8 per cent annual rate of contraction last quarter from the previous three months compares with the median forecast for a 15.7 per cent decline among 19 economists surveyed.
Manufacturing, which accounts for about a quarter of Singapore’s economy, climbed 12.1 per cent from a year earlier in the three months through September, after surging a revised 46.1 per cent in the second quarter.
The construction industry gained 6.7 per cent, while services grew 10.2 per cent. The city’s two casino resorts run by Genting Singapore Plc and Las Vegas Sands Corp. have attracted millions to its gaming centers, while employment growth is boosting spending at malls and restaurants.
The government reiterated its prediction for GDP to rise 13 per cent to 15 per cent in 2010. That pace would put Singapore in the running to be the world’s fastest-growing nation in 2010.