SINGAPORE, April 14 — Singapore’s central bank unexpectedly eased its monetary stance, adopting a policy last used during the 2008 global financial crisis, as economic growth in the trade-dependent city-state ground to a halt.
The Monetary Authority of Singapore moved to a neutral policy of zero per cent appreciation in the exchange rate, causing the local dollar to slide and dragging down currencies across Asia-Pacific. The surprise announcement came two days after the International Monetary Fund warned of the risk of negative shocks to the global economy.
“The MAS is delivering a strong message by returning policy to the post-Great Financial Crisis settings,” Sean Callow, a Sydney-based currency strategist with Westpac Banking Corp, said by email. “The surprise move indicates a gloomy outlook for regional trade.”
As Asia’s financial hub, Singapore is feeling the effects of the global downturn and China’s weakening economy. Monetary easing follows an expansionary budget announced by Finance Minister Heng Swee Keat last month, indicating how severe authorities view the slowdown as businesses shut and growth in bank loans contract.
Dollar slides
“It seems that Singapore is using both fiscal policy and the exchange rate to address the situation,” Weiwen Ng, an economist with Australia & New Zealand Banking Group Ltd., said by phone from Singapore. “We may not be at the end of the easing cycle.”
Gross domestic product posted zero expansion on an annualised basis in the first quarter compared with the previous three months, the trade ministry said in a separate report today. That was in line with the median forecast of 12 economists surveyed by Bloomberg.
The Singapore dollar fell 0.9 per cent to 1.3633 per US dollar as of 12:20pm local time.
The last time the MAS shifted its currency policy to zero appreciation was in October 2008, when the economy was in a recession. Today’s move was the bank’s second unexpected decision in less than 16 months, following an emergency policy change in January last year to combat the threat of deflation.
Deflation spiral
The IMF warned on Tuesday that a prolonged period of slow global growth has left the world economy more exposed to negative shocks. The fund is predicting 1.8 per cent expansion for Singapore this year, compared with the government’s projection of 1 per cent to 3 per cent.
Singapore’s services industry, which makes up about two-thirds of the economy, contracted an annualised 3.8 per cent in the first quarter from the previous three months, the first decline since the first quarter of 2015. Manufacturing and construction rebounded strongly in the quarter, expanding 18.2 per cent and 10.2 per cent respectively.
“The economy remains mired in an extended spell of deflation and steadily lower growth,” Andrew Wood, an economist with BMI Research in Singapore, said by e-mail. The central bank needed to adjust the currency because “Singapore’s competitiveness has taken a hit,” he said.
Citigroup Inc. economist Kit Wei Zheng said in a report last month that the decline in net new businesses for the first time since 2009 signals a possible recession. In the past two decades, the only times that business closures exceeded openings came during contractionary periods — in 2009, 2001 and 1995 to 1997, he said.
Weaker GDP
More evidence of a sluggish economy comes from inflation and the housing market. Consumer prices fell 0.8 per cent in February from a year earlier, declining for a 16th consecutive month to post the longest slump since the 1970s. Home prices dropped 0.7 per cent in the first three months of the year, the 10th straight quarter of declines in Asia’s second-most expensive housing market.
Compared with the first quarter of 2015, GDP rose 1.8 per cent, slightly better than the 1.7 per cent median estimate in a Bloomberg survey.
The advance estimate for GDP that was released today is based on only two months’ of data and the government revises the figures when more information is available.
There was a difference of 4.3 percentage points on average between advance and final GDP readings from the start of 2010 to the fourth quarter last year, based on annualised quarter-on-quarter data, according to figures compiled by Bloomberg. That difference was 1 percentage point for US GDP and 1.5 percentage points for Japan in the same period.
While the government revised its GDP estimates higher in the fourth quarter, the risk this time around is that the reading may be lowered, according to Irvin Seah, an economist with DBS Group Holdings Ltd in Singapore.
“Most important here is the contraction in the services sector,” Seah said. “I’m also sceptical that manufacturing rose 18 per cent.” — Bloomberg
