Singapore govt may weaken Sing dollar

Singapore govt may weaken Sing dollar


Dreary: Cranes are seen at the Brani container terminal in Singapore. Trade numbers have fallen since New Year's Day. Pictures: Reuters, AFP
SINGAPORE

Thursday, January 22, 2009

SINGAPORE'S economy shrank the most on record in the last quarter of 2008 and the government forecast a five per cent contraction this year and a possible fall in consumer prices, which may prompt a one-off currency devaluation.

A government declaration that the economy was suffering its worst ever recession and official forecasts of a continued slump suggested to analysts the central bank could push down the centre of the trading band for the Singapore dollar, effectively devaluing it to help the key export sector.

The Brunei dollar is pegged against the Singapore dollar 1:1 under a bilateral agreement.

The grim figures, largely a reflection of Singapore's exposure to the slump in global trade, also pave the way for an expansionary budget today as the government scrambles to shelter the economy from the worst global financial crisis in decades.

"The Singapore economy is going through its sharpest, deepest and most protracted recession," the Trade Ministry's Second Permanent Secretary Ravi Menon told journalists.

Government data showed gross domestic product shrank in the fourth quarter at a deeper-than-expected and seasonally adjusted rate of 16.9 per cent, the biggest fall on record and the third consecutive quarterly contraction. Provisional figures had reported a 12.5 per cent slump.

From a year earlier, gross domestic product fell 3.7 per cent. That left 2008 growth at just 1.2 per cent, an abrupt turnaround from a 7.7 per cent expansion in 2007 when the stock market, financial services and property prices were booming.

The government downgraded its view of the economy for the second time in just three weeks, reflecting the rapid deterioration in the global economy that has seen much of the developed world slip into recession.

Singapore now sees GDP falling between two percent and five per cent this year, which would be the worst performance on record, with consumer prices flat to down one per cent.

"The official acknowledgement of deflation risks keeps alive a strong possibility that an eventual downward band re-centring could be on the cards in April," said Kit Wei Zheng at Citigroup, adding it could also restore some cost competitiveness.

However, the central bank said yesterday its monetary policy stance was intact after it moved to zero appreciation for the currency in October to counter the financial crisis.

It said it had no plans to review policy before a scheduled meeting in April.

Singapore manages monetary policy by adjusting the value of its currency in a secret trade-weighted band.

A sustained slide in prices can be damaging for an economy if it leads to a fall in demand as buyers hold back from making purchases in anticipation of yet lower prices.

However, Prakriti Sofat, an economist at HSBC, said in a note that the risk of sustained deflation in Singapore was remote since consumer prices would fall as the boost from high food and other commodity prices drops out of the annual price comparison.

The Singapore dollar fell to a low of S$1.512 against the US dollar after the GDP data.

The central bank said it saw no reason for a persistent weakening of the currency after it fell from a record high in July.

For key central bank and government quotes

"I'm bearish for the Singapore dollar," said Irene Cheung, currency strategist at Royal Bank of Scotland in Singapore.

"I expect monetary policy to remain accommodative they should have recentred the band earlier, but they might still do it the sooner the better."

The government expects non-oil domestic exports, which make up around 70 per cent of the city-state's economy, to shrink nine per cent to 11 per cent.Reuters