DBS says Singapore will keep currency stance

October 6, 2009
Singapore Democrats

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David Yong
Bloomberg

Singapore is a year away from switching to a strengthening currency bias because economic indicators are “far from levels” that triggered similar moves in the past, according to DBS Holdings Ltd.

The Monetary Authority of Singapore will likely maintain its “neutral” stance of zero-appreciation for the local dollar until October 2010, analysts Philip Wee and Irvin Seah at Southeast Asia’s biggest banking group, wrote in a research note today. An earlier move in April is possible should the pace of recovery continue to surprise on the upside, they said.

“Current gross domestic product growth, inflation and exports remain far from levels where the MAS historically shifted to an appreciation policy,” the analysts said. “Against this backdrop we believe the MAS will switch in October 2010.”

The economy may contract between 4 percent and 6 percent in 2009, Prime Minister Lee Hsien Loong said on Aug. 8. GDP shrank 12.2 percent in the first quarter, putting the city-state into its worst recession in 44 years. In the past, it took four to seven quarters from the trough before the central bank switched to an appreciation policy, DBS said.

The MAS reviews its currency policy twice a year, with the next assessment falling on Oct. 12. It conducts monetary policy by adjusting the center, slope or width of an undisclosed band in which the Singapore dollar is allowed to fluctuate against a basket of currencies.

Exports rebound

Singapore’s central bank focuses on currency policy rather than interest rates because trade is so important to the economy.

DBS said the drop in non-oil domestic exports reached the worst point in April, when shipments tumbled 19.2 percent from a year earlier. The decline in overseas shipments slowed to 7.1 percent in August, according to the latest government data. The MAS may favor a stronger currency after August 2010, judging by past experience, the bank said.

The Singapore dollar advanced 0.5 percent to S$1.4105 against the greenback as of 3:37 p.m. local time, according to data compiled by Bloomberg. The currency will climb to S$1.41 by the end of 2009 and appreciate 2.9 percent to S$1.37 by the end of 2010, DBS forecasts. The currency has dropped 5.9 percent since the last policy review on April 14.

The MAS opted for faster gains in the currency over a six- month period in October 2007. It announced a one-off strengthening in April last year that caused the currency to jump 1.9 percent against the dollar in a single week. It stopped seeking appreciation in October 2008.

Inflation in Singapore bottomed in April when prices declined 0.7 percent from a year earlier, DBS said. Past trends suggest policy makers would adopt a tightening bias in 10 to 21 months from that point, according to the bank.

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