SGD: MAS Can Afford To Be Patient

March 19, 2015
FX In-Sight
SGD: MAS Can Afford To Be Patient
Recent data releases appear to signal that growth in the
first half of the year could be sluggish, and which in turn
has increased the risk of a MAS policy move in Apr. However,
support from the expansionary budget stance should keep
the economy humming. We believe that the growth
weakness in 1H 2015 should have already been largely
accounted for when MAS reduced the policy slope on 28 Jan.
Moreover, the inflation outlook has not changed since the
surprised intermeeting. Inflation remains subdued.
We do not expect any further moves by MAS at its bi-annual
policy meeting in Apr policy for now. Instead, we think that
the MAS will take a “wait-and-see” approach driven by data
and a medium- to long-term perspective. Any adjustments
to the policy band then could come via another
intermeeting move with a higher probability that such an
unscheduled meeting could take place between Jun and
Recent market developments - an imminent Fed fund rate
hike and market speculation of a further MAS move at its biannual policy meeting in Apr - has dragged the USD/SGD
higher. Despite the brief respite from a retracement in the
dollar, we are now expecting the USD/SGD to end-2Q at
1.3900 and then moving higher to 1.3950 following the
resurgence in dollar strength when Fed rate normalization
begins before settling to 1.3700.
Since the surprise inter-meeting reduction in the policy slope of
the SGD NEER by MAS on 28 Jan, the USD/SGD has been on the
rapid ascent towards the 1.39-levels. The pair has remained
elevated since then as markets anticipate the MAS’ next moves as
its approaches its regular bi-annual policy meeting in Apr amid
dollar strength. MAS’ policy decision will depend significantly on
Singapore’s growth-inflation trade-off and second order dynamics.
The SGD NEER is currently still trading around 1.8% below the midpoint since the surprised policy easing by the MAS. We continue to
expect the SGD NEER to trend lower amid a more modest growth
path, normalization in domestic property prices and ongoing
restructuring of the economy with some negative impact in the
short term. We believe that it is finely balance now between
growth and inflation. However, the risks are tilted slightly towards
growth based on available data so far.
Saktiandi Supaat
[email protected]
(+65) 63201379
Leslie Tang
[email protected]
(+65) 63201378
Fiona Lim
[email protected]
(+65) 63201374
Christopher Wong
[email protected]
(+65) 63201347
SGD: MAS Can Afford To Be Patient
Chart 1: SGD NEER Estimates
Source: CEIC, Bloomberg, Maybank FX Research
Growth Conundrum
The economy expanded more strongly than expected in 4Q 2014, growing
by 2.1% y/y vs. flash estimates of 1.5%, helped by an upward revision in
manufacturing and services. This brought the full-year growth to 2.9% in
2014, though this was markedly slower than 2013’s 4.4%. Going into 2015,
the economy has yet to show any strong recovery so far but also is not
showing any significant distress that points towards a recessionary phase.
Headwinds like higher domestic interest rates, ongoing structural reforms
to improve productivity, government measures to curb car and property
prices have been cited are likely to be drags on growth this year. But
tailwinds of expansionary fiscal policy, and favorable inflationary
environment and purchasing power effects from lower crude oil prices
should offset these headwinds to spur growth. As a result of these crosscurrents of headwinds and tailwinds, full-year growth could come in at
2.5% in 2015, closer to the lower bound of the government’s 2-4% forecast
for this year.
Comments by cabinet ministers so far do not suggest an economy in dire
straits. Instead, they highlight a maturing economy that is moving towards
a lower but more sustainable rate of growth as reiterated by Minister for
Trade and Industry Lim Hng Kiang. The Minister continued to expect the
economy to grow by 2-4% in 2015. Similarly, Minister of Manpower Tan
Chuan Jin expects local employment growth to fall to about 20000 per year
in the last part of this decade as labor force participation plateaus from
supply constraints and not from a lack of demand. More importantly,
Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam has
19 March 2015
SGD: MAS Can Afford To Be Patient
insisted that “it is not an economy in crisis”! (duringin the Budget Debate
2015 round up on 5 March 2015).
Still, recent data releases appear to signal that growth in the first half
of the year could be sluggish, and which in turn has increased the risk
of a MAS policy move in Apr. Industrial production index (IPI) rose by just
0.9% y/y in Feb, against expectations for a 3.3% rise, though this was an
improvement over Jan’s -1.9%. Non-oil domestic exports (NODX) contracted
by 9.7% y/y in Feb, the most in two years on the back of a broad
deterioration in pharmaceuticals, electronics and petrochemical exports.
The weak Feb numbers are most likely distorted by the Chinese New Year
holidays in Jan/Feb. Averaging the Jan and Feb data together still paints a
picture of uneven growth with NODX contracting by 2.4% y/y.
Chart 2: NODX & IPI – Pointing To A Sluggish First Half?
Source: CEIC, Maybank FX Research
However, it was not all bad news, non-oil retained imports (NORI)
rebounded 94.5% m/m sa in Feb from Jan’s -59.5%, suggesting that
industrial production could be poised for a rebound. Similarly, non-oil reexports, which rose by just 0.9% y/y in Feb from Jan’s +12.7%, averaged
7.2% y/y in Jan-Feb, significantly better than 4Q 2014’s +1.8%. The
numbers so far suggest that growth in 1Q is likely to be lackluster and we
will be watching Feb IPI closely for confirmation.
More importantly, keeping the economy humming along in 2015 would be
the government’s expansionary fiscal stance. The sizeable basic deficit
(which excludes top-ups to endowment and trust funds) in the Budget 2015
of SGD9.62bn should help to offset the headwinds facing the economy. The
immediate injection into the economy from the government’s productivity
and innovation credit and wage credit scheme (totaling SGD3.81bn) and
development expenditure should help to keep the economy buoyant in
2015. Even should exports and private consumption stall in 2015, we can
still expect fiscal policy to be the engine of growth.
We believe that growth weakness in 1H 2015 have already been largely
accounted for when MAS reduced the policy slope on 28 Jan. As we noted
in our report then, “the government is still expecting the economy to grow
by 2-4% this year but there is now a greater possibility of growth coming
19 March 2015
SGD: MAS Can Afford To Be Patient
in at the lower end of the forecast range. Reducing the pace of
appreciation of the SGD NEER would better align monetary policy with the
lower inflationary environment amid a possible slowdown in domestic
Outlook For Inflation Remains Benign
The main reason given by MAS when it adjusted the policy slope of the SGD
NEER was the subdued inflation outlook amid uneven growth prospects.
The low inflationary projection was largely due to the receding global oil
prices, which MAS now expects to average USD40-70 per barrel in 2015
(WTI), as well as domestic factors such as lower car, imputed rentals on
owner-occupied accommodation and healthcare cost because of the
Pioneer Generation Package. Also weighing on inflation would be the
smaller pass-through from the tight labour market because of the more
moderate economic environment. MAS is now expecting headline and core
inflation to average -0.5-0.5% (from 0.5-1.5%) and 0.5-1.5% (from 2-3%)
respectively in 2015.
Chart 3: Inflation – Still Subdued
Source: CEIC, Maybank FX Research
So far, the subdued inflationary environment expected by MAS is slowly
panning out. CPI data for Jan showed that headline inflation fell by 0.4%
y/y in Jan (Dec 2014: -0.1%, the third consecutive month of deflation. MAS
core inflation (CPI excluding accommodation and private road transport)
eased to 1.0% y/y from 1.5% in Dec 2014. Driving prices lower were housing
and transportation costs again, largely on the back of government policies.
Imported inflation is also not expected to hit prices significantly in 2015.
Food, which is largely imported, has so far been subdued. Food prices have
risen by 2.2% y/y in Jan, a moderation from Dec 2014’s 2.7%. As well,
clothing and footwear continued to see price contractions, falling by 2.3%
in Jan from -1.7% in Dec 2015. According to MAS, “external price
developments are expected to be generally benign, given ample supply
buffers in the major commodity markets.”
19 March 2015
SGD: MAS Can Afford To Be Patient
Moreover on the domestic front, the government’s recent budget has
introduced a host of measures to alleviate living costs that should keep
domestic cost contained. These measures included subsidies to reduce cost
of pre-school childcare; waiver of examination fees in government-funded
schools, polytechnics and Institutes of Technical Education; reduction in
foreign domestic worker concessionary levy to households with children
aged below 16 years; and enhancement to the GST Voucher Scheme. More
importantly, the MAS is cognizant of the impact of a weaker SGD on
inflation with the Minister of Culture, Community and Youth Lawrence
Wong (on behalf of Deputy Prime Minister Tharman Shanmugaratnam)
highlighting in parliament on 10 Mar that the “MAS has repeatedly
emphasized that an excessive weakening of the domestic currency will
only lead to higher inflation.”
What We Can Learn From The Apr 2012 Episode
While there have been previous episodes of re-centering and policy band
adjustments, the closest example that can be used to illuminate the
current situation is the slope steepening and band widening move in Oct
2010 (see Annex).
In the early part of 2010, the economy was booming in the aftermath of
the Great Recession in 2009 and inflation was accelerating due to rising
global commodity prices and private road transport costs. But by 2H 2010,
the economy was sputtering with 3Q growth contracting due to a sharp
pullback in pharmaceutical and moderation in the rest of the economy.
However, inflation continued to move north, still driven by higher car and
commodity prices. The policy response of MAS at that point in Oct 2010
was to increase the slope of the policy band slightly and widen the band as
well. These moves were to accommodate greater volatility in the financial
markets and cap inflation to ensure price stability while supporting
The episode in Oct 2010 appears to be a similar to the situation the
economy is facing currently, except in reverse. In the current situation, the
economy is not in dire straits but is moderating as the earlier section
above amid a disinflationary environment. With the MAS having already
taken the first step of a reducing the slope (as opposed to steepening in
Oct 2010) at its intermeeting on 28 Jan, the next possible step then for the
MAS is to widen the policy band from the current 2% to 3% depending on
the situation to accommodate increases in volatility in the event risk of a
Fed fund rate hike later this year.
Policy Expectations For Apr Meeting
But for now, we are not expecting any moves by MAS at its bi-annual policy
meeting in Apr. Inflation has remained subdued since the 28 Jan policy
decision and the outlook for core inflation has not changed. Similarly,
sluggish growth in the first half of 2015 should have been mostly accounted
for when the policy decision was announced on 28 Jan. We are currently
seeing the manifestation of this sluggish growth in the recent industrial
production and NODX prints. Moreover, our estimates show that the output
gap over the next three quarters is expected to improve slightly (but not in
an exceptional way), which negates the need for any further monetary
stimulus for now.
19 March 2015
SGD: MAS Can Afford To Be Patient
Chart 4: Output Gap – Still A Slight Positive
Source: CEIC, Maybank FX Research
Instead, we think that the MAS will take a “wait-and-see” approach driven
by data and a medium- to long-term perspective. Any adjustments to the
policy band then could come via another intermeeting move with a higher
probability that such an unscheduled meeting could take place between
Jun and Sep.
Implication for the USD/SGD
The surprise intermeeting move by the MAS had given the pair a leg up
towards the 1.3500-levels by the end of Feb. Since then, an imminent Fed
fund rate hike and market speculation of a further MAS move at its biannual policy meeting in Apr have intensified and has dragged the USD/SGD
higher with it, lifting the pair towards the 1.39-levels. The recent Fed
announcement has led the USD/SGD to ease off slightly to settle around
the 1.3800-levels currently, but we expect this to be temporary given that
the dollar could rebound as Fed rate normalization approaches. To
accommodate these recent market adjustments, we are now expecting the
USD/SGD to end-2Q at 1.3850 and then moving higher to 1.3950 following
the resurgence in dollar strength when Fed rate normalization begins
before settling to 1.3700.
1Q 2015
2Q 2015
3Q 2015
4Q 2015
Previous forecasts in parenthesis
19 March 2015
SGD: MAS Can Afford To Be Patient
Some Key Highlights of MAS Policy Statements
Monetary Policy
Current Growth
The Global Scene
Overall growth
Current inflation
- Modest & gradual
- slope reduced
- - no re-centering of
- the policy band
- no change to its width
- Policy aim: To ensure
medium-term price
stability amid a more
benign inflation
Slower GDP
growth in 4Q 2014
more slowly on the
back of uneven
global growth.
Global growth
uneven with stronger
growth in US partly
offset by weakness in
the Eurozone, Japan
and China.
Moderate growth
ahead as mixed
outlook for global
economy will
weigh on the
sectors while
sectors will stay
broadly resilient.
Imported Inflation:
Receding on the back
of subdued global oil
- Modest & gradual
- no re-centering of the
policy band
- no change to slope
- no change to its width
- Policy aim: To contain
domestic and
imported sources of
inflation, and ensuring
medium-term price
stability as a basis for
sustainable growth.
GDP figures:
+1.6% q/q sa. 4Q
2014 (flash est.).
Outlook for the
global economy is
+3.1% q/q (s/adj
ann.) for 1Q 2014
1Q GDP rose by a
modest 0.1%q/q
after the 6.1%
growth in 4Q.
Financial sector
expanded slower
while growth in
domestic oriented
remained firm
GDP figures:
+0.1%q/q (s/adj
ann.) for 1Q 2014
+6.1% q/q (s/adj
ann.) for 4Q 2013
2015 GDP
Geopolitical events
and China slowdown
added downside
pressure on
S$NEER, apart from
the QE tapering by
the Fed.
Outlook for the
global economy
has brightened,
anchored by
prospects in G3,
along with
turnaround in
global IT industry.
Brighter outlook for
the global
anchored by
prospects of G3,
together with a
mild turnaround in
the global IT
2014 GDP
Domestic inflation:
Domestic cost
pressures remain,
though the passthrough to consumer
prices is expected to be
4Q 2014 CPI averaged
-0.1% y/y from 0.9% in
4Q 2014 core inflation
averaged 1.6% y/y vs.
2.1% in 3Q 2014.
Imported inflation:
Benign, buttress by
ample buffers in major
commodity markets
and modest inflation in
most key import source
Domestic inflation:
Will pick up in coming
months due to base
effects but should east
by 2H 2014 on more
moderate COE
premiums and weaker
outlook for imputed
Inflation outlook
Further easing is expected
before rising in 2H 2015 on
some recovery in global oil
prices and base effects in
4Q 2014. Pass-through of
accumulated costs to CPI
will be somewhat
constrained in the near term
by more economic growth
environment. Car prices and
imputed rentals of owneroccupied accommodation
will also dampen overall
inflation pressures.
Core inflation forecast:
2015 – 0.5-1.5%
CPI forecast:
2015 – -0.5-0.5%
Wage pressures will persist
and firms likely to pass on
business costs to consumer
Core inflation to remain
Core inflation forecast:
2014 – 2-3%
CPI Forecast:
2014: 1.5-2.5%
Jan-Feb CPI averaged
0.9% y/y vs. 2.0% in 4Q
Jan-Feb core inflation
averaged 1.9% y/y vs.
2.0% in 4Q 2013.
- Modest and gradual
- Slope slightly
- Band widened
- Policy aim: Band
widened in view of the
volatility in financial
markets. Policy to
remain supportive of
economic growth
while seeking to cap
CPI inflation and
ensure medium-term
price stability
The Singapore
contracted in Q3
owed to sharp
pullback in
and moderation in
underlying growth
in the rest of the
Outlook: Global
economy is
expected to expand
at a slower pace.
Fiscal consolidation
was still underway
expected to be
slower and more
sustainable pace,
in line with its
growth potential.
Unemployment was
still elevated and
credit growth
Economic activity
in Singapore is
projected to
remain high
Increase in domestic
inflation driven by
higher car and
commodity prices.
Jul-Aug CPI inflation
averaged 3.2%y/y vs
3.1% in Q2 2010, 0.9% in
Q1 2010.
-19.8% q/q (s/adj,
ann.) for Q3 2010
+15.5% y/y in Q1Q3 (Jan-Sep)
- Re-centre the band at
the prevailing level of
- Shift band to one of
modest and gradual
appreciation from that
of a zero appreciation
- No change to its width
Policy rationale
(summary): Economy
is expected to
continue on its firm
recovery path while
inflationary pressures
are likely to pick up
GDP figures:
Outlook: External
demand conditions
are expected to be
supportive in the
transition towards
more sustainable
private sectordriven growth as
governments exit
from their
+21.1% q/q (s/adj,
ann.) for Q1 2010
Asia growth to remain
Recovery was
stronger than
expected and more
Growth was broadbased with output
lost during the
recession, fully
recovered. Output
gap turned positive
in Q1 2011
Economic activity
is likely to sustain
at a relatively high
level even as
growth momentum
slows. Support is
also expected from
external demand
2010 GDP forecast
raised from 4.5-6.5%
to 7-9%.
Higher car prices, commodity
prices, accommodation costs,
domestic-oriented services,
wages and food commodity
2010 core inflation forecast:
2011 core inflation forecast: 23%
2010 CPI inflation forecast:
2011 CPI inflation expected to
stay high in H1 2011
2010 GDP forecast:
GDP figures:
Domestic cost pressures are
rising. Balance of risks is
weighted towards inflation
Inflation trended higher
since Q3 2009 due to
rise in global commodity
prices and private road
transport costs.
Jan-Feb CPI inflation
averaged 0.6%y/y vs. 0.3% in Q4 2009, -0.8%
in Q3 2009
Inflationary pressures are
likely to pick up
Rising global commodity
prices, wages, private road
transport costs
2010 core inflation forecast:
2010 CPI inflation forecast
raised from 2-3% to 2.5-3.5%
Source: MAS, Maybank FX Research
19 March 2015
SGD: MAS Can Afford To Be Patient
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Published by:
Malayan Banking Berhad
(Incorporated in Malaysia)
Saktiandi Supaat
Fiona Lim
Leslie Tang
Christopher Wong
Head, FX Research
Senior FX Analyst
Senior FX Analyst
Senior FX Analyst
[email protected]
[email protected]
[email protected]
[email protected]
(+65) 63201379
(+65) 63201374
(+65) 63201378
(+65) 63201347
19 March 2015