(Aug 5): Singapore has turned out to be the canary in a coal mine and an unwitting casualty of the simmering trade tensions between the US and China. The city state is experiencing a slowing economy, with GDP growth declining from 1.1% in 1Q2019 to an advance estimate of 0.1% for 2Q2019, according to data released by the Trade and Industry Ministry (MTI) last month.

Market watchers expect this trend to continue in 2H2019, especially with the International Monetary Fund (IMF) cutting its full-year growth forecast for Singapore to 2%, down from the 2.3% it had announced previously. Meanwhile, the ASEAN+3 Macroeconomic Research Office (AMRO) has also revised downwards its full-year GDP forecast for Singapore, from the 2.5% it predicted in May to 1.3%.

Singapore is not the only country in this situation. Its fellow ASEAN+3 countries are also suffering from global economic uncertainties, leading AMRO to cut its GDP forecast for the region to 4.9%, down from its 5.1% projection in May.

The other Asean countries, however, have been leveraging domestic demand to cushion the impact of global headwinds. With World Bank data showing that exports accounted for 176.4% of GDP in 2018, the nature of Singapore’s economy has made it more vulnerable.

Within the economy, the hardest hit have been companies in the export-oriented sectors, which have seen lower earnings. The trend is expected to continue in the next six months, according to two surveys on business expectations for the July-to-December 2019 period, released on July 31.

The manufacturing sector was found to have the poorest sentiment, with a net weighted 22% expecting a softer business outlook, the Economic Development Board (EDB) notes. In contrast, only a weighted 11% expect improving business conditions, bringing the overall outlook to a net weighted balance of 11% of firms anticipating declining business conditions.

This is a deterioration from the weighted balance of 7% of firms that expected improving business conditions for the same period a year ago. It also contrasts with the 1% that envisaged better business prospects in the previous survey of business sentiment for the period between April and September 2019.

Within the manufacturing sector, firms in precision engineering, electronics and chemicals have been the worst hit, with each cluster expecting negative growth  of 31%, 27% and 21%, respectively. The bleak outlook for precision engineering and electronics is caused by subdued demand for semiconductors and semiconductor-related equipment, owing to the trade war, which is threatening to turn into a technology war. The chemicals cluster, on the other hand, has been affected by declining refining margins and a general weakening in demand from the region, particularly China.

In a separate survey by the Department of Statistics (Singstat), 12% of firms foresee slower business, compared with 14% that are optimistic about the prospects in the upcoming months. This results in a net weighted balance of 2% of firms that expect a more favourable outlook.

These expectations are down two percentage points from the 4% net weighted balance recorded in the survey of the outlook from April to September. On a y-o-y basis, it is down seven percentage points (ppts) from the 9% recorded.

The data aggregates the responses of 1,500 businesses in the services sector — trade, transport and storage, accommodation, F&B, information and communications, financial and insurance services, real estate and community services.

Those in accommodation, F&B, information and communications, and transport and storage services foresee more favourable conditions, as they expect more spending with the approaching festive season in the last quarter of the year.

<strong>Weaker Singdollar to help</strong>

To counter the impact of a further slowdown and to stave off a recession, most economists are expecting the Monetary Authority of Singapore (MAS) to “ease”. This involves weakening the Singapore dollar to lower costs in the city state’s trade- and export-driven economy.  Such a move, if executed, is likely to give the ailing manufacturing sector a much-needed boost.

Easing is done by shifting the slope of the Singapore dollar Nominal Effective Exchange Rate (S$NEER). This comprises a policy band and the Singapore dollar moves within this band. At each monetary policy review in April and October, MAS formulates monetary policy by setting a path for the S$NEER policy band to ensure price stability in the medium term.

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In the mid-1980s and 1997/98, when the Asian financial crisis occurred, economic conditions warranted an easing of the S$NEER policy band to facilitate economic recovery. Song Seng Wun, an economist at CIMB private banking, notes that MAS has historically eased the band during times of crisis. Now, with central banks around the world easing, it is likely that the MAS will follow suit, he says.

The central bank is now widely expected to flatten the slope of the band. Economists and market watchers to whom The Edge Singapore spoke emphasise that the move is much needed. Kelvin Tay, regional chief investment officer at UBS wealth management, says: “There are no two ways about [the cut].” He adds that he expects the SGD to weaken to 1.37 or 1.39 against the US dollar by year-end.

Barnabas Gan, an economist at UOB Bank, notes that the past five easing moves by MAS were done in October 2008, October 2016, January 2015, October 2015 and April 2016 — amid global economic crises that saw the “S$NEER [coming] below the estimated mid-point”. He expects MAS to flatten the slope by 0.5ppts, from the currently estimated 1%. This would bring the estimated appreciation slope to 0.5%, reversing one of the two steepening moves made in 2018. Gan believes a weaker SGD will promote price stability amid “reduced optimism in Singapore’s economic outlook for the four quarters ahead”.

MAS tweaks the slope of the S$NEER policy band based on how stable prices are. Price stability occurs when broad-based inflation, or average price increments in the economy, are contained. This is determined based on a range of price and cost indicators as well as developments in wages and rents, import and export prices, output prices and measures of resource utilisation, MAS says in its Frequently Asked Questions report that was released last October.

It adds that it alters the slope of the policy band “when the trajectory of economic activity over the medium-term policy horizon is changing gradually”. While MAS has never set a negative slope to the S$NEER, the central bank acknowledges that it may re-centre the policy band lower if economic conditions warrant it.

Singapore’s monetary policy is centred on the exchange rate because it is the best way to secure price stability in a small, highly open economy, Ravi Menon, managing director of MAS, said in a speech on June 27.

With headline inflation coming in at 0.6% y-o-y in June, down from 0.9% and below economists’ expectations of 0.8%, it appears that a temporary weakening of the SGD is likely.

<strong>Benefits of a weaker SGD</strong>

While a weaker SGD is expected to improve the competitiveness of exports, Song cautions that “we cannot out-cheap anyone”. “Whatever produced and exported from Singapore can be done at a much cheaper cost elsewhere, especially in countries where the cost of labour and raw materials are low,” he adds.

Nonetheless, the indirect benefits of a weaker SGD will bring much-needed relief to the economy. For instance, it could encourage more travel to and consumption in Singapore. Chua Hak Bin, a senior economist at Maybank Kim Eng, observes that visitor arrivals in April grew 3.39% y-o-y, but slowed to an increase of just 0.9% y-o-y in May. Tourists spend on hotel accommodation and other services such as retail and F&B, says Chua. A weaker SGD will boost growth in these industries.

In addition, it will also induce spending on private properties, particularly among foreigners. Data released by URA on July 26 indicates that the vacancy rate for private properties stood at 6.4% in 2Q2019 — 0.1% higher than the 6.3% recorded in the quarter before. The second quarter also saw a take-up rate of 2,350 — 27.9% higher than the 1,838 recorded in 1Q. However, there was an overall increase in prices by 1.5%, following a 0.7% decrease in the previous quarter.

This year, there were several purchases of high-priced private properties. The most recent one was that of a $45 million bungalow on Cluny Road by the founder of Dyson. The purchase comes nearly a month after he bought a $73.8 million penthouse at Wallich Residence in the Tanjong Pagar Centre mixed-use development.

While some argue that foreign buyers will cause property prices to skyrocket — a scenario that will be detrimental to locals — it is worth noting that foreigners usually acquire high-end properties.

Tay says property sales boost loans and employment — through the use of lawyers, agents and bankers — and the increased velocity of money boosts the economy through its multiplier effect. According to Chua, the property market and wider economy could use a boost, which could be brought about by a reduction in the additional buyer’s stamp duty or a relaxation of the loan-to-value ratio.

Indeed, in its recent report on the Singapore economy, IMF noted that the property sector — and its stability — is very much tied to the broader economy. That has resulted in macroeconomic policies being centred on the property market. In that context, the global body welcomed the government’s macroprudential and other property-related measures, but recommended that market conditions be continuously monitored and the macroprudential measures be adjusted accordingly. In fact, IMF has suggested “eliminating residency-based differentiation for the ABSD, and then phasing out the measure once systemic risks dissipate”.

Last year, MAS introduced a new corporate structure for investment funds, the Variable Capital Company. The VCC structure will position Singapore to become a key fund domiciliation hub and strengthen Singapore’s position as a full-service international fund management centre, MAS said.

In 2017, some $3.3 trillion worth of assets were managed out of Singapore. This is a 19% increase from the $2.7 trillion managed in 2016. Financial services have a significant multiplier effect.

While the economy seeks to benefit from a weaker currency — through more competitive exports, more tourism and possibly more investments in property and other assets — a weaker currency is merely a temporary solution to rejuvenate the ailing economy. Once it serves its purpose of reviving the economy, economists expect the weakness to be reversed should inflationary pressures set in.

The inflation level is relatively low, but, as Song says, “it will shoot up with a weaker currency”. “This will affect you and me through higher costs.” Given the long-standing grouse of a high cost of living here, a weaker currency is certainly not a long-term solution, especially with falling domestic consumption — retail sales fell 2.1% y-o-y in May, the fourth consecutive month of decline. For now, though, the domestic economy and resident population will have to bear the pain in expectation of stronger economic gains in the future.

Weaker Singdollar to drive Singapore's economic growth

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