S'pore's growth may hit lower half of estimates

S'pore's growth may hit lower half of estimates

The Straits Times, Asia News Network/Singapore

Singapore's central bank has signaled that economic growth here may be cooling faster than many had expected, but it is maintaining its policy of targeting a stronger Singapore dollar.

The Monetary Authority of Singapore (MAS) said recently that growth this year may finish up in the lower half of the Government's forecast range of 3 percent to 5 percent.

But it added in its half-yearly monetary policy statement that the underlying growth support for the economy remains "intact".

As such, it decided to stick with its policy of targeting a "modest and gradual appreciation" of the trade-weighted Singdollar to combat rising inflationary pressures.

This reiteration of its monetary policy put paid to speculation that the MAS may shift to a neutral policy -- that is, a policy targeting zero appreciation for the Singdollar.

The relative value of the Singdollar against a basket of currencies of key trading partners is a vital tool because the Republic's economy is heavily reliant on exports.

The competitiveness of exports depends, in part, on the relative value of the Singdollar - that is, how much Singapore's exports cost foreign buyers in their own currency.

Some economists argued that shifting to a neutral stance could help boost economic growth as the appreciating Singdollar makes Singapore's exports less competitive.

The economy slowed dramatically in the first quarter to grow just 2.4 percent compared with a year earlier.

But the MAS explained its decision by pointing to rising inflationary pressures. "Inflationary pressures continue to be a concern over the medium term, with the economy at close to its potential output level and with upside risks to external inflation."

Targeting a "modest and gradual appreciation" of the Singdollar means the MAS will allow the local currency to strengthen gradually.

This management of the trade-weighted exchange rate is the MAS' main monetary policy tool.

An appreciating Singdollar will help cap inflationary pressures by lowering import prices for Singapore consumers and businesses.

Standard Chartered Bank senior economist Steve Brice said: "We expect the Singdollar to hit $1.58 against the U.S. dollar by the end of the year."

Stanchart was among a handful of private-sector forecasters which had expected the MAS to shift to a "neutral" monetary policy.

"Our view was that inflationary pressures were benign, so there is no need for a tightening bias for monetary policy," said Brice.

But the MAS said consumer prices may rise by between 0 percent and 1 percent this year, before increasing to between 1 percent and 2 percent next year.

This reflected rising commodity prices, wages and services charges. Domestic labor costs are also expected to rise, the MAS said, adding that there are "further upside risks" to inflation.

And the global economy is still growing at a healthy pace. The slowdown in the global information technology sector may also be shallower and shorter this time, than in the previous downturn in 2001.

The slowdown in the first quarter also reflected volatility in biomedical manufacturing, which is "not expected to have significant spillover effects on the broader economy or on overall employment conditions".

"Against this backdrop and taking into account the first- quarter performance, GDP growth for 2005 is projected to come in at the lower half of the forecast range of 3 percent to 5 percent.

"Notwithstanding the slower pace of growth, the economy will remain close to its potential output path, following its sharp rebound in 2004," the MAS said.

The central bank is not the only forecaster to have slashed its gross domestic product (GDP) expectations.

ING Group cut its estimate for Singapore's growth this year from 5 percent to 3.5 percent, while Action Economics' David Cohen also cut his forecast from 5 percent to 4 percent.

But Cohen added: "Growth of 4 percent is nothing to get alarmed about. It is still a respectable growth rate after the very solid growth performance last year."