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."