Singapore growth will slow further on weak external demand
USD-SGD will move higher on slowing growth expectations, global deleveraging
Exporters should maintain low hedge ratios on short-term USD receivables
Singapore’s economy remains highly dependent on global trade – and thus highly vulnerable to a downturn in external demand. Indeed, exports as a percentage of overall GDP are around 200%. With the global economy slowing sharply, the Monetary Authority of Singapore (MAS) eased monetary policy on 10 October, moving to a neutral FX policy stance from a tight stance. In the last few months, the SGD has moved towards the floor of its Nominal Effective Exchange Rate (NEER) band. Currently, the estimate for the band’s middle and floor are at around 1.5115 and 1.5417. Singapore experienced a technical recession in Q2/Q3 of this year and the economy continues to slow. The MAS expects the economy to grow around 3% in 2008, with economic activity likely to remain below the 4-6% potential growth rate in 2009. Meanwhile, headline inflation is expected to be 6-7% in 2008 and 2.5-3.5% in 2009. Local interest rates remain extremely low, with the 3M SIBOR rate at around 1.13%. Given the prospect of a narrowing in Singapore‟s external surplus, the means for restoring greater equilibrium in the balance of payments will be further SGD weakness.
The tricky part of this is that SGD performance has been mixed. In the last month to 30 October, the SGD has fallen against the JPY by -11.89% and -3.46% against the USD, but rallied against the AUD by +17.25%, against the EUR by +7.50% and +6.40% against the GBP. It has been a similarly mixed performance against the Emerging Market (EM) currencies, rallying against the INR and KRW, but falling against the CNY, Malaysian ringgit (MYR) and Taiwan dollar (TWD). The overall picture is one of SGD weakening gradually on a NEER basis, albeit within the MAS policy band. However, within this, the SGD has had widely diverging performances against different currencies, which needless to say require specific focus and risk management.
The last three major highs in USD-SGD were 1.8175 (Asian crisis high on 09 January 1998), 1.8556 (28 December 2001) and 1.7064 (18 December 2005). By comparison, the current rally in USD-SGD from the 1.3450 low on 18 July has been relatively modest. Indeed, from this perspective, there is still significant upside potential from current levels.
Global recessions are typically USD-bullish events. They have been in the 1970s and 1980s, and there seems no reason why they should not be again. Indeed, the global economy appears to be facing its worst period of economic activity since the 1970s at the very least if not before World War II. This is not only USD bullish from a strategic perspective, but also bearish for Asia. Note that Asia has the highest trade/GDP exposure of any Emerging Market region (EM). Much lower energy prices will eventually provide support in 2009, but not before both the external and the domestic sides of the Asian regional economy have fallen some way. Within this, Singapore’s export vulnerability is the highest in the region at around 210% of GDP. Singapore is already facing a technical recession and the slowdown will extend for much of H1-09. Given this, the fundamental backdrop is bullish for USD-SGD. Moreover, market expects the SGD to continue to underperform the Japanese yen (JPY) near term as Japanese investors continue to repatriate offshore investments more generally.
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