Bloomberg News

Singapore Shows Asia Dilemma as Inflation Compounds Global Risks

October 14, 2011

Oct. 15 (Bloomberg) -- Singapore’s decision to slow its currency’s advance rather than halt gains shows the dilemma facing Asian nations trying to tame inflation while protecting exporters from faltering economies in Europe and the U.S.

The Monetary Authority of Singapore, which uses the island’s dollar to manage prices, said yesterday it will continue to allow the currency to advance even as the trade ministry cut its growth forecast for 2011 and the central bank said the expansion may slow further next year.

The Singapore dollar rose as much as 0.8 percent as policy makers signaled they’ll maintain efforts to curb prices rising at the fastest pace in almost three years. China yesterday reported inflation exceeded 6 percent for a fourth month even as bank lending fell to the lowest level since 2009, limiting Premier Wen Jiabao’s scope to ease policy to support growth.

“A slower pace of currency appreciation should provide some support against slowing growth but still dampen inflationary pressures and anchor inflation expectations” in Singapore, said Wai Ho Leong, an economist at Barclays Capital in Singapore. “Inflation remains a policy concern as there is less clarity as to how fast and to what extent inflation will fall this time.”

Gross domestic product may increase 5 percent this year, compared with an earlier forecast range of 5 percent to 6 percent, the Singapore trade ministry said in a statement yesterday. The island’s export-dependent economy may expand “more slowly” in 2012 and growth may be below its potential rate of 3 percent to 5 percent, the central bank said.

Exports Ease

Singapore’s exports probably rose at a slower pace in September, while electronic shipments by companies such as Venture Corp. likely slumped for an eighth month, according to the median estimates of economists surveyed by Bloomberg News before an Oct. 17 report. Overseas shipments rose 3.5 percent last month from a year earlier, after climbing 5.1 percent in August, according to the median estimate of 11 economists.

The Singapore dollar, the fourth-worst performing Asian currency in the past month, rose 0.6 percent to S$1.2702 against its U.S. counterpart yesterday. It had reached unprecedented levels since the central bank said in April it would allow further appreciation to tame price gains, trading below S$1.20 in July.

The Singapore monetary authority guides the local dollar against a basket of currencies within an undisclosed band. It adjusts the pace of appreciation or depreciation by changing the slope, width and center of the band. The central bank, which releases a policy statement every six months, tightened monetary conditions at each of its last three reviews.

Global Recession

The risk of another global recession erased $10 trillion of equities worldwide last quarter and prompted officials from China to Indonesia to boost fiscal measures or cut interest rates. With a potential Greek default threatening to disrupt world financial markets, Singapore is trying to stimulate growth just six months after its last monetary tightening.

Singapore’s GDP increased an annualized 1.3 percent last quarter from the previous three months, when it shrank a revised 6.3 percent, the trade ministry said. The $223 billion economy expanded 5.9 percent from a year earlier, after rising 1 percent the previous quarter.

“The outlook for the global economy has deteriorated sharply against the backdrop of increased uncertainty in financial markets,” the Singapore central bank said yesterday. “Given the stresses and fragility in the advanced economies, the prospects for growth in Singapore’s major trading partners have deteriorated.”

IMF Forecast

Asia’s growth has slowed since the second quarter, the International Monetary Fund said Oct. 13 as it reduced forecasts for regional expansion this year and next.

“There won’t be an easy solution or a quick rebound for Asia this time around because the European crisis may be long drawn, the U.S. economy is struggling and there are trepidations about China’s economy,” said Vishnu Varathan, an economist at Mizuho Corporate Bank Ltd. in Singapore. “Many in the region have tightened quite a bit and they now have dry gunpowder. The shift will unequivocally be towards loosening policy.”

The global slowdown has prompted some Asian central banks to start cutting interest rates or refrain from increasing borrowing costs. Pakistan and Indonesia have lowered rates this month while the Bank of Korea left borrowing costs unchanged this week for a fourth straight month.

Stocks Slump

Bank Indonesia Governor Darmin Nasution said yesterday that inflation isn’t his country’s primary challenge at a time when the global economy is slowing.

The MSCI Asia Pacific Index of stocks has slumped about 15 percent this year. Singapore’s benchmark Straits Times Index has dropped about 14 percent in the same period, led by Neptune Orient Lines Ltd., Southeast Asia’s biggest container carrier, and CapitaMalls Asia Ltd., an owner of shopping malls across the region.

Singapore’s inflation will average about 5 percent this year and 2.5 percent to 3.5 percent in 2012, the central bank said yesterday. Consumer prices rose 5.7 percent in August from a year earlier.

“The ongoing slowdown in domestic economic activity will reduce tightness in the labor market and alleviate price pressures,” the central bank said. “Inflationary pressures emanating from abroad should also subside.”

Core inflation, which excludes private road transport and accommodation costs, will ease to a range of 1.5 percent to 2 percent in 2012, from an average of about 2.1 percent this year, the monetary authority predicts.

“They are concerned about the growth outlook going into next year, but at the same time inflation remains an issue so the central bank wants to be prudent about keeping the Singapore dollar on an appreciating trend,” said Kun Lung Wu, a Singapore-based economist at Credit Suisse Group AG. “This will help contain inflation pressures.”

--With assistance from Sarina Yoo in Seoul, Lars Klemming, Sunil Jagtiani and Kristine Aquino in Singapore and Mark Deen in Paris. Editors: Stephanie Phang, Cherian Thomas

$SGAVQOQ% <Equity> CN $SGAVYOY% <Equity> CN

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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