Singapore: Solid outlook but MAS likely to remain cautious – BBH

The Singapore dollar is trading at multi-year highs against the dollar this week and the economic recovery is solid, but the MAS is likely to keep policy steady at its October policy meeting, according to analysts at BBH.  

Key Quotes

“The economy is still sluggish.  GDP growth is forecast by the IMF to accelerate modestly to 2.2% in 2017 from 2.0% in 2016, before picking up to 2.6% in 2018.  GDP rose 2.5% y/y in Q2.  While the firm mainland economy should help boost regional growth, current rates are well below historical norms.”

“Price pressures remain low, with CPI decelerating to 0.6% y/y in June from 1.4% in May.  Core inflation also eased in June to 1.5% y/y from the cycle peak of 1.7% in April.  The Monetary Authority of Singapore (MAS) does not have an explicit inflation target, but it’s clear that price pressures are simply not a concern.”

“This supports the case for steady policy.  Indeed, we believe MAS will keep policy on hold when it meets in October.  The MAS typically announces its October policy decision on the same day as advance Q3 GDP data is reported.  The MAS runs monetary policy by adjusting the width, slope, and/or midpoint of an unspecified trading band around its nominal effective exchange rate (S$NEER).”

“The MAS last eased in April 2016 by moving to a policy of zero appreciation of its S$NEER.  Since then, the economic outlook has improved but not by enough to change its forward guidance.  From its October 2016 statement:  “MAS assesses that a neutral policy stance will be needed for an extended period to ensure medium-term price stability.”  It maintained the phrase “extended period” at its April meeting this year.”

“While there is a chance that the MAS could tilt more hawkish at the October meeting by removing this phrase, we think it’s too early to do so.  Removal would suggest that MAS will then adjust policy at its next meeting in April 2018.  Given the high degree of global uncertainty, we believe the MAS will keep policy steady well into 2018.”

“The Singapore dollar is outperforming after a solid 2016.  In 2016, SGD fell -2% vs. USD and was in the middle of the EM pack.  So far in 2017, SGD is up 6.5% YTD and is amongst the top EM performers, behind only MXN (+17%), KRW (+8.5%), THB (+7.5%), and TWD (+7%).  Our EM FX model shows the Singapore dollar to have VERY STRONG fundamentals, so this year’s outperformance is likely to continue.”

“USD/SGD has been steadily falling since peaking around 1.4545 in early January.  Now, the pair appears on track to test the June 2016 low near 1.3315.  Ahead of that, intermediate targets can be found near 1.35, 1.3435, and 1.3350 (various lows from Q3 and Q4 2016).”

“Our own sovereign ratings model shows Singapore’s implied rating at AAA/Aaa/AAA.  This is consistent with the actual ratings.”