Singapore Lowers Currency Band as Economy Shrinks
By SE YOUNG LEE and P.R. VENKAT
SINGAPORE -- Singapore's central bank eased monetary policy modestly Tuesday as the economy logged its biggest contraction on record in the first quarter, devastated by a collapse in demand for the city-state's exports.
The Monetary Authority of Singapore lowered the trading band for the Singapore dollar, setting the conditions for a one-off weakening of the currency. But it said it will maintain a neutral stance, keeping the undisclosed band flat and at the same width.
The announcement came as the government reported that gross domestic product plunged at an unexpectedly sharp annualized rate of 19.7% in the first three months of the year from the previous quarter, the worst since the government began compiling comparable data in 1976.
Singapore's economic contraction accelerated from the 16.4% pace of decline in the fourth quarter, the Ministry of Trade and Industry said, and was much worse than the 7.5% fall forecast by economists in a Dow Jones Newswires poll.
The government now expects the economy to shrink between 6% and 9%, worse than its previous forecast for a contraction of between 2% and 5%.
The Singapore dollar rose as the central bank said it was merely lowering the currency to prevailing rates and said there was "no reason for any undue weakening of the Singapore dollar."
The move, in the central bank's half-yearly policy review, acknowledges the damage that the global crisis has already done to the local currency. Markets had largely expected a re-centering of the band, with some analysts predicting more aggressive steps.
"It's a really modest move in a time of unprecedented economic stress. I think they're effectively saying, 'We can't do much about this,'" said Westpac currency strategist Sean Callow. "If such a modest move in the exchange rate is all that's warranted in this case, you have to think that they're just going to hold on tight, wait for the world to recover."
The U.S. dollar fell to S$1.4966 from S$1.5147 just before the data and policy statement were released.
"Everybody had positioned themselves for the easing," said a trader at a foreign bank. "The fact that it was not so aggressive prompted the Singapore dollar to rise in a knee-jerk reaction, but I expect it to close the day around $1.5100."
The MAS uses the Singapore dollar exchange rate, rather than interest rates, as its main tool of monetary policy because Singapore's trade flows dwarf the island's small domestic economy. It last eased policy in October, when it shifted to its neutral stance. Before that, the MAS had guided the currency higher to curb inflation that was plaguing the economy.
After Tuesday's easing, the central bank will likely keep policy unchanged until April 2010 in the absence of further negative surprises for the economy, said Citigroup economist Kit Wei Zheng. "My sense is that probably for now this is a done deal, and I think unless there is a significant relapse towards the end of the year, probably they will stand pat," Kit said.
The MAS said considerable downside risks remain but that "the Singapore economy continues to be anchored by sound fundamentals and a resilient financial system."
The economic data, however, remain grim.
First-quarter GDP fell 11.5% from a year earlier, also the worst on record, a bigger drop than the October-December decline of 4.2% and deeper than the 8.6% fall forecast in the Dow Jones poll.
The government cut its full-year GDP forecast for the fourth time since November in a sign of how the intensity of the downturn in Singapore's export markets has caught the government by surprise.
"MTI's earlier forecast had factored in the likelihood of a weak first quarter, but the advance estimates indicate that actual GDP growth will undershoot earlier expectations by a significant margin," the ministry statement said.
The quarterly GDP decline was led by a 29.0% on-year plunge in manufacturing, which accounts for nearly a quarter of Singapore's economy. Services fell 5.9%, but construction bounced 25.6%.
Unlike bigger economies, Singapore doesn't have a large domestic consumption market to sustain growth. Instead, it relies heavily on overseas demand mainly for its electronic goods, which has been steadily falling since last year.
Separately, the trade promotion agency International Enterprise Singapore said exports fell for an 11th straight month in March but the decline slowed and exports to China rose for a second month.
Non-oil domestic exports fell 17% on year, compared with February's 23.7% drop. The contraction was smaller than the median forecast of a 25.3% fall in a Dow Jones poll.
Singapore's exports to China rose 14% from a year earlier, accelerating from February's 8% rise. Exports to Hong Kong rebounded 13% on year in March after falling 21% in February.
Write to Se Young Lee at vincent.lee@dowjones.com and P.R. Venkat at p.r.venkat@dowjones.com
