The Monetary Authority of Singapore (MAS) could reverse the appreciating bias it applied to the exchange rate just one month ago, if there is a global economic slowdown next year, its managing director Heng Swee Keat has told Emerging Markets. But he emphasized that the policy remained in place for now, as he still believes Singapore could ride out the worst of the impact from the US credit crunch.
“Given its openness to capital flows, Singapore is still highly susceptible to downturns in external demand as well as movements in financial markets,” said Keat. To meet these challenges, he would aim for “price flexibility”, he added.
Last month the MAS, which manages monetary conditions through the exchange rate rather than interest rates, announced it would allow faster Singapore dollar appreciation to fight inflation, which is projected to reach 3.5% year-on-year in the first half of 2008. The central bank implied it would allow a 2.5% yearly appreciation, up from 2% previously. But Keat confirmed that the MAS retains the option of reverting to a weaker currency in order to prop up exports to the US in particular, if the economy requires a boost next year.
The Dow Jones Index closed down more than 2.5% yesterday, as poor corporate results amid the continuing US sub-prime mortgage crisis escalated fears about US economic growth. Still, Keat is maintaining his current policy course, and argued that Singapore is now more insulated than in the past from external shocks, thanks to strong domestic consumption and increased spending by a government that has built a substantial fiscal cushion. These two items together contributed more than 70% to real GDP in the year to Q2 2007, and Keat is also reassured by growing economic diversification away from traditional dependence on asset-market related activities.
“There is clear evidence of a broadening of economic growth. We are expanding the biomedical sciences and transport engineering segments, to complement the electronics and chemicals clusters,” said Keat. He added that Singapore is expanding its services sector to broaden the structure of exports and develop new niche areas such as in healthcare, and business tourism in the hospitability industry.
“Each of these segments has very different market dynamics and supports, which could help to ameliorate the impact of a US economic downturn.”
Alvin Liew, southeast Asia economist at Standard Chartered, agreed that the outlook for domestic consumption remains positive until at least end-2008, and added that the ongoing financial market distress was a “useful driver to diversify the economy”. He is particularly heartened by the prospects for rising pharmaceutical production and oil-rig manufacturing, and by major projects such as two casino resorts and the Marina Bay Financial Centre.
“They are already organized and developers have been mandated, so this will fuel economic growth in the medium-term even if Singapore’s financial services sector is hit by a slowing US,” said Liew.