VZCZCXRO6989
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHGP #1110/01 2901057
ZNR UUUUU ZZH
R 161057Z OCT 08
FM AMEMBASSY SINGAPORE
TO RUEHC/SECSTATE WASHDC 5889
INFO RUCPDOC/USDOC WASHDC
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 SINGAPORE 001110 
 
TREASURY FOR SSEARLS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD EINV SN
 
SUBJECT: Singapore In Recession, Loosens Monetary Policy 
 
¶1.  (U) Summary.  Singapore officials announced October 10 that 
third quarter GDP growth was a negative 0.5 percent, which on top of 
negative second quarter numbers placed the country into a technical 
recession.  Analysts blamed the poor performance on declining 
industrial production and falling export figures.  The Monetary 
Authority of Singapore (MAS), Singapore's central bank, announced a 
looser monetary policy, preventing the appreciation of the Singapore 
dollar in order to boost exports and support the economy in the 
midst of a global demand slowdown and financial crisis.  If 
conditions continue to deteriorate, MAS may be forced to take a more 
aggressive policy stance before its next scheduled review.  End 
Summary. 
 
¶2.  (SBU) The Ministry of Trade and Industry (MTI) released 
preliminary GDP estimates for the third quarter October 10 that 
showed Singapore in a technical recession, defined as a contraction 
of the economy on a seasonally-adjusted basis for two consecutive 
quarters.  On a year-on-year basis, GDP contracted by 0.5 percent in 
the third quarter on the back of a broad-based slowdown in economic 
activities in the manufacturing and services sectors.  Seasonally 
adjusted, GDP growth was negative 6.3 percent for the third quarter, 
building on a 5.7 percent drop in the second quarter of 2008. 
 
¶3.  With prospects of a domestic recession running parallel to 
possible recessions in the U.S., U.K. and Euro economies, the 
government downgraded its 2008 GDP forecast to 3.0 percent from 
4.0-5.0 percent previously, and market participants similarly 
revised downwards their real GDP growth forecasts (see Table 1 
below).  In its Monetary Policy Statement, MAS predicted that 
economic growth would be below potential for the next few quarters, 
with a recovery dependent on economic conditions among its major 
trading partners. 
 
Table 1. Singapore's Real GDP Growth Forecasts 
--------------------------------------------- - 
(Percent change)             2008               2009 
                  Old Forecast  New Forecast 
                  ------------  ------------    ---- 
Government           4.0-5.0        3.0          na 
Citigroup              2.8          2.2         -1.2 
Credit Suisse          3.9          3.2          2.8 
Goldman Sachs          3.4          2.0          2.9 
HSBC                   3.8          3.0          4.8 
JP Morgan              3.3          2.0          1.5 
Standard Chartered     3.0          2.0          2.0 
--------------------------------------------- ------- 
Source:  Ministry of Trade & Industry and various bank reports 
 
¶4.  Analysts blamed the poor GDP growth figures on a sharp 
contraction in industrial output and exports.  Manufacturing was off 
11.5 percent in the third quarter, worsening from a 5.2 percent drop 
in the second quarter.  Pharmaceuticals led the decline in both 
production and exports, followed by the sizable electronics sector. 
Domestic retail sales have also moderated, and falling visitor 
arrivals have hit the tourist market.  Non-oil domestic exports 
continued their year-long decline, posting a 13-percent drop in 
September. 
 
Inflation vs. Growth 
-------------------- 
 
¶5.  (U) On the same day as the MTI announcement, the MAS announced 
it would loosen monetary policy by halting the appreciation of the 
Singapore dollar against a trade-weighted basket of currencies.  The 
action reverses MAS's tighter monetary policy made in April when 
rising inflation was the primary concern.  At that point, inflation 
had accelerated from 2.1 percent in the whole of 2007 to 6.6 percent 
on a year-on-year basis in the January-February period of 2008 -- 
its highest level in more than 25 years.  With inflation moderating, 
MAS sees the balance of risks shifting from inflation to growth. 
Analysts believe inflation peaked in June at 7.5 percent and has 
been moderating since, while GDP growth has suffered.  For the 
remainder of the year, market analysts as well as the MAS expect 
inflation to continue to moderate, given the deflationary impact of 
the current financial crisis, and falling prices for oil, food and 
other commodities.  Nevertheless, MAS is projecting inflation will 
remain elevated at approximately 6-7 percent for 2008, but will 
likely temper in 2009 to 2.5-3.5 percent as global economic growth 
continues to slow. 
 
Table 2. Singapore's Inflation 
------------------------------ 
                  Consumer      Percentage Change 
                 Price Index    Year-on-year 
--------------------------------------------- ---- 
2002                  97.8            -0.4 
2003                  98.3             0.5 
2004                 100.0             1.7 
 
SINGAPORE 00001110  002 OF 002 
 
 
2005                 100.4             0.5 
2006                 101.4             1.0 
2007                 103.5             2.1 
--------------------------------------------- ---- 
January 08           108.0             6.6 
February 08          108.6             6.5 
March 08             108.5             6.7 
April 08             109.8             7.5 
May 08               110.0             7.5 
June 08              102.0             7.5 
July 08              111.0             6.6 
August 08            111.2             6.4 
--------------------------------------------- ---- 
Source: Department of Statistics, Singapore 
 
Unique Monetary Policy Instrument 
--------------------------------- 
 
¶6. (U) MAS uses the exchange rate as its primary tool to fight 
inflation, rather than the interest rate as in most countries.  As a 
small, open economy, Singapore operates on the premise that most 
inflation will be imported from overseas.  By appreciating the local 
currency MAS makes imports cheaper and tempers inflation; 
conversely, depreciating the currency boosts exports and therefore 
GDP growth.  Technically, MAS controls the exchange rate by 
intervening in the foreign exchange market to keep the rate within 
an undisclosed band verses a trade-weighted average nominal exchange 
rate, known as the Singapore dollar nominal effective exchange rate 
(S$NEER).  MAS does not disclose the exact weights of the currencies 
used in the S$NEER, the currencies in the basket or the width or 
slope of the band of allowable changes for the Singapore dollar 
versus the S$NEER.  MAS uses its twice annual policy statements to 
describe the general trend of its currency policy and any changes it 
intends to make to the intervention band. 
 
MAS To Halt Singapore Dollar Appreciation 
----------------------------------------- 
 
¶7. (U) The MAS's policy statement on October 10 was considered 
dovish, opting for an easing of its exchange rate policy to prevent 
further appreciation of the Singapore dollar, rather than a bolder 
shift in the trading band of the dollar.  Although the market had 
anticipated that the MAS would announce a looser policy, the 
Singapore dollar nevertheless weakened immediately, and analysts 
expect it to soften further by year-end.  According to Citigroup, 
some participants in the market had expected a more aggressive move 
by the MAS.  The analysts believe that the current policy stance may 
not be effective should global economic conditions continue to 
deteriorate sharply, and said MAS may need to take a more aggressive 
policy stance before its next scheduled review in six months. 
 
Comment 
------- 
 
¶8.  (SBU) The change in monetary policy was welcomed by most 
analysts in the face of a global demand slowdown and financial 
meltdown.  MAS's policy shift is in line with the action taken by 
central banks around the world in the face of the financial turmoil. 
 Although the market appears to be focused exclusively on the role 
of monetary policy at the moment, as the recession deepens fiscal 
policy could play an increasing role.  Singapore is one of the few 
economies in Asia with the scope to use its large fiscal surplus to 
mitigate the effects of an economic downturn.  In the medium to 
longer term, Singapore could benefit from a more permanent 
countercyclical program to support the economy as well as its 
citizens.  The question is whether they have the political will to 
spend more aggressively and systematically than in the past. 
HERBOLD