VZCZCXRO1002
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHGP #0355/01 1060031
ZNR UUUUU ZZH
R 160031Z APR 09
FM AMEMBASSY SINGAPORE
TO RUEHC/SECSTATE WASHDC 6610
INFO RUCPDOC/USDOC WASHDC
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 SINGAPORE 000355 
 
STATE PASS USTR 
TREASURY FOR SSEARLS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD EINV SN
 
SUBJECT: SINGAPORE SEES SHARP DECLINE IN GDP, LOOSENS MONETARY 
POLICY 
 
¶1.  (U) Summary:  The Singapore government announced April 14 that 
first quarter GDP growth was 11.5 percent lower than the first 
quarter of 2008, the sharpest fall in GDP on record.  The steep drop 
is attributed to the collapse in global trade demand which has 
dramatically reduced economic activity in the manufacturing and 
services sectors.  The same day, the Monetary Authority of Singapore 
(MAS), Singapore's central bank, loosened monetary policy by a 
one-off depreciation of the Singapore dollar, but set a less 
aggressive future path than anticipated.  Future moves to support 
the economy will likely come from the fiscal side.  In the only 
positive news of the day, exports declined more slowly than expected 
and analysts foresee less weak export and industrial production 
figures in future quarters.  End Summary. 
 
Sharpest Drop In GDP Since The 1970s 
------------------------------------ 
 
¶2.  (U) Singapore's Ministry of Trade and Industry (MTI) released 
GDP estimates for the first quarter of 2009, computed largely from 
January and February data, showing Singapore experiencing its 
sharpest decline on record (since quarterly statistics began to be 
recorded in 1975) both in year-on-year (yoy) and seasonally adjusted 
annualized terms.  The MTI calculated that GDP shrank by 11.5 
percent yoy in the first quarter.  On a quarter-on-quarter 
seasonally adjusted annualized basis, the first quarter's 19.7 
percent fall in GDP is even worse than the 16.4 percent contraction 
in the fourth quarter of 2008. 
 
¶3.  (U) The contraction in first quarter GDP was more than double 
market expectations.  Analysts said the downside surprise came from 
a continued broad-based slowdown in manufacturing and services, both 
of which were dragged down by the collapse in world trade.  The 
fall-off in global export demand was reflected in the continued 
contraction in non-oil domestic exports of 24.5 percent in March 
compared to the same month last year.  Manufacturing declined by 29 
percent in the first quarter compared to the previous quarter, 
significantly lower than the contraction of 4.1 percent in the 
fourth quarter of 2008.  The services sector was down 5.9 percent, 
with wholesale and retail, transport and storage, and hotel and 
restaurant services particularly hard hit.  The latter has suffered 
from a falloff in tourist arrivals. 
 
2009 GDP Growth Forecasts Revised Downwards 
------------------------------------------- 
 
¶4.  (SBU) Looking ahead, MTI warned that despite some tentative 
signs of economic stabilization in the United States, officials do 
not yet see a clear turnaround in economic activity.  Similarly, in 
its Monetary Policy Statement, MAS predicted that economic growth 
will remain below potential until its major trading partners show 
definitive signs of recovery.  In light of this sharp deterioration 
in GDP in the first quarter, the government lowered its 2009 GDP 
forecast to a range of negative nine to negative six percent from 
negative five to negative two percent previously.  Some market 
participants similarly revised downwards their real GDP growth 
forecasts (see Table 1 below). 
 
Table 1. Singapore's Real GDP Growth Forecasts 
--------------------------------------------- - 
(Percent)                       2009 
                     Old Forecast  New Forecast 
                     ------------  ------------ 
Government           -5.0 to -2.0  -9.0 to -6.0 
DBS                      -4.8          -7.7 
Goldman Sachs            -8.0        no change 
HSBC                     -7.0        no change 
JP Morgan                -4.5          -7.5 
Morgan Stanley           -6.0         -10.0 
OCBC                     -4.8          -7.6 
Standard Chartered       -3.9          -7.5 
UBS                      -5.0          -6.5 
UOB                      -4.0          -7.5 
--------------------------------------------- --- 
Source:  Ministry of Trade & Industry, various bank reports 
 
¶5.  (U) Although GDP growth estimates were substantially worse than 
expected, analysts were heartened by better than expected export 
figures for March, which showed an eleven percent month-on-month 
increase in non-oil domestic exports, even if the figures are still 
significantly below their levels from a year ago.  Citigroup 
analysts said the month-on-month increases in exports in February 
and March together with improvement in other leading indicators gave 
confidence that free-falling exports had bottomed out during the 
first quarter.  With stabilization in exports and industrial 
production, analysts believe that the first quarter will be the 
trough of GDP contraction.  Nevertheless, year-on-year growth 
 
SINGAPORE 00000355  002 OF 002 
 
 
figures for at least the next two quarters will likely also be in 
the red, but at a slower pace of contraction. 
 
MAS Loosens Monetary Policy, But By Less Than Expected 
--------------------------------------------- --------- 
 
¶6. (SBU) Also on April 14, the MAS announced it would loosen 
monetary policy with a small one-off devaluation of the Singapore 
dollar against a trade-weighted basket of currencies. (The MAS uses 
the exchange rate as its primary tool for monetary policy, rather 
than the interest rate as in most countries.) However, the MAS 
tempered expectations about future depreciation by maintaining a 
neutral path for the currency going forward (i.e. signaling no 
depreciation or appreciation of the Singapore dollar compared to its 
trading partners' currencies).  Analysts had expected a sharper 
devaluation and a commitment to depreciating the currency in the 
future, but MAS said in its report that the local economy's 
fundamentals remained sound and saw "no reason for any undue 
weakening of the Singapore dollar."  In fact, after the MAS 
announcement of a one-off devaluation, the currency strengthened by 
nearly one percent compared to the U.S. dollar, reflecting the 
market's surprise at the MAS's less-than-aggressive response. 
 
¶7.  (SBU) A depreciation of the currency would typically spark 
concerns of inflation as imported goods become more expensive, but 
MAS expects inflation to moderate further in the coming months on 
the back of lower commodity prices and the weak prospects for 
growth.  The MAS kept its inflation forecast unchanged at negative 
one percent to zero percent for 2009.  Analysts reckon that the move 
by the MAS is expected to result in a modest 1.0 to 1.5 percent 
depreciation of the trade-weighted currency from the current level. 
The devaluation of the Singapore dollar may give a mild boost to 
Singapore exports and thereby the economy at large.  However, 
according to JP Morgan, the depreciation appears to be aimed more at 
stabilizing domestic prices than addressing the collapse in global 
demand. 
 
Comment 
------- 
 
¶8.  (SBU) MAS's Monetary Policy Statement was unexpectedly dovish, 
with MAS saying the economy had "sound fundamentals" and seeing no 
need for an "undue weakening" of the Singapore dollar.  Unless 
economic conditions deteriorate further, the MAS will likely 
maintain this neutral policy stance at its next Monetary Policy 
meeting in October 2009.  Any future GOS moves to support economic 
growth are likely to come from the fiscal policy side. 
 
SHIELDS