Singapore, in Recession, Ends Currency Gain Policy
By Shamim Adam
Oct. 10 (Bloomberg) -- Singapore fell into the first recession since 2002 as manufacturing slumped, prompting the central bank to end a policy favoring gains in its currency in an effort to support the economy.
The Monetary Authority of Singapore, which relies on the currency rather than interest rates as its policy tool, said today it's shifting to a ``zero-percent appreciation'' stance. Gross domestic product contracted an annualized 6.3 percent in the third quarter from the previous three months, after shrinking a revised 5.7 percent between April and June.
A weaker Singapore dollar, which fell today, would help electronics exporters such as Venture Corp. and Chartered Semiconductor Manufacturing Ltd. by making their products cheaper overseas. Central banks around the world are loosening monetary policy and cutting interest rates as a worsening global credit crisis saps growth.
``The whole world has gone on an easing policy and Singapore is no different,'' said Song Seng Wun, an economist at CIMB-GK Securities Pte in Singapore. ``We are likely to face a prolonged period of slow growth or recession, maybe for the next two years. This downturn is unlike previous downturns.''
The Singapore currency slid 0.6 percent to 1.4769 against the U.S. dollar as at 11:01 a.m. local time.
The trade ministry said today the city's economy will grow about 3 percent in 2008 from a year earlier, slower than a previous estimate of as much as 5 percent. That would be the weakest pace in seven years.
Inflation Peaks
``Asian countries cannot avoid the impact of weakening U.S., European and Japanese economies,'' Singapore Prime Minister Lee Hsien Loong said today. ``We must prepare for a rough ride at least over the next year, and quite possibly longer.''
The Monetary Authority of Singapore's new policy is a reversal of its stance six months ago when it called for faster exchange-rate appreciation to damp inflation. The Singapore currency has dropped 8.1 percent against the U.S. dollar in that period. Singapore manages its dollar against an undisclosed basket of currencies.
Inflation, which reached a 26-year high earlier this year, has peaked, the central bank said. Consumer prices will increase between 6 percent and 7 percent this year, and gains will ease to between 2.5 percent and 3.5 percent in 2009, it predicted.
``Against the backdrop of a weakening external economic environment and continuing stresses in global financial markets, the growth of the Singapore economy is expected to remain below potential in the period ahead,'' the monetary authority said. ``Inflation is expected to trend down in 2009 as the global and domestic economies slow.''
Rate Cuts
The Federal Reserve, European Central Bank and four other central banks lowered interest rates on Oct. 8 in an emergency coordination that was followed in Asia by China, Taiwan and South Korea. Australia cut its key rate by one percentage point on Oct. 7, the most since a recession in 1992.
Singapore's $161 billion economy declined 0.5 percent last quarter from a year earlier, compared with a revised 2.3 percent gain between April and June.
Growth has deteriorated as a slump in export demand forced factories to cut production, tourist arrivals faltered and a real-estate boom ended.
The island's manufacturing industry, which accounts for a quarter of the economy, contracted 11.5 percent last quarter from a year earlier, compared with a revised 4.9 percent drop in the previous three months, according to today's report.
Exports Slump
Singapore's government expects exports to decline as much as 4 percent this year, and the island's shipments of electronics goods have fallen for 19 consecutive months. That's hurting profits at companies including Venture Corp., the city's biggest publicly traded electronics maker.
Services climbed 6.1 percent in the third quarter from a year earlier, slowing from a 7 percent pace in the previous three months. Singapore will probably miss a government target of 10.8 million visitors in 2008, the tourism board said on Sept. 23, after visitor arrivals dropped 7.7 percent in August.
``The financial services sector is likely to see slower growth in the coming months as the ongoing global financial crisis has heightened uncertainties for sentiment-sensitive segments such as stocks-trading and fund-management activities,'' the government said in today's report.
The construction industry grew 7.8 percent, easing from a revised rate of 19.8 percent in the previous quarter.
The annualized 6.3 percent economic contraction in the third quarter compares with the median forecast of 0.3 percent growth in a Bloomberg News survey. The figures today are computed from data for July and August. Revised numbers will be released next month.
To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net
