Search

 

Cablegate: Monetary Authority Downplays Inflation Risk

VZCZCXRO4065
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHGP #0853/01 1230517
ZNR UUUUU ZZH
R 030517Z MAY 07
FM AMEMBASSY SINGAPORE
TO RUEHC/SECSTATE WASHDC 3007
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 03 SINGAPORE 000853

SIPDIS

STATE PASS TREASURY FOR JCIORCIARI AND ABAUKOL
FEDERAL RESERVE SAN FRANCISCO FOR DFINEMAN AND TCURRAN
FEDERAL RESERVE NEW YORK FOR MHILDEBRANT AND MCHOI
OFFICE OF THRIFT SUPERVISION FOR RGAFFIN

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON ETRD EINV SN
SUBJECT: MONETARY AUTHORITY DOWNPLAYS INFLATION RISK

1. Summary: The Monetary Authority of Singapore (MAS)
downplayed possible domestic inflationary pressures such as
the upcoming two-percent increase in sales tax, double-
digit rental increases, and a tight labor market during an
April 24 briefing for analysts ahead of the release of its
biannual Macroeconomic Review. MAS reiterated its stance
that use of the exchange rate is the best tool to combat
inflation. MAS asserted that Singapore's economic
prospects hinged on a pick-up in demand for electronics
exports expected in the second half of the year. While
officially "unconcerned" and "puzzled" by the recent
volatility in interbank interest rates, MAS highlighted the
role that non-resident deposits played in driving down
interest rates and welcomed a "two-way bet" again on the
currency, which had appreciated to the strong end of its
intervention band. Private sector analysts expressed
concerns during the briefing that MAS was slowly losing its
policy flexibility and ignoring what they perceived to be
structural shifts in inflation expectations, balance of
payments trends, and sources of economic growth. End
Summary.

Cautious Tone
-------------

2. In its Macroeconomic Policy Review released April 24,
MAS left unchanged its current GDP growth forecast for 2007
of 4.5 percent to 6.5 percent Q compared to a 7.9 percent
actual growth rate in 2006. At a meeting with economic
analysts just before the Review's release, MAS's tone was
not optimistic: they stated that the risks were to the
downside, driven by concerns about the electronics export
cycle and U.S. demand/property price correction, with the
former causing the most consternation. MAS conceded that
Singapore's electronics exports had been lagging the region
and noted that only South Korea had a worse electronics
export performance in 2006. MAS's sectoral analyst
attributed this underperformance in part to a
reorganization of the domestic disk drive industry after
Seagate Technology took over rival Maxtor Corp; and in part
to restructuring by Hewlett Packard's Singapore operations
to emphasize services over production. MAS expressed
optimism that the sector's exports would turn around in H2
2007.

Inflation Pressures and Interest Rate Drops
--------------------------------------------

3. MAS dismissed concerns about domestic sources of
inflation. First, echoing sentiments expressed in its
March inflation forecast announcement, MAS argued that the
two-percent increase in the Goods and Services Tax (GST) to
7 percent starting in July would result in a 60 to 80
percent pass-through rate, or only a 0.2 percent increase
in the rate of inflation in each of the four to five
quarters after the hike. Second, despite the tight labor
market and the high labor diffusion index (indicating that
the tight labor market was not limited to one or two
sectors), MAS said it was not concerned about wage
increases. (Note: Press reports have highlighted MAS's
analysis about the role of foreign workers in keeping wage
pressure under control and in providing a buffer for
employment in downturns. End Note.) Finally, MAS said it
was not worried about the effect on inflation of recent
double-digit increases in commercial rentals since such
expenses comprised only 10 to 14 percent of average unit
costs for production for businesses. MAS asserted that
external and not domestic factors remained the more likely
drivers of inflation.

Consumer Price Index (2004=100)
Percentage change (year-on-year)
--------------------------------

CPI % Change
--- --------
1997 96.2 2.0
1998 95.9 -0.3
1999 96.0 0.0
2000 97.2 1.3
2001 98.2 1.0
2002 97.8 -0.4
2003 98.3 0.5
2004 100.0 1.7
2005 100.4 0.5
2006 101.4 1.0

SINGAPORE 00000853 002 OF 003


2007 March 101.7 0.7

Source: Department of Statistics (www.singstat.gov.sg)

4. Economic analysts who attended the MAS briefing were
most concerned with recent volatility in interest rates.
MAS reiterated that its monetary policy only targeted the
exchange rate, keeping a neutral liquidity stance that
enabled the interest rate to be determined by the market.
While MAS maintained that interest rates were a "market
phenomenon" and that they were "just as puzzled" as the
analysts about what was driving the rates, it offered two
possible explanations for the drop: 1) a large inflow of
non-resident funds, particularly non-resident "quasi fixed
deposits" and "transactional accounts"; and 2) lower
interest rates in those countries whose currencies comprise
the basket of denominations MAS uses to peg the Singapore
dollar, assuming that the theory of interest parity held.
(Note: The one-month Singapore Inter Bank Offer Rate
(SIBOR) -- the interbank interest rate that is usually the
reference rate for pricing loans in Singapore dollars --
has fallen 100 basis points, i.e., one percentage point,
since the beginning of the year to 2.44 percent. See chart
below. End note.)

Domestic Interest Rates
-----------------------

End of Period Interbank 1-Month
------------- -----------------
2007
Jan 05 3.44
Jan 12 3.41
Jan 19 3.38
Jan 26 3.38
Feb 02 3.38
Feb 09 3.38
Feb 16 3.38
Feb 23 3.38
Mar 02 3.31
Mar 09 3.13
Mar 16 3.00
Mar 23 3.00
Mar 30 2.94
Apr 05 2.88
Apr 13 2.75
Apr 20 2.44

Source: MAS (www.mas.gov.sg)

5. Despite MAS'S professed neutrality, one official
conceded that it was not inherently undesirable to have
"more symmetrical risk" in the currency market as was the
case currently. One analyst explained that lower interest
rates meant that expected returns for holding Singapore
dollars were roughly on par with expected returns for
holding U.S. Treasuries, and thus this shift to a more
balanced outlook would reduce speculative pressures on the
Singapore dollar.


FX Reserves Build-Up
--------------------

6. One analyst questioned the rate of increase in
Singapore's FX reserves, noting that MAS had heretofore
maintained that its current account surplus, which ran to
US$37 billion or 28 percent of gross national income in
2006, was not a concern as it was "recycled" outward
through the capital account by parties re-investing the
funds overseas. He pointed out that this recycling had
ceased recently, resulting in a rapid accumulation of FX
reserves, especially reserves plus net forward positions.
According to the analyst, the current account surplus plus
net forward position is 25-30 percent of GDP and foreign
exchange reserves are 130 percent of GDP. He asked if this
was an issue for monetary policy, and whether MAS
considered this to be a "permanent shock" or a cyclical
issue. MAS responded only that money had to be flowing
back out, perhaps through the net foreign assets of the
banking sector or through corporate investment overseas.
(Note: MAS data show that the official foreign reserves
increased by US$10.5 billion to US$136.6 billion in 2006,
an acceleration from the US$5.9 billion increase in 2005.
End note.)


SINGAPORE 00000853 003 OF 003

Comment
-------

7. To its credit, MAS has a respectable track record of
keeping inflation below 2.0 percent on an annualized basis.
However, there may be some merit to analysts' concerns
about domestic sources of inflation and unease about MAS's
monetary policy choices. MAS's belief that external shocks
pose the biggest inflation risk to the economy drives its
use of the exchange rate rather than the interest rate as
its monetary policy tool to manage inflation. However, too
much allegiance to this monetary policy regime may be
leading to an excessive focus on old drivers of the economy
(such as electronics exports) at the risk of ignoring new
threats that would challenge MAS's monetary policy
paradigm. In particular, the risks of domestic sources of
inflation (GST, property prices, wages, falling interest
rates) might be hard to mitigate using only the exchange
rate as a tool, especially when the Singapore dollar is
near the strong end of its band, as it has been until
recently. The contrast between MAS's gloomy outlook and
the higher than expected 7.2 percent first quarter GDP
growth figure also announced on April 24 only highlighted
the disconnect that worries analysts. End Comment.


FERGIN

© Scoop Media

 
 
 
World Headlines

 

New IPCC Report: ‘Unprecedented Changes’ Needed To Limit Global Warming

Limiting global warming to 1.5°C will require “far-reaching and unprecedented changes,” such as ditching coal for electricity to slash carbon emissions, says a special report that finds some of the actions needed are already under way, but the world must move faster… More>>

ALSO:

Jamal Khashoggi: UK, France, Germany Join Calls For Credible Investigation

Germany, the United Kingdom and France share the grave concern expressed by others including HRVP Mogherini and UNSG Guterres, and are treating this incident with the utmost seriousness. More>>

ALSO:

MSF Not Wanted: Nauru Government Shows Continued Callousness

The Nauruan Government’s decision to ask Doctors Without Borders to immediately leave shows continued callousness towards asylum seekers desperately seeking a safe place to call home, Green MP Golriz Ghahraman said today. More>>

ALSO:

Sulawesi Quake, Tsunami: Aid Response Begins

Oxfam and its local partners are standing by to deploy emergency staff and resources to the Indonesian island of Sulawesi, as an estimated 1.5 million people are thought to be affected by the massive earthquake and tsunami that hit on Friday. More>>

ALSO:

Decriminalising Same-Sex Relationships: UN Rights Chief Applauds Indian Decision

“This is a great day for India and for all those who believe in the universality of human rights," Bachelet said. "With this landmark decision, the Indian Supreme Court has taken a big step forward for freedom and equality...” More>>

ALSO: