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Cablegate: Singapore in Recession, Loosens Monetary Policy

DE RUEHGP #1110/01 2901057
R 161057Z OCT 08




E.O. 12958: N/A

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

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.

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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

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.


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.

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