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Cablegate: Singapore Keeps Monetary Policy Unchanged As Economy

VZCZCXRO8341
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHGP #0994/01 2861020
ZNR UUUUU ZZH
R 131020Z OCT 09
FM AMEMBASSY SINGAPORE
TO RUEHC/SECSTATE WASHDC 7312
INFO RUCPDOC/USDOC WASHDC
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 SINGAPORE 000994

STATE PASS USTR

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV SN

SUBJECT: SINGAPORE KEEPS MONETARY POLICY UNCHANGED AS ECONOMY
CONTINUES RECOVERY

REF: 08 SINGAPORE 1110

1. (SBU) Summary: Singapore's GDP tallied up 14.9 percent growth
in the third quarter compared to the previous quarter, its second
consecutive strong quarter of double digit growth. The government
revised upward its official estimates of 2009 GDP growth, predicting
a contraction of between 2.0 and 2.5 percent. Manufacturing showed
the strongest recovery (after showing the most serious decline
earlier in the year), but growth in services is also returning as
tourism and global trade improves. The central bank announced at
its semi-annual review that it would make no changes to its monetary
policy, declining to tighten the reins on the economy while the
external economic environment remains uncertain. GDP growth is
likely to moderate over the next couple quarters, but Singapore
appears to be returning to the path of steady economic growth. End
Summary.

Manufacturing Recovery Drives Strong Growth
-------------------------------------------

2. (U) Singapore's economy continued its rebound out of recession
with another quarter of double digit growth. The Ministry of Trade
and Industry (MTI) released advance GDP estimates October 12 showing
GDP up 14.9 percent quarter-on-quarter, and up 0.8 percent
year-on-year, the second consecutive quarter of growth after four
quarters of consecutive decline. MTI revised GDP growth in the
second quarter to 22 percent. The last two quarters have seen the
largest six-month rise in GDP since Singapore began tallying the
quarterly series in 1975, but the gains are tempered by the previous
two quarters that witnessed Singapore's largest six-month decline.
MTI revised its forecast for 2009 GDP growth from a range of -4.0%
to -6.0% to a new range of -2.0 to -2.5%. Earlier in the year MTI
had projected a possible contraction of as much as nine percent.

3. (U) The quarterly expansion built on a recovery in the
manufacturing sector that had been hit hard by the slowdown in
economic growth and trade. Manufacturing was up 35% in the third
quarter following on a 59% upward spike in the second quarter. Much
of the expansion was in the volatile pharmaceutical and biomedical
sector, but Singapore also saw strong growth in electronics
production and financial services. Trade-related and tourism
sectors, including wholesale and retail trade, transport and
storage, and hotels and restaurants, improved as tourist arrivals
and global trade returned.

MAS Cautious on Recovery, Keeps Policy Steady
---------------------------------------------

4. (SBU) The Monetary Authority of Singapore (MAS) announced the
same day that it would not change its current monetary policy and
would maintain the Singapore dollar on a zero appreciation path.
(Note: Due to its small size and external orientation, Singapore
sets monetary policy by managing the value of its currency rather
than setting interest rates (reftel).) Although MAS noted the
strong rebound in economic growth, it pointed out that final demand
in Singapore's export markets had yet to see full recovery. Noting
"continuing weakness and uncertainties" in overseas markets, MAS saw
no need to tighten the reins on the economy and risk pulling the rug
out from under the recovery.

5. (SBU) MAS's policy statement warned of a risk of higher
inflation in the medium term, and analysts expect the central bank
to begin tightening monetary policy at its next policy review in
April 2010. MAS predicts that domestic costs will be contained, but
external factors, particularly oil and food prices, will drive
inflation into 2010. Barclays Capital noted in an October 12 report
that weather-related damage to food production could result in
higher rice prices in the region. The global rise in fuel prices
has also driven up electricity rates quicker than expected. MAS
estimates inflation will hit one to two percent in 2010, though
local analysts told us inflation would likely peak higher.

Growth To Moderate
------------------

6. (SBU) MTI said in its announcement that the modest global
recovery underway would support Singapore's economic growth in the
near-term, but cautioned that economic activity would remain below
pre-crisis levels until developed markets could work through surplus
capacity and tight credit conditions. Nevertheless, the Ministry
considers a return to recessionary conditions unlikely. Local
investment banks have been more optimistic than the government this
year and for the most part have adjusted GDP estimates for the year
above or at the top of MTI's projected range. However, on balance
the banks agree with MTI that growth will begin to moderate from its

SINGAPORE 00000994 002 OF 002


rapid recovery and revert to closer to its long-term growth path.
Growth in the fourth quarter will likely be flat in
quarter-on-quarter terms, but banks are looking for 2010 growth to
hit between six and seven percent for the year.

SHIELDS

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