Economic Analysis - Stable Growth-Inflation Dynamics To Prompt MAS Hold - DEC 2017


BMI View: The MAS ' s decision to maintain its existing policy stance during its monetary policy meeting on October 13 was in line with our expectations and we forecast the central bank to retain its neutral stance over the coming months amid a stable growth-inflation outlook. Headline inflation is likely to remain muted and we have downgraded our 2017 and 2018 average inflation forecasts to 0.8% and 1.3%, respectively, from 1.0% and 2.3% previously.

During its monetary policy meeting on October 13, the Monetary Authority of Singapore (MAS) indicated that it would maintain its neutral policy stance, noting that doing so 'would be appropriate for an extended period'. This was in line with our expectations and we forecast that the MAS will remain neutral over the coming months amid a stable growth-inflation dynamic. In its monetary policy statement, the MAS stated that it would 'maintain the rate of appreciation of the S$NEER policy band at zero percent' and that 'the width of the policy band and the level at which it is centred will be unchanged'. Growth is showing signs of recovery, while both headline and core inflation are holding steady. Inflation has remained fairly muted and we expect this to remain so amid still-low oil prices and a strong SGD.

Growth Showing Signs Of Picking Up

Advanced GDP estimates indicate that Singapore's economy continues to recover, with the economy having expanded by 4.6% y-o-y in Q317 from 2.9% y-o-y in Q217. We believe that growth is likely to remain resilient due to still-strong global demand for electronics while the precision engineering manufacturing sector benefits from a positive global economic outlook (we forecast global growth to expand by 3.1% in 2017 and 3.0% in 2018). However, we note that the economic recovery is not broad-based and this is echoed by the MAS, which noted that 'economic activity in other sectors of the economy also showed signs of improvement, albeit with some unevenness'. Furthermore, the central bank highlighted that while growth 'should stay firm in 2018', it 'could moderate' from 2017. As such, we expect the MAS to maintain its existing monetary policy stance as it seeks to continue to provide support to weaker sectors of the economy.

Inflation Not A Problem
Singapore - Headline CPI, % chg y-o-y
BMI, Bloomberg

Inflation To Remain Stable

In addition, inflation has remained stable and we believe that inflationary pressures are likely to remain contained over the coming months, enabling the MAS to maintain its policy without fears of stoking inflationary pressures. Headline consumer price inflation (CPI) has fallen considerably from the highs of 1.4% y-o-y in May, coming in at 0.4% y-o-y in August. While core inflation remains above that of headline CPI, it has remained on a gradual downtrend, coming in at 1.4% y-o-y in August (versus the high of 1.7% y-o-y in April).

Over the coming months, we believe that the inflationary environment is likely to remain muted with the strong SGD keeping imported inflation in check. Indeed, the Singapore dollar's nominal exchange rate continues to trade around the midpoint and we forecast the currency to remain on a broad appreciatory trend, averaging SGD1.38/USD in 2017 and SGD1.34/USD in 2018.

Trading At The Midpoint
Singapore - SGD NEER & MAS Policy Band* & Midpoint*
Source: BMI, Bloomberg , MAS *denotes BMI estimate

In addition, we expect property prices to remain weak, which would lessen inflationary pressures, with housing and utilities accounting for approximately a quarter of the CPI basket. The MAS also noted that it expects core inflation to remain broadly stable throughout 2017 and 'trend towards but average slightly below 2.0%' over the medium term. This will be due to muted domestic sources of inflation as there continues to be slack in the labour market. As such, we are downgrading our 2017 and 2018 average inflation forecasts to 0.8% and 1.3%, respectively from1.0% and 2.3% previously.

Risks To Outlook

We note that the risks to our view are firmly to the upside and that a spike in inflation or stronger-than-expected growth could see the MAS tighten monetary policy over the coming months. We highlight that the removal of the phrase 'for an extended period' from the statement 'MAS had indicated in the October 2016 MPS that the neutral policy stance would be appropriate for an extended period' is likely to signal the start of the central bank's tightening cycle.

Macroeconomic Forecasts (Singapore 2013-2019)
Indicator 2013 2014 2015 2016e 2017f 2018f 2019f
e/f = BMI estimate/forecast. Source: National sources, BMI
Population, mn 5.36 5.45 5.54 5.62 5.71 5.79 5.87
Nominal GDP, USDbn 299.4 292.8 278.0 277.4 309.3 329.8 353.9
GDP per capita, USD 55,858 53,749 50,216 49,339 54,177 56,947 60,304
Real GDP growth, % y-o-y 5.0 3.6 1.9 2.0 3.2 3.0 2.8
Industrial production, % y-o-y, ave 1.7 2.7 -10.0 9.9 1.3 1.8 2.3
Consumer price inflation, % y-o-y, ave 2.4 1.0 -0.4 -0.2 0.8 1.3 2.0
Consumer price inflation, % y-o-y, eop 2.3 -0.1 -0.6 0.2 1.0 1.5 2.5
Central bank policy rate, % eop 0.00 0.00 0.25 0.50 1.00 1.50 2.00
Exchange rate SGD/USD, ave 1.25 1.27 1.37 1.38 1.38 1.34 1.32
Exchange rate SGD/USD, eop 1.26 1.33 1.42 1.45 1.35 1.32 1.29
Budget balance, SGDbn 4.7 5.2 -2.6 4.0 2.4 2.2 1.9
Budget balance, % of GDP 1.2 1.3 -0.7 1.0 0.6 0.5 0.4
Goods and services exports, USDbn 579.0 577.6 516.7 511.4 524.9 561.6 599.5
Goods and services imports, USDbn 508.8 502.4 438.1 434.6 443.6 474.5 508.6
Current account balance, USDbn 54.1 58.8 57.6 56.5 59.8 63.5 65.6
Current account balance, % of GDP 18.1 20.1 20.7 20.4 19.3 19.2 18.5
Foreign reserves ex gold, USDbn 273.1 256.9 247.7 246.6 258.9 271.8 285.4
Import cover, months 6.4 6.1 6.8 6.8 7.0 6.9 6.7
Total external debt stock, USDbn 1,182.8 1,179.6 1,106.8 1,094.7 1,083.3 1,078.0 1,075.5
Total external debt stock, % of GDP 395.0 402.8 398.2 394.6 350.3 326.8 303.9
Crude, NGPL & other liquids prod, 000b/d 0.5 0.5 0.5 0.5 0.5 0.5 0.5
Total net oil exports (crude & products), 000b/d -1,215.1 -1,267.1 -1,280.0 -1,286.6 -1,293.1 -1,295.8 -1,298.4
Dry natural gas production, bcm 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Dry natural gas consumption, bcm 9.4 11.1 11.1 11.2 11.5 12.0 12.0