MAS Should Retain Neutral Policy as Downside Risks Rise


Singapore’s central bank meets next week and markets are somewhat split.  Most analysts look for tighter policy, but we believe growing downside risks warrant a delay until the October meeting. 


The next general election is due by January 2021.  The ruling People’s Action Party is expected to retain its grip on power, as it has ruled uninterrupted since independence in 1959.  It won 83 of the 89 parliamentary seats in in the September 2015 election with 69.9% of the vote, recovering from 60.1% in 2011 (the lowest since 1965).  The opposition parties are unlikely to mount any credible challenges to the PAP in the next general election.

A presidential election was held in September 2017 under new rules aimed at greater ethnic representation.  While this post is largely ceremonial, a constitutional reform was passed that reserves the presidency for a minority candidate if that group has not held the post in the past five consecutive terms.  That held true then, and so the post was reserved for an ethnic Malay.  The next presidential election is will be held in 2023.

We note that Singapore typically ranks right at the top of the World Bank’s Ease of Doing Business rankings (2 out of 190).  The best categories are protecting minority investors and enforcing contracts, while the worst are getting credit and trading across borders.  Singapore also does extremely well in Transparency International’s Corruption Perceptions Index (6 out of 180 and tied with Sweden).


The economy is slowing.  GDP growth is forecast by the IMF at 2.6% in 2018, down from 3.6% in 2017.  GDP rose 3.6% y/y in Q4, down from 5.5% in Q3.  PMI readings remain firmly above 50.  However, with other indicators suggesting that a regional slowdown is under way in Q1, we see some downside risks to the growth forecasts.  This is also underscored by rising tensions that could impact global trade flows.

Price pressures remain low, with CPI inflation at 0.5% y/y in February.  This was likely distorted higher by the timing of the Lunar New Year, and so inflation is likely to fall back in March.  While the MAS does not have an explicit inflation target, limited price pressures supports the case for steady monetary policy.  Note that the MAS runs monetary policy by adjusting the width, slope, and/or midpoint of an unspecified trading band around its nominal effective exchange rate (S$NEER).

The MAS last eased in April 2016 by moving to a neutral policy of zero appreciation of its S$NEER.  Since then, the economic outlook has improved and the MAS modified its forward guidance slightly at the October 2017 meeting.  It wrote that “MAS had indicated in the October 2016 MPS that the neutral policy stance would be appropriate for an extended period. Given the economic outlook at this stage and consistent with medium-term price stability, MAS will maintain the rate of appreciation of the S$NEER policy band at zero percent.”

Despite dropping the placement of “an extended period” at the end of this last statement, we believe MAS will keep policy on hold when it meets next week.  According to Bloomberg, the MAS will announce its policy decision between April 8-13.  While it is a close call with a chance of a hawkish surprise, we think it’s too early to tighten.  The MAS should play it cautious and keep policy steady now, putting off a decision to tighten until the October meeting.

The fiscal outlook bears watching.  After posting a small nominal deficit equal to -1.2% of GDP in 2016, the budget moved back into surplus in 2017.  However, it is expected to move back into deficit in 2018 after Finance Minister Heng Swee Keat presented a budget that he said will “remain expansionary.”  In order to limit any medium-term deterioration, the government announced a hike in the Goods and Services Tax (GST) from 7% to 9% sometime between 2021 and 2025.

The external accounts remain very strong.  The current account surplus was an estimated 19% of GDP in both 2016 and 2017.  The IMF expects the surplus to widen to nearly 20% of GDP in both 2018 and 2019.  Foreign reserves are making new record highs, at $282.8 bln in February.  Singapore’s Net International Investment position (NIIP) is over 200% of GDP and so external vulnerabilities remain extremely low.


The Singapore dollar remains in the middle of the EM pack.  In 2017, SGD rose 4% vs. USD and compares to the worst performers TRY (-3%) and PHP (-1%) as well as the best ones MXN (+11%) and KRW (+8%).  So far in 2018, SGD is up 2% and compares to the worst performers ARS (-8%) and TRY (-5%) as well as the best ones MXN (+8%) and COP (+8%).  Our EM FX model shows the Singapore dollar to have VERY STRONG fundamentals, and so it should start to outperform more.

Singapore equities are still underperforming.  In 2017, MSCI Singapore was up 21% vs. 34% for MSCI EM.  So far this year, MSCI Singapore is flat YTD and compares to up 1.5% YTD for MSCI EM.  This underperformance should ebb, as our EM Equity model has Singapore at a VERY OVERWEIGHT position.

Singapore bonds have underperformed.  The yield on 10-year local currency government bonds is +32 bp YTD.  This is behind only the worst EM performers Turkey (+87 bp), Hungary (+37 bp), Philippines (+37 bp), and Pakistan (+36 bp).  With inflation likely to remain low and the central bank seen on hold this week, we think Singapore bonds will start to outperform.  Our own sovereign ratings model shows Singapore’s implied rating steady at AAA/Aaa/AAA, which lines up with its actual ratings.