As we expected, the MAS announced a flattening and lowering of the mid-point of the SGD NEER policy band with no change to the policy band width. The emphasis is for the FX-centered monetary policy to play a supporting role, with fiscal policy taking the lead role in addressing the Covid-19 fallout.
Extraordinary times call for a lengthier-than-usual explanation in the monetary policy section of the MAS policy statement, expanding from the typical two to five bullet points.
First, the MAS easing is likely to be a necessary response to the Covid-19 fallout amid a lack of visibility on the depth and duration of the economic downturn. Disinflationary/deflationary pressures are also set to persist in 2020 amid lower oil prices and Covid-19 outbreak. Policymakers revised down their 2020 headline CPI/core CPI forecast range from between 0.5% and 1.5% previously to between -1.0% and 0%.
Second, our take is that policymakers appear keen to avoid giving the impression of guiding the currency weaker. After all, weaker exchange rates can do little to prevent a decline in economic activity driven by stricter social distancing measures. We think the MAS policy statement's focus on financial stability suggests no further FX policy easing this year if growth snaps back in the second half of 2020 on relaxation of social distancing as the virus is contained.
What public policies can do is to ensure that the economic downturn is not longer and deeper than it needs to be.
It is apt that monetary policy is focused on preventing excessive currency volatility and maintaining stable liquidity conditions. Monetary policy must help keep the financial sector liquid and ensure supportive financing conditions for all sectors in the economy.
Third, MAS is also saying that monetary policy is more a supporting act to fiscal policy that is at the front of the response to help the people and firms at risk. Policymakers recently unveiled a SGD48bn supplementary budget, which brings fiscal deficit to an unprecedented 7.9% of GDP and makes Singapore's fiscal stance one of the most aggressive in the region.
Stable liquidity conditions are likely to be supportive of SGD government bonds, where yields remain elevated within the AAA-rated club. Developed market public debt is set to explode with “wartime” deficits. But a similar rise in Singapore Government Securities (SGS) issuance is unlikely given Singapore’s ample fiscal space. This is likely to increase the appeal of Singapore’s AAA-rated government bonds. The scope to draw down past fiscal savings means there will be likely no correlation with SGS issuance for funding the record budget deficit in Singapore.
SGD government bond yields remain elevated within the AAA-rated club
Our view remains that risk-reward in chasing SGD weakness is unattractive even as awful data ahead are likely to remind investors of the challenges from a deep downturn. We think the easing of USD funding and liquidity stress point to scope for USDSGD to retrace lower.Disclaimer applicable to recommendation
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Version: March 2020