The Monetary Authority of Singapore (MAS) brought forward the date of its monetary policy statement – usually scheduled in April - to 30 March. The change in the timing may be related to the second fiscal stimulus package, which will be presented on 26 March. Singapore will release the 1Q20 flash GDP estimate on 26 March, which historically has always been released the same time as the MAS decision.
Now that Covid-19 is spreading rapidly around the world, a likely recessionary hit to global growth in the first half of 2020 adds to downside growth risks for the Singapore economy, on top of the expected slowdown in economic activity due to an escalation of domestic containment measures. Weak global and domestic price pressures, including softer commercial, retail rents and limited wage pressures will probably extend the dynamics of subdued core inflation in recent months.
MAS is set to flatten the SGD NEER slope and re-center the midpoint lower
Given heightened downside growth risks and the likely trend of softer core inflation, we expect the MAS to flatten the SGD NEER slope and re-center the midpoint lower. There is merit to temporarily widening instead of re-centering the band, as recessionary growth driven by a public health crisis rather than a leverage crisis can be deep but is typically not expected to last long. A snapback in growth is possible in the second half of 2020.
However, forecasting the speed and strength of the snapback is no different from guesswork. There is, of course, significant risk that the pandemic persists and activity remains restricted for longer. While the coronavirus crisis did not start as a financial crisis, the financial repercussions of the primary shock to the real economy are worrying. In an unprecedented and necessary move, the Federal Reserve has become the buyer of last resort for a multitude of financial instruments to ease the global USD crunch.
While the MAS easing is likely a necessary response to the Covid-19 fallout, our view remains that there is a limit to how much SGD policy easing can alleviate the economic shock of the coronavirus outbreak. A weaker currency is unlikely to do much to meet the immediate priority to deliver a financial cushion to allow businesses and individuals adversely affected by an inevitable decline in economic activity to have enough buffer to survive the shock.
Policymakers are probably keen to avoid giving the impression of guiding the currency weaker should the band be re-centered lower as we expect. Perhaps one way to do this is to highlight that there is sufficient room within the policy band to accommodate a stronger SGD NEER in the event of a strong snapback in economic growth later this year.
Timely fiscal easing, which puts targeted relief in the hands of hard-hit businesses and households, remains a better first line of defence (see here). The second fiscal stimulus package could be sizeable. It helps that Singapore is in a solid position to roll out more fiscal support. Policymakers earlier commented that they will not rule out tapping on past reserves to fund this package, even though the current term of government has a sizeable current reserves surplus of SGD7.7bn.
USD funding stress has sparked a USD surge across the board recently, including versus the SGD. With the MAS easing largely priced in and the Fed aggressively stepping up efforts to ease USD funding stress, risk-reward in chasing SGD weakness is unattractive in our opinion.Disclaimer applicable to recommendation
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