SGD Outperformance Should Continue

Singapore skyline

Singapore is facing rising inflation even as the economy recovers.  This should keep the MAS on hold at its April meeting, but we think it will tilt more hawkish as the year passes.  This should help SGD continue to outperform.


The ruling People’s Action Party (PAP) remains firmly in control.  The PAP has ruled since independence in 1959.  The opposition parties are unlikely to mount any credible challenges in the next general elections, due by January 2021.

The next presidential election is due by August 2017.  Starting in 1993, the president is elected by direct vote every six years.  While this post is largely ceremonial, major changes to the process were made last year.  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.


The economy is picking up.  GDP growth is forecast by the IMF to accelerate modestly to 2.2% in 2017 and 3.2% in 2018 from 2.0% in 2016.  GDP rose 2.9% y/y in Q4, the strongest rate since Q2 2015.  Forward-looking PMI data (new orders, new export orders) are at cycle highs, while trade data for January suggest that momentum may be growing.  As such, we see slight upside risks to the growth forecasts.

Price pressures are rising, with CPI accelerating to 0.5% y/y in January.  This is the highest rate since September 2014.  The MAS does not have an explicit inflation target.  However, it projects headline inflation of 0.5-1.5% in 2017.  We believe low base effects and rising energy prices will push the y/y rate above that forecast range by mid-year.  Note core inflation was 1.5% y/y in January, the highest since December 2014.

Rising inflation and a recovering economy support the case for steady policy at the next semiannual policy meeting in April.  The MAS typically announces its April policy decision on the same day as advance Q1 GDP data is reported.  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 policy of zero appreciation of its S$NEER.  Since then, the economic outlook has improved and supports our view that the MAS will refrain from further easing.  Instead, it is likely to keep policy steady in April.  From its October 2016 statement:  “MAS assesses that a neutral policy stance will be needed for an extended period to ensure medium-term price stability.”  Looking forward, it should tilt more hawkish at the October meeting.  However, it may be too early to tighten policy then with an adjustment to its S$NEER trading band.  Much will depend on the global backdrop.

Singapore is reportedly studying measures to boost revenue, including higher taxes.  Lawrence Wong, second minister of finance, said “Medium-term expenditures will continue to rise significantly, be it for infrastructure or for health care reasons.  So we are studying revenue. Revenue means taxes.”  The government is required to run a balanced budget over its term in office.  The surplus was 0.6% of GDP in 2016, and is expected at 0.8% in 2017 and 0.5% in 2018.

The external accounts remain strong.  The slowdown in the mainland China economy has hurt exports, but low energy prices and the sluggish economy helped reduce imports.  The current account surplus was 19% of GDP in 2016, and is expected to rise modestly to nearly 20% in both 2017 and 2018.  Foreign reserves rose to $252.7 bln in January, which is near the cycle high of $253.4 bln in September but below the record high of $278 bln from June 2014.


The Singapore dollar is outperforming after a “so so” 2016.  In 2016, SGD fell -2% vs. USD and was in the middle of the EM pack.  BRL (+22%) and RUB (+20%) were the best performers, while ZAR (-18%) and TRY (-17%) where the worst.  So far in 2017, SGD is up 3.1% YTD and puts it close to the best performers KRW (+6.5%), ZAR (+6%), RUB (+5.5%), and TWD (+5.2%).

Our EM FX model shows the Singapore dollar to have VERY STRONG fundamentals, so this year’s outperformance is to be expected.  USD/SGD is trading at its lowest level since November 10.  A break of 1.3950 and then 1.38 is needed to confirm a test of the August 2016 low near 1.3350.

Singaporean equities continue to underperform.  In 2016, MSCI Singapore was -1% vs. +7% for MSCI EM.  So far this year, MSCI Singapore is up 7.3% YTD and compares to up 9.5% YTD for MSCI EM.  This underperformance should ebb, as our EM Equity model has Singapore at a VERY OVERWEIGHT position.

Singaporean bonds have performed OK this year.  The yield on 10-year local currency government bonds is about -9 bp YTD.  This compares to the best performers Argentina (-241 bp) and Brazil (-116 bp), as well as the worst performers India (+37 bp) and China (+30 bp).  With inflation likely to continue rising and the MAS likely to tilt more hawkish this year, we think Singaporean bonds will start underperforming more.

Our own sovereign ratings model shows Singapore’s implied rating at AAA/Aaa/AAA.  This is consistent with the actual ratings.