Singapore Outlook Solid but MAS Likely to Remain Cautious

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The Singapore dollar is trading at multi-year highs against the dollar this week.  The economic recovery is solid, but the MAS is likely to keep policy steady at its October policy meeting. 


The ruling People’s Action Party (PAP) remains firmly in control.  It won 83 of the 89 parliamentary seats in in the September 2015 election with 69.9% of the vote, up from 60.1% in 2011.  The PAP has ruled uninterrupted 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 will be held in September.  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.  That holds true this year, and so the post will be reserved for an ethnic Malay.

There was a family squabble earlier this year involving the ruling Lees.  Two siblings of Prime Minister Lee Hsien Loong (son of founding father Lee Kuan Yew) announced they were leaving Singapore over accusations of nepotism and abuse of power against their brother.  We see limited implications, however.

We note that Singapore ranks incredibly well in the World Bank’s Ease of Doing Business rankings (2 out of 190 and up from 3 in 2016).  The best categories are protecting minority investors (1), enforcing contracts (2), and starting a business (6).  Singapore also does extremely well in Transparency International’s Corruption Perceptions Index (7 out of 176).


The economy is still sluggish.  GDP growth is forecast by the IMF to accelerate modestly to 2.2% in 2017 from 2.0% in 2016, before picking up to 2.6% in 2018.  GDP rose 2.5% y/y in Q2.  While the firm mainland economy should help boost regional growth, current rates are well below historical norms.

Price pressures remain low, with CPI decelerating to 0.6% y/y in June from 1.4% in May.  Core inflation also eased in June to 1.5% y/y from the cycle peak of 1.7% in April.  The Monetary Authority of Singapore (MAS) does not have an explicit inflation target, but it’s clear that price pressures are simply not a concern.

This supports the case for steady policy.  Indeed, we believe MAS will keep policy on hold when it meets in October.  The MAS typically announces its October policy decision on the same day as advance Q3 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 but not by enough to change its forward guidance.  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.”  It maintained the phrase “extended period” at its April meeting this year.

While there is a chance that the MAS could tilt more hawkish at the October meeting by removing this phrase, we think it’s too early to do so.  Removal would suggest that MAS will then adjust policy at its next meeting in April 2018.  Given the high degree of global uncertainty, we believe the MAS will keep policy steady well into 2018.

Fiscal policy has remained prudent.  Oil revenues account for around a third of government revenue.  As such, the drop in oil prices necessitated several rounds of fiscal tightening.  The budget deficit came in at an estimated -2.6% of GDP in 2016, down from -3.5% 2015.  It is expected to remain around -2.5% of GDP in both 2017 and 2018, but much will depend on oil prices.

The external accounts are in excellent shape.  The current account surplus is expected to remain near 20% of GDP both 2017 and 2018.  Foreign reserves are nearing all-time highs, at $266 bln in June.  Non-oil domestic exports (NODX) have slowed in recent months, and bears watching.  On the other hand, electronics exports have held up better.  Forward-looking orders and export orders components of the PMI remain in expansionary territory.


The Singapore dollar is outperforming after a solid 2016.  In 2016, SGD fell -2% vs. USD and was in the middle of the EM pack.  So far in 2017, SGD is up 6.5% YTD and is amongst the top EM performers, behind only MXN (+17%), KRW (+8.5%), THB (+7.5%), and TWD (+7%).  Our EM FX model shows the Singapore dollar to have VERY STRONG fundamentals, so this year’s outperformance is likely to continue.

USD/SGD has been steadily falling since peaking around 1.4545 in early January.  Now, the pair appears on track to test the June 2016 low near 1.3315.  Ahead of that, intermediate targets can be found near 1.35, 1.3435, and 1.3350 (various lows from Q3 and Q4 2016).

Singaporean equities continue to underperform.  In 2016, MSCI Singapore was -1% vs. +7% for MSCI EM.  So far this year, MSCI Singapore is up 17% YTD and compares to up 24.5% 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 -40 bp YTD.  This is amongst the best performers and compares to Brazil (-145 bp), Indonesia (-96 bp), Peru (-81 bp), and Turkey (72 bp).  With inflation likely to remain low and the MAS likely to remain on hold this year, we think Singaporean bonds will continue to outperform.

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