OREANDA-NEWS. The Singapore economy is expected to grow by 2.8% in 2015, down from the previous forecast of 3.1%, according to the latest quarterly Survey of Professional Forecasters conducted by the Monetary Authority of Singapore (MAS).

However, private economists expect financials to do better, with the Finance and Insurance sector forecast to grow 7.5% instead of 6.5% estimated in the December survey. Interestingly, the sector was predicted to expand by 7.5% in the fourth quarter, but grew at a better-than-expected rate of 10.3%.

Earlier, MAS Core Inflation, which excludes the costs of accommodation and private road transport, came in at 1.0% in January 2015 compared to 1.5% in December 2014, due to the cut in electricity tariffs, as well as lower food and services inflation. CPI-All Items inflation eased to -0.4 % in January 2015 from -0.1% in December 2014, mainly due to sharper price declines in oil-related items, as well as lower food and services inflation.

MAS Core Inflation and CPI-All Items inflation could ease further, before rising in the second half of 2015, on account of some recovery in global oil prices, and in view of the base effects associated with the low inflation in Q4 2014, the Ministry of Trade and Industry said in a February statement.

Elsewhere, the Singapore economy expanded by 2.9% in 2014, slowing from the 4.4% growth chalked up in 2013. The growth forecast for 2015 is 2.0% to 4.0%, according to the Ministry of Trade and Industry.

According to Morgan Stanley, relocation of manufacturing capacity out of Singapore has kept industrial production and non-oil domestic exports on a weak footing. Meanwhile, the leverage cycle continues to unwind, posing further headwinds to the economy. Credit growth is decelerating and the property market and construction sectors are seeing the collateral impact from that. In addition, the aging population and policy measures to wean the economy from dependence on foreign labour, given the infrastructure/political/social constraints, continue to exert pressure on near-term and medium-term prospects.

The combination of falling growth and lower inflation means the government has incentive to hike growth and room to further ease monetary policy.

MAS Easing Catches Market by Surprise

On 28 January, the Monetary Authority of Singapore (MAS) lowered the slope of the Singapore dollar policy band.

“MAS will continue with the policy of a modest and gradual appreciation of the Singapore Dollar Nominal Effective Exchange Rate (NEER) policy band. However, the slope of the policy band will be reduced, with no change to its width and the level at which it is centred,” MAS said in the statement.

This was the first emergency policy change for the MAS - which only has two scheduled policy announcements a year - since the move after the 11 September, 2001 attacks.

According to UOB Global Economics & Markets Research, “The surprise move by the MAS on 28 Jan to lower the SGD NEER slope was due to the re-assessment of Singapore’s core inflation. Core inflation for 2015 is now forecasted to be much lower than before.  The off-cycle nature of this policy move is partly explained by the change in inflation forecast. We think that the urgency of this move is probably in response to potential capital inflows after ECB’s QE as well as dovish central banks policies.”

The Singapore dollar has retreated some 2.53% against the US dollar since 28 January 2015. Nonetheless, the US dollar uptrend may not be smooth. “The USD is not necessarily on a one-track strengthening path against the SGD. With more central banks around the world adopting a loosening monetary policy, the Fed is increasingly isolated in its policy bias. One of the risks is that the continued strengthening of the USD will negatively impact the competitiveness of US corporations and affect the economic recovery that is still fragile,” said DBS Group Research in a March Strategy report.

The Singapore Sibor rate or rate of interbank lending saw a sharp jump towards the end of December as the US dollar continued to appreciate in anticipation of interest rate hikes by the Fed. From the beginning of January, in the space of a few days, Sibor jumped by over 15 basis points. Presently, Sibor is nearing 1%.

The easing Singapore dollar should help the city state’s exports and exporters.

Currencies’ Performance against the US dollar (28 Jan 2015-19 Mar 2015)

Source: Bloomberg

Budget 2015 – Another Boost

Besides a retreating Singapore dollar, which will aid exporters, cash handouts of up to S\$300 in the form of GST vouchers and income tax rebates of up to S\$1,000 could provide a one-time boost to consumer spending. Other non-cash benefits to individuals include S\$500 per person in credits for education/training, 20% subsidies on certain wage increases, and various additional subsidies and handouts for older workers and families.

Incentive schemes for small-medium enterprises (SME) have been continued and levy increase for low-skilled foreign workers was deferred, which should aid the construction and manufacturing sectors.

SIMSCI Index and SGX SIMSCI Futures

The steps undertaken by the Singapore authorities to boost growth could help Singapore companies, which in turn will benefit shareholders. Traditionally, companies that constitute the MSCI Singapore Index (“SIMSCI Index”) give higher dividends than corporations in other developed markets.

Dividend Yield (%)

Year SIMSCI IndexSM MSCI US IndexSM MSCI Pacific IndexSM
2011 4.57 2.11 3.40
2012 3.42 2.26 2.97
2013 4.81 1.88 2.43
2014 3.54 1.91 2.70

Source: Bloomberg

Further, the SIMSCI Index, with a sizeable sector weightage in financials, will gain from stronger growth in the financial sector going forward.

GIC Financials’ Weighting in SIMSCI Index (%)

Companies Weighting (%)
DBS Group Holdings Ltd 13.49
Oversea-Chinese Banking Corp Ltd 12.01
United Overseas Bank Ltd 11.35
CapitaLand Ltd 3.45
Global Logistic Properties Ltd 3.10
Singapore Exchange Ltd 2.41
CapitaMall Trust 2.02
Ascendas Real Estate Investment Trust 1.97
Suntec Real Estate Investment Trust 1.73
City Developments Ltd 1.60
CapitaCommercial Trust 1.40
UOL Group Ltd 1.36
Keppel Land Ltd 1.24

Source: Bloomberg 18 March 2015

In early March, the underlying SIMSCI Index dipped below the 100-day simple moving average as the US dollar gathered strength. However, the index quickly rebounded as the upward trajectory of the US dollar stalled.

Effective 27 March 2015, Keppel Land will be removed from the SIMSCI Index.

Performance of SIMSCI Index (2014 -2015)

Source: Bloomberg

The SGX MSCI Singapore Index Futures (“SIMSCI Futures”) saw higher trading volume and open interest in recent months. Since October, trading of SIMSCI Futures had steadily increased with average daily volume touching 15,166 in February 2015, compared with 13,319 a year ago.   Despite the Lunar New Year holiday, daily average trading volume in February rose compared with January’s 15,093. 

Volume and Month-End Open Interest of SGX SIMSCI Futures