Sing dollar could be revalued: Citi

By OH BOON PING

THE trading band for the Singapore dollar could be adjusted downwards as early as April to cushion the effects of the economic contraction, Citigroup said yesterday.

In a report, economist Kit Wei Zheng said that although the prospect of prolonged economic weakness calls for a lower equilibrium real effective exchange rate (REER), ‘the Sing dollar REER has actually appreciated since the start of 2009, resulting in a tightening of monetary conditions’.

Last week the Sing dollar went up against the greenback, driven by stockmarket rebounds in the US and in the region. However, ‘the appreciation bias was halted at the end of the week on suspected MAS intervention to weaken the Sing dollar at unusually weak levels within the band’, Mr Kit wrote.

Citi sees this as signalling a currency depreciation in early April. It noted that with the economy set to suffer a sharp slowdown this year, a weaker currency will not only help boost manufacturing activity but also the services sector, where import content is lower.

The ‘import content of Singapore’s manufactured exports is among the lowest in the region, implying greater bang for the buck for a given depreciation’, it said. Last year, the economy grew a dismal 1.1 per cent due to severe blows to the key manufacturing and services sectors.

Both shrank in the fourth quarter - the services sector for the first time since 2001 - and dragged the economy into the red with a worse-than-expected 4.2 per cent contraction in Q4. The Monetary Authority of Singapore has traditionally adopted a policy of gradual appreciation for the Sing dollar to control for imported inflation.

But with oil prices having sunk two-thirds from year-ago levels, Citi said concerns have rapidly shifted from inflation towards deflation.

In this regard, Mr Kit pointed to South Korea, saying a major depreciation of the won has helped Korean tech exporters weather the recession better than competitors.

This is evidence ‘that price competitiveness is playing a greater part in differentiating between over and under-performance in exports’, he said. ‘An overvalued Sing dollar REER could exacerbate the demand shock and impede the subsequent export recovery.’

Compared with fiscal measures, Mr Kit feels a modest depreciation is less costly, while fiscal spending is also ‘largely one-off and narrower in scope’. The yield curve in the Sing-dollar bond market steepened significantly at the start of last week, but subsequently retreated and ended the week slightly flatter.

Source : Business Times - 17 Mar 2009