Singapore's central bank devalued its currency less aggressively than expected in a monetary policy review on Tuesday, signalling growing confidence that the global economy was bottoming out. The Monetary Authority of Singapore repeated what it had done in previous downturns in 2002 and 2003 by shifting the centre of the secret trade-weighted band for the Singapore dollar down to the market level of the exchange rate basket, effectively a devaluation.
Based on their estimates of the policy band the Singapore dollar is managed in, economists said the currency may have been devalued by 1.5 to 2 percent. Coming alongside news of a near 20 percent annualised contraction in the economy between January and March, the policy easing appeared inadequate to most analysts. With the market poised for a sharp devaluation, the Singapore dollar rallied on the news. "There had been some expectation that the re-centring would be as much as a 400 basis points depreciation," J.P. Morgan Chase strategist Claudio Piron said.
There were hints of optimism in the central bank's statement, such as the allusions to Singapore's "sound fundamentals", and references to a pick up in leading indicators and improved consumption in the United States. Singapore's March export data also contained signs of a recovery in demand from China. Shipments to China jumped 14 percent in March even as overall non-oil exports fell 17 percent from a year earlier after a record 35 percent plunge in January and a 24 percent fall in February.
"The statement was somewhat optimistic with the usual dose of cautiousness," said Emmanuel Ng, a currency strategist at OCBC Bank. Other regional central bank have taken note of signs that global trade is beginning to bottom out after collapsing last year in the wake of the global financial crisis. At least some of the optimism has been linked to signs a rebound in China.
The Bank of Korea kept rates on hold last week, citing evidence of an economic rebound. The Bank of Japan said this month that declines in industrial output and exports were likely to slow. Still, with industrialised economies in recession, Singapore was by no means out of the woods, analysts said. "Although we are seeing some faint heartbeats in the Singapore economy...we have not seen the bottom yet," said Song Seng Wun, economist at Malaysian bank CIMB in Singapore.
"With inflation easing and external demand fragile, the shift in policy remains appropriate." The Monetary Authority of Singapore sets policy by managing the Singapore dollar in a secret trade-weighted band against a basket of currencies, instead of setting interest rates. The bank said the economy is likely to remain below its potential growth rate until a decisive recovery in exports, which account for twice the value of GDP, making it Asia's most-trade dependent economy.
Most economists had reckoned that devaluing the currency had been the Singapore's best option for the trade-dependent economy well into its deepest-ever recession, delivering some currency weakness while preventing expectations of a steady depreciation. Other options such as gradually steering the currency lower or widening the width of the policy band would have stoked speculative selling of the currency, thereby pushing yields higher.
"The one-off recentring is the least ambiguous way of loosening foreign exchange policy without encouraging market expectations of undue weakening of the Singapore dollar," said OCBC's Ng. "Other options would have introduced too much uncertainty in terms of how wide would be the new band, what kind of slope, plus it would have opened up a whole can of worms about competitive devaluation etc."
Tuesday's monetary easing came as Singapore's economy contracted a record 11.5 percent from a year earlier in the first quarter of 2009, more than a market median forecast of an 8.8 percent slump. The government expects the economy to shrink 6-9 percent this year. The Singapore dollar, which has been emerging Asia's second-worst performing currency this year, strengthened to a two-month high of 1.497 against the US dollar, from 1.515 before the announcement, and was trading at 1.5005 by 0600 GMT.
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