Depreciation bias remains for SGD to cushion economic downturn, says Commerzbank

For the Singaporean dollar, a depreciation bias remains to cushion the economic downturn, according to the latest research report from Commerzbank.

Singapore revised down this year’s growth forecast by 1 percentage point to -0.5-1.5 percent due to the expected impact of Covid-19. It experienced a difficult 2019 where growth slipped to just 0.7 percent from an average of above 3 percent for the past four years.

This was due to the slump in the global electronics sector. Prime Minister Lee stated last week that Singapore could see a recession this year and is seemingly preparing the markets for the worst. In the SARS shock of 2003, growth contracted over 5 percent q/q annualized but it rebounded over 20 percent in Q3 as the virus was contained swiftly.

This time however, the impact could be deeper and longer due to 1) there is still no clear timeline on when the coronavirus can be contained. This could take another 3-6 months and the longer it takes, the deeper the impact on the economy; and 2) China is much more integrated to Asia and the world now compared to 2002, the report added.

For example, China accounted for 19 percent of tourist arrivals to Singapore in 2019 vs 9 percent in 2002. This is similar to the statistics for the top tourist spenders globally where China spent USD277 billion or 19 percent of the total vs just 3 percent in 2000, according to the World Tourism Organization.

The Monetary Authority of Singapore (MAS) reiterated that its policy stance is unchanged and reiterated that its next scheduled decision remains unchanged in April. Nevertheless, it has already allowed the trade-weighted exchange rate to depreciate in the past few weeks.

The focus now shifts to the size of the fiscal stimulus at tomorrow’s budget. It could be as much as 1.6-2 percent of GDP for the coming year vs an expected deficit of 0.4 percent for the current fiscal year ending in March 2020, Commerzbank further noted in the report.