Macro + FX Strategy Singapore MAS Preview: More Easing Needed To Aid Growth - United Overseas Bank
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Global Economics & Markets Research
Email: GlobalEcoMktResearch@uobgroup.com
URL: www.uob.com.sg/research
Macro + FX Strategy
Singapore MAS Preview: More Easing Needed To Aid Growth
Wednesday, 18 March 2020
Highlights
The Monetary Authority of Singapore (MAS) is slated to announce its monetary policy
decision in April 2020. MAS previously reduced its S$NEER slope by an estimated 0.5% in
Barnabas Gan Oct 2019, while keeping other policy parameters unchanged.
Economist We identify three drivers that could lead to another round of monetary easing in the
Barnabas.GanSC@uobgroup.com
upcoming meeting, seen from (1) lower interest rates globally, (2) the softness in the
Peter Chia S$NEER below its mid-point and (3) a likelihood of a persistent negative output gap in 2020.
Senior FX Strategist
Peter.ChiaCS@uobgroup.com We reiterate our base case call for MAS to ease policy to neutral, down from a currently
perceived +0.5% appreciation slope. This is predicated on the recent deterioration in
economic fundamentals. There is also a growing risk that S$NEER band could be re-centred
lower.
There is an increasing risk for the MAS to announce an off-cycle meeting before its April
schedule, although this is not our base case. The last time MAS did an off-cycle monetary
policy meeting was back in January 2015, where policy-makers reduced the slope while
keeping other policy parameters unchanged.
Three Drivers That Could Signal Monetary Easing
Given that the objective for the Monetary Authority of Singapore is to “maintain price stability
conducive to sustained growth of the economy”, we see three drivers that could signal a potential
MAS monetary easing in April 2020, namely from the (1) lower interest rates globally, (2) the
softness in the S$NEER below its mid-point and (3) a likelihood of a persistent negative output
gap in 2020.
Chart 1: Benchmark Rate Cuts Seen Year-To-Date
Source: Macrobond, UOB Global Economics & Markets Research
Singapore MAS Preview: More Easing Needed To Aid Growth
Wednesday, 18 March 2020
1|P a g eFirst, MAS may see a growing impetus to ease monetary policy conditions in tandem with lower
interest rates globally. Since the start of this year, the US Federal Reserve has reduced its
Federal Funds Target Rate (FFTR) by a total of 150 basis points to a range of 0.0% - 0.25%.
Other developed central banks that cut rates also included RBNZ (-75bps since YTD), BOE (-
50bps) and RBA (-25bps). Over in Asia, Singapore’s key trading partners including Hong Kong
(HKMA: -114bps), Malaysia (BNM: -50bps), Thailand (BOT: -25bps), Indonesia (BI: -25bps) and
Philippines (BSP: -25bps) have also cut rates since the start of 2020.
Second, the softness in the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) in the
recent weeks below its mid-point reflects a relative pullback in investor risk appetite on concerns
over the COVID-19 outbreak and falling oil prices. As we flagged in our previous MAS meeting
preview report1, we had observed that a majority of easing moves were done when the S$NEER
was below the estimated mid-point (specifically in October 2008, October 2011, January 2015,
October 2015 and April 2016). The recent softening of the S$NEER below mid-point could also
suggest that market players have guided the S$NEER lower in anticipation of such monetary
easing move into April 2020. According to our in-house S$NEER model, the S$NEER has
weakened to -0.4% from its mid-point at the time of writing (18 March 2020), down from a strong
+1.8% from mid-point at the end of January 2020.
Chart 2: S$NEER Has Softened To Below Mid-Point In March 2020
Source: Macrobond, UOB Global Economics & Markets Research
Note that the fall in the S$NEER also coincided with the MAS statement on 5 th February which
cited that there is “sufficient room within the policy band to accommodate an easing of the
S$NEER in line with the weakening economic conditions”. With the fall of the S$NEER in the
recent weeks, the room for further weakness in the S$NEER is comparatively limited versus
when the S$NEER is “fluctuating near the upper bound of the policy band” after October 2019.
As such, an easing of monetary policy may be on the cards in April 2020, in order to allow the
S$NEER to weaken further in line with the weaker economic outlook.
Third, the expected growth headwinds into 2020 should suggest a persistent negative output gap
for Singapore in the year ahead. Singapore’s output gap, defined as the difference between the
actual GDP growth and potential GDP growth, persisted in negative territory for five quarters into
4Q19. A negative output gap also indicates the presence of growth slack in the economy, and
that inflation will likely be kept in check as well.
1
United Overseas Bank, Singapore Focus: A Global Slowdown, An Easing MAS?, 7 October 2019
Singapore MAS Preview: More Easing Needed To Aid Growth
Wednesday, 18 March 2020
2|P a g eChart 3: Negative Output Gap Persists, May Worsen Into 1Q20
Source: Macrobond, UOB Global Economics & Markets Research
On the same note, given that the MAS monetary policy is forward looking and focused on the
medium term economic outlook, a monetary easing move in April 2020 may indicate policy-
makers’ reduced optimism on Singapore’s economic outlook into the four to six quarters ahead.
The MAS noted that their econometric models suggest that the “peak impact of a change in
exchange rate policy on the economy occurs only after four to six quarters,” which is then cited
as the main reason why monetary policy formulation needs to be forward-looking2.
MAS Likely To Ease Policy Slope To Neutral
The negative output gap which is expected to worsen into the start of 2020 will likely persuade
the MAS to ease monetary policy at the April meeting. We reiterate our base case call for MAS
to ease policy to neutral, down from a currently perceived +0.5% appreciation slope, while
keeping the width of the policy band and the level at which it is centred unchanged. This
is predicated on the recent deterioration in Singapore-centric economic fundamentals, including
the contraction in manufacturing PMI (Feb 2020) and retail sales (Jan 2020) on the back of rising
global recession risk. There is also a growing risk that MAS could re-centre the S$NEER band
lower as a signal that a looser monetary policy is needed to cushion both growth and inflation
risks this year.
Meanwhile, in the light of several unscheduled meetings by key central banks and their moves
to loosen their respective monetary policies, there is an increasing possibility for MAS to join the
bandwagon and announce an off-cycle meeting before its April schedule. The last time MAS did
an off-cycle monetary policy meeting was back in January 2015, where policy-makers reduced
the slope while keeping the rest of its policy parameters unchanged. Back in January 2015, the
MAS cited that the inflation outlook since its October 2014 monetary policy statement has “shifted
significantly” given the rapid decline in global oil prices amid weaker prospects for global demand.
We observe that current circumstances have some similarities to-date, given that oil prices have
plummeted by over 50% from January 2020’s high of US$68.9/bbl to March’s US$30~/bbl. Global
economic prospects are similarly dim as well, seen from the exacerbation in COVID-19 concerns,
while the recent announcement by Malaysia to restrict inbound and outgoing human traffic at its
borders effective 18 – 31 March will likely affect foreign labour supply into Singapore and add to
downside risk to growth prospects in 1Q20. Should an off-cycle meeting occur, our call for MAS
remains identical to the above-mentioned base case.
2
Monetary Authority of Singapore, how does MAS formulate its monetary policy? Oct 2018
Singapore MAS Preview: More Easing Needed To Aid Growth
Wednesday, 18 March 2020
3|P a g eUSD/SGD To Be Sticky Above 1.40 In 1H20
The SGD has weakened to a 3-year low of 1.42 against the USD. The quick turnabout from 1.35
at the turn of the year reflects the sudden deterioration of Singapore’s growth and inflation outlook
brought about by the COVID-19 outbreak. Trading under the midpoint, the S$NEER has also
largely priced in a lowering of the policy slope to neutral in the upcoming MAS meeting in April,
while keep other parameters unchanged. In a challenging macroeconomic backdrop, it is likely
the S$NEER will stay pinned below the midpoint in the coming few months. That said, in keeping
pace with expected weakness of most of its trading peers against the USD, we can expect a
further slide in SGD to 1.43 /USD in 2Q20. After which, we expect a modest growth recovery in
2H20 as the COVID-19 outbreak shows signs of getting under control, with USD/SGD point
forecasts at 1.41 in 3Q20, 1.40 in 4Q20 and 1.38 in 1Q21. A risk to our updated set of forecasts
is a more aggressive easing by MAS, either off cycle or at its scheduled April meeting, which
involve a one-off re-centring of the S$NEER lower. Such a move would put upside risks to our
USD/SGD forecasts, especially in the immediate quarter (2Q20).
Singapore MAS Preview: More Easing Needed To Aid Growth
Wednesday, 18 March 2020
4|P a g eDisclaimer This publication is strictly for informational purposes only and shall not be transmitted, disclosed, copied or relied upon by any person for whatever purpose, and is also not intended for distribution to, or use by, any person in any country where such distribution or use would be contrary to its laws or regulations. This publication is not an offer, recommendation, solicitation or advice to buy or sell any investment product/securities/instruments. Nothing in this publication constitutes accounting, legal, regulatory, tax, financial or other advice. Please consult your own professional advisors about the suitability of any investment product/securities/ instruments for your investment objectives, financial situation and particular needs. The information contained in this publication is based on certain assumptions and analysis of publicly available information and reflects prevailing conditions as of the date of the publication. Any opinions, projections and other forward-looking statements regarding future events or performance of, including but not limited to, countries, markets or companies are not necessarily indicative of, and may differ from actual events or results. The views expressed within this publication are solely those of the author’s and are independent of the actual trading positions of United Overseas Bank Limited, its subsidiaries, affiliates, directors, officers and employees (“UOB Group”). Views expressed reflect the author’s judgment as at the date of this publication and are subject to change. UOB Group may have positions or other interests in, and may effect transactions in the securities/instruments mentioned in the publication. UOB Group may have also issued other reports, publications or documents expressing views which are different from those stated in this publication. Although every reasonable care has been taken to ensure the accuracy, completeness and objectivity of the information contained in this publication, UOB Group makes no representation or warranty, whether express or implied, as to its accuracy, completeness and objectivity and accept no responsibility or liability relating to any losses or damages howsoever suffered by any person arising from any reliance on the views expressed or information in this publication. Singapore MAS Preview: More Easing Needed To Aid Growth Wednesday, 18 March 2020 5|P a g e
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