SINGAPORE (July 1): The Monetary Authority of Singapore will keep its exchange rate-based monetary policy stance, signalling a status quo in line with that of the US Federal Reserve. This comes after two rounds of tightening by MAS last year, while keeping the status quo in April.
“MAS’ monetary policy stance remains appropriate against the backdrop of subdued inflation and weakening growth prospects,” said Ravi Menon, managing director of MAS, at a press briefing on June 27 at the release of its 2018/19 annual report.
“Our current stance of a modest and gradual appreciation path of the Singapore dollar nominal effective exchange rate policy band will help to keep the economy close to potential and ensure medium-term price stability,” he added.
On June 19, the Fed announced that it was keeping the fed fund rate unchanged at between 2.25% and 2.5%. The US economy remains in relatively good shape, even with the trade war with China unresolved. Fed chairman Jerome Powell, who expressed concern on the outlook, said the US central bank would “closely monitor” incoming economic data and act appropriately ahead.
Menon is similarly cautious. He recalled that at last year’s annual report conference, he had singled out the escalating US-China trade conflict as a significant risk to global growth, hurting especially manufacturing, trade and investment. “We are now in the throes of a trade [and technology] war, and all three engines have indeed stalled,” he said.
As such, Singapore is expected to be hit by the global slowdown. MAS has estimated the domestic economy to grow 1.2% in 1Q2019, compared with 3.1% for the full year in 2018. The official forecast growth range of 1.5% to 2.5% this year is under review, Menon said.
The current forecast was premised on 3Q stabilising and a modest pickup thereafter, offsetting the weak first half. This scenario is unlikely to happen. “Downside risks have clearly increased,” he said.
Still, Menon is confident of Singapore’s economic and financial stability. He noted that the modern services cluster will be the main driver of growth this year, supported by healthy regional demand and increased investments in digitalisation. He also noted that MAS’ most recent stress tests indicate that the country’s financial system is resilient in the event of a severe global downturn.
For FY2019 ended March 31, MAS recorded earnings of $19.2 billion, after contributing $3.9 billion to the Singapore government. The improved bottom line was up by more than threefold compared with FY2018. Income increased to $27.1 billion, primarily from interest income and realised capital gains. Total expenditure increased to $4 billion, largely attributable to higher interest expenses on MAS bills and other borrowings for domestic money market operations.
In May, MAS announced it would be transferring $45.2 billion in excess of official foreign reserves (OFR) to GIC for investment purposes. This amount will only be accounted in MAS’ financial statements in FY2020.
Menon said the amount transferred was decided after taking into account that it did not result in the central bank’s OFR falling below 65% of GDP. “So, we just made a judgement call to see how much we could make a transfer of and arrived at $45 billion,” he said.
Whether or not MAS will transfer more amounts in the future remains to be seen, as it depends on MAS’ trading activities in the foreign exchange markets and what will result from this intervention. The quantum of capital inflows and outflows will be key factors as well. “That is extremely hard to predict or tell,” Menon said.
