SINGAPORE (Mar 24): As the global economy tips closer to a recession amid the Covid-19 pandemic, Singapore is not likely to be spared.
Analysts at Morgan Stanley have issued a dire warning for the small and open city-state: A full-year GDP contraction is in the pipeline for the first time since 2001.
“Growth risks are skewed to the downside,” caution Morgan Stanley analysts. “The spread of Covid-19 to other geographies means we now expect a global recession in 2020.”
Apart from the pick-up in the number of daily new confirmed cases in line with the spike in imported cases and cluster infection, the analysts note that the subdued global backdrop and Singapore-Malaysia border restrictions mean that Singapore is likely to see a sharp growth impact.
“We see the economy falling into a full-blown recession, with the economy contracting by -1.5% year-on-year over 2020, the first full-year GDP contraction since 2001 (-1.1% y-o-y),” say analysts.
“Moreover, disinflation/deflation pressures are looming, with the latest February core inflation print falling into negative y-o-y territory at -0.1%,” they note, adding that this is a clear reflection of the subdued domestic demand.
Looking ahead, Morgan Stanley is shifting its focus to what the Monetary Authority of Singapore (MAS) can, or should, do.
In an environment where policymakers are scrambling to save their economies as much as possible, Morgan Stanley acknowledges that the Singapore government’s efforts include the various packages announced in the Budget 2020, as well as the possibility of tapping on past reserves to fund a much-anticipated second fiscal stimulus package.
The analysts also note that the authority had brought forward its upcoming semi-annual policy review to Mar 30, suggesting the “exigency for policy easing”.
“Specifically, we expect MAS to reduce the S$NEER slope to zero and re-center the midpoint down to the prevailing level of S$NEER concurrently,” note the analysts.
“While this is unprecedented, we believe the imminent sharp economic downturn warrants this simultaneous move,” they add.
Lowering to a zero appreciation gradient for the S$EER has been the typical policy stance adopted in past recessions such as the 2001 Dot.com bust and the 2008 Global Financial Crisis.
Morgan Stanley envisions that with the S$NEER now tracking at about 1.4ppt below the midpoint, the MAS is likely to concurrently re-center the midpoint down to the prevailing level.
“This will allow for a more immediate adjustment in the currency to cushion the macro impact from the Covid-19 outbreak. Notably, during the 2003 SARS, MAS re-centered downward whilst keeping the zero appreciation stance,” say analysts.
“Should the MAS reduce the appreciation slope to zero and recenter the S$NEER to the prevailing level, we would expect the S$NEER to depreciate around another 2% in the next several weeks,” they add.
