Surprise #1: No technical recession. Singapore released advanced estimate of 3Q 2012 real GDP (based on July-Aug economic indicators) where the economy shrank -1.5% annualised QoQ and grew sluggishly by +1.3% YoY. However, 2Q 2012 real GDP number was revised upwards (PM Lee Hsien Loong hinted at the revision to 2Q 2012 on Tuesday, 9 Oct 2012), resulting in a +0.2% annualised QoQ and +2.3% YoY, better than the previously reported -0.7% annualised QoQ and +2.0% YoY, mainly due to the higher certified progress payments from private sector industrial and residential projects that led to higher construction sector growth.

Consequently, surprise number one – albeit a minor one – was that Singapore averted QoQ technical recession, although there was this manufacturing’s technical recession given the sector's two consecutive quarters of ann. QoQ contraction (3Q 2012: -3.9%; 2Q 2012: -0.1%). YTD, the economy expanded by 1.7% (Jan-Sep 2011: +5.4%). Official growth forecast for 2012 stays at 1.5%-2.5%. Currently, we are looking at Singapore's full-year real GDP growth of 2.1% for 2012 and 3.8% for 2013.

Surprise #2: No change in Monetary Authority of Singapore’s (MAS) policy. The real and bigger surprise was the decision by Monetary Authority of Singapore (MAS) to keep its monetary policy (i.e. the exchange rate policy) unchanged i.e. a modest and gradual appreciation of the SGD NEER policy band, with no change to the slope and width of the policy band, as well as the level at which it is centered. Our FX Research Team expected MAS to slightly flatten the slope of SGD NEER policy band.

We were also expecting the policy easing by MAS on account of the Asian NIEs group being the most adversely affected by the current global economic condition compared with ASEAN (ex-Singapore) economies given the sharp growth slowdown in 1H 2012 and the poor monthly data on exports and industrial output during 3Q 2012. We also noted that on the Real Effective Exchange Rate (REER) basis, the Singapore Dollar is high, especially via-a-vis other NIEs like South Korea and Taiwan.

Meanwhile, Bank of Korea (BoK) lowered its policy rate by 25bps to 2.75% yesterday after it signaled the switch in its monetary policy stance to growth bias from inflation bias earlier this month, while Bank Indonesia left its benchmark interest rate unchanged at 5.75%, underscoring the performance gap between Asian NIEs and ASEAN economies.

Inflation risk upstaged growth risk. MAS decision shows inflation remains a key policy issue, especially in light of the latest round of property measure to curb asset price inflation and talks of introducing inflation-indexed bonds. Indeed, MAS policy statement contained an additional line saying “This policy stance is assessed to be appropriate in containing inflationary pressures and keeping the economy on a path of restructuring towards sustainable growth”. It also suggests MAS sees the current slump in growth as temporary, reflecting manufacturing inventory correction – a view that is probably boosted by recent improvements in US economic data for Sep 2012 e.g. rebound in US ISM manufacturing index to above 50; better housing market and job market conditions. The Ministry of Trade and Industry (MTI) added that while sectors like manufacturing and wholesale trade are being affected by the slowdown in advanced economies, there will be modest support to headline growth from sectors like transport engineering and construction for the remaining part of this year, while MAS expects the global IT industry to register a mild recovery next year.

Nonetheless, given the developments in Europe, no clear sign of slowdown in China bottoming and fiscal cliff risk in US that prompted downgrades in global and regional economic and trade outlook by international institutions like IMF, WTO, World Bank and Asian Development Bank, as well as slowing monthly inflation rate is, MAS decision is indeed a huge surprise.

Source: Maybank Kim Eng Research - 15 Oct 2012