ALL EYES ARE now on economic data and increasingly, economists are sounding downbeat in the wake of the Eurozone crisis. Locally, talk of a technical recession is getting louder. Mark Tan, Singapore economist at Goldman Sachs, says he expects negative sequential growth in 3Q2011, making it the second consecutive quarter of negative growth and a “technical recession” by definition. However, this time round, inflation will prove “sticky”.
Inevitably, growth will be a casualty of the slowdown in the US, Europe and Japan. Goldman is forecasting a 2.5% q-o-q annualised fall in GDP in 3Q2011 after the 6.5% q-o-q annualised fall registered in 2Q2011. The slowdown comes mainly from the external sector given the rising risks to global demand. Some slowing in momentum is also to be expected after the sharp 27% q-o-q annualised spike in 1Q2011, Tan says.
Singapore’s non-oil exports rose 5.1% y-o-y in August after falling 2.8% in July, beating consensus estimates of a 7.1% decline. While this figure is something of a surprise, it was attributed to a one-off surge caused by delivery of transport equipment, believed to be one or more oil rigs, and optical apparatus. But key electronics sales continued to slump by 19.4% and even pharmaceutical sales were down by 7.1%.
Goldman is forecasting full-year GDP growth of 4.8% “with risks skewed to further downside, depending on unfolding global developments”. The forecast is already below the government’s recently revised forecast range of 5–6% and Tan reckons that the government’s forecast will be revised lower in the months ahead.
If Singapore slips into a “technical recession” again, this will be the fourth recession the country has experienced over the last 10 years, compared to just twice for Malaysia, once for Thailand and none for Indonesia.
But as Tan sees it, recessions in Singapore aren’t such a bad thing since it is mitigated by an active stance on job creation. For instance, in 2009, the budget was expansionary with a job credit scheme which gave employers a significant cash grant for every employee on their payroll. The result was that during 2008–2009, Singapore experienced continuous job creation compared to significant job losses in previous recessions.
“The recent shifts in the political landscape also mean that the current thread of aggressive anti-cyclical fiscal policy with an emphasis on job protection will likely continue to be pursued if necessary. A more expansionary fiscal stance can thus be expected for FY2012 as well, which the government can well afford given its healthy budget position and huge reserves,” Tan writes in his report.
However, the sticky problem is inflation, and high property and transportation costs. “In our view, the pressures in transport and accommodation are precisely a manifestation of the pressures from an FX-centered monetary policy regime,” Tan says, echoing the views of many local economists. “This naturally means Singapore is a price taker on interest rates and with the Fed now likely on hold till 2013, the low interest rate environment in Singapore will persist for some time to come. We think the real core of the problem is the underlying distortion of prices — too low domestic rates resulting in upward pressures on non-tradables.”
And if growth takes precedence over inflation, the upshot could be a weaker SGD. Tan says the SGD NEER slope could ease from 3% to 2%, or even to 0%. The immediate implication for SGD rates if the MAS were to enact a less tight stance would be for upward near-term pressure on domestic interest rates, especially the SOR (Swap Offer Rate). The SOR is a synthetic rate backed out from USD rates and SGD FX forwards. “With US rates expected low for some time and less SGD appreciation expected if the MAS were to enact a less tight stance, then we could see a near term rise in the SOR,” Tan concludes.
FUNDS OUTFLOW AND REVERSE
Emerging market equity fund outflows continued for the seventh successive week, notes Markus Rosgen, strategist at Citigroup. Historically, average duration of weekly outflows from EM equity funds lasted for 6–8 weeks, he points out. This implies an impending inflow.
The pace of equity outflows this week (Sept 9-15) is similar to the previous week, with net redemption at US$1.3 billion ($1.6 billion) or 0.21% AUM. Asia ex-Japan experienced an outflow of US$651 million (–0.29% AUM). Rosgen says what’s different this round was that net outflows were spilt equally between ETF (exchange traded funds) and non-ETFs. “The lingering unsolved problems of the European debt crisis probably made investors worry again about the fundamental drag on the global economy and equity markets,” he says.
Bigger markets such as China, Korea, India, and Taiwan were the key sources of outflows. As a percentage of AUM, cyclical markets Korea and Taiwan were amongst the worst markets for redemptions, a pattern that continued from the previous week.
TECHNICAL OUTLOOK
The market could be in for a less volatile week as directional indicators fall, suggesting smaller price movements and range bound behaviour. Additionally, the STI which was above a support on Sept 12–13 at 2,720 has been able to rebound off this level. Resistance is at 2,900.
No comments:
Post a Comment