SINGAPOREe’S ECONOMIC PROSPECTS may be looking up but consumers here may be no better off as inflation is poised to take a greater toll on their pockets.
The city-state’s economy not only averted a technical recession in 1Q2012 but also exceeded economists’ expectations with growth of 9.9%, in seasonally-adjusted q-o-q annualised terms, after contracting 2.5% in 4Q2011.
The city-state’s economy not only averted a technical recession in 1Q2012 but also exceeded economists’ expectations with growth of 9.9%, in seasonally-adjusted q-o-q annualised terms, after contracting 2.5% in 4Q2011.
The main driver of growth was the manufacturing sector, which expanded 14.7% q-o-q, as electronics production and trade recovered from supply disruptions triggered by the devastating floods in Thailand late last year. Manufacturing accounts for about a quarter of Singapore’s GDP. The construction sector also fared markedly well, expanding 24.6% q-o-q, as more homes were built.
On a y-o-y basis, the economy expanded 1.6% in 1Q2012. The figures, unveiled on April 13, are advance estimates by the Ministry of Trade and Industry, which will release its detailed report card on the economy in May.
The outlook for the quarters ahead should be stable, with the economy expected to grow 1% to 3% this year, according to the Monetary Authority of Singapore (MAS), which says economic conditions in the US are improving, domestic demand in Asia remains firm, and tail risks in the eurozone have receded.
But as far as consumers are concerned, that’s probably where the good news ends. The cost of living is set to creep up even further on increased oil prices and higher wages amid a tight domestic labour market. “The pass-through of costs to consumers is therefore likely to continue, though at a reduced pace,” MAS warns.
Noting that inflationary pressures have been stronger than expected since last October, and will remain elevated over the next few months, the central bank has bumped up its 2012 all-items inflation forecast to between 3.5% and 4.5% from a range of 2.5% to 3.5%.
Its estimate for core inflation, which excludes private road transport and accommodation costs, has also gone up, to a range of 2.5% to 3% from between 1.5% and 2%. Cost pressures, it says, are likely to ease in the latter half of the year.
In a bid to contain inflation, MAS has tightened its monetary policy to allow the local dollar to rise at a slightly faster pace in an undisclosed band against a trade-weighted basket of currencies of Singapore’s main trading partners. It adjusts the pace of appreciation or depreciation by changing the slope, width or centre of the band.
In this case, MAS has increased the slope of its currency band slightly while narrowing the band’s width. “The latest MAS policy stance will ensure that the Singapore dollar remains relatively strong on a trade-weighted basis in the next six months,” says Daiwa.
Investors, meanwhile, will do well to study the implications of rising inflation on companies before ploughing money into stocks. “Even as the market reacts to the strong GDP numbers, investors will also be scrutinizing how higher oil prices, labour costs and freight charges will affect margins,” says DBS Vickers.
Allowing the local currency to appreciate will keep the Singapore interbank offered rate soft. This, accordingly to DMG & Partners, is negative for DBS Group Holdings, as its lower Singapore dollar loan-deposit ratio of 64%, compared to 79% for its Singapore peers, will mean reduced interbank yields.
On the other hand, low interest rates in Singapore will continue to make real estate investment trusts (REITs) attractive as an investment choice for funds, says DMG. Its favourite sector for REITs is retail, with CapitaMall Trust its top pick, as its asset enhancement programmes for four of its malls are completed and 76% of its portfolio is in the “defensive” suburban mall space.
Perpetual bonds, which a growing number of companies in Singapore are offering, may also be worth checking out for investors eyeing higher returns. The latest company selling these instruments is Genting Singapore. Its perpetual bonds offer a coupon of 5.125% a year. Mapletree Logistics Trust’s perpetual bonds pay an annual interest of 5.375%.
In the Apr 16 issue of The Edge Singapore
A decade of liberalisation created increasingly diverse and complex financial products, leaving investors exposed to risks they did not understand. But new regulations to protect them are having unintended consequences. Issue 519 of The Edge Singapore is now available on the iPad.
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