SGD: MAS should re-centre S$NEER lower – RBC CM

Sue Trinh, Research Analyst at RBC Capital Markets, notes that the SGD was one of the worst-performing Asian currencies in September, rounding out three consecutive months of underperformance in the region.

Key Quotes

“Weak sentiment stemming from a string of data showing very weak activity (technical recession in the services sector) has continued into the MAS’ October Policy Review. Deputy Prime Minister and MAS Chairman Shanmugaratnam said that economic growth for 2016 will be at the lower end of the government’s forecast of 1% to 2% compared to “normal growth of 2% to 3%” and a “tough” period will last for a while. This suggests a growth downgrade could be coming at the MAS semi-annual Macroeconomic Review.

Going forward, external headwinds remain strong. The WTO cut its forecast for 2016 world goods trade volume growth from 2.8% to just 1.7%. It will be the first time in 15 years that trade growth has fallen below GDP growth and will weigh on Singaporean exports further.

According to our model, the SGD nominal effective exchange rate (S$NEER) has fallen marginally through the bottom of the estimated trading band. This indicates the S$NEER has increasingly become a binding constraint. We have long argued that it would be appropriate for the MAS to shift the level at which the SGD NEER is centred lower and we think the risk of this occurring at the 14 Oct MPS is higher than the market appreciates. We think the MAS will be cautious in the magnitude and opt for a 1% shift, but 2% would be more appropriate in our view.

6-12 Month Outlook – Rocky road ahead

Singapore is most vulnerable from a trade perspective to growth revisions following the UK’s vote to leave the EU and second order effects on EU demand. Singapore’s goods exports to the UK are worth 1.1% of GDP and services exports account for another 2.7% of GDP. Singapore’s goods exports to the EU are worth 8.4% of GDP and services exports account for an additional 6.4% of GDP. A challenging external environment and subdued domestic growth momentum should see growth forecasts lowered further below potential. SGD will come under pressure from continued depreciation in the RMB, particularly as SGD/CNY is trading near a 2-year high already. We target 1.60 in mid-2017.”