Singapore 2020 Budget – Dealing with the viral crisis - ING Think

Damage control - MAS is likely to pitch in too

We think a wave of growth forecast downgrades is becoming the order of the day in both Asia and globally and we won’t rule out further cutting our forecast for Singapore’s 2020 growth, even after our recent revision to 1% from 1.6%. Although 1% is consistent with the official view of growth improving modestly this year over the 2019 rate, it still sounds optimistic considering the gravity of the crisis at hand. However, underlying optimism is the expectation of a greater macro policy thrust.

Not just the fiscal policy, but monetary policy will eventually need to share some of the burden. The Monetary Authority of Singapore (MAS – the central bank) has dampened hope of any easing ahead on the grounds that there was room for accommodation within the current policy band for the Singapore Dollar Nominal Effective Exchange Rate (S$-NEER). Even so, and despite a slight reduction in the slope or the rate of appreciation of the S$-NEER band at the last review in October 2019, the policy still dictates a tightening bias which may not come across as appropriate for the ongoing economic risks.

Recognising the growth risks, the central bank easing cycle in Asia has gained momentum lately – banks in China, Malaysia, Philippines, and Thailand (Indonesia’s is likely to join the camp this week) have cut their policy interest rates in recent meetings. We don’t think the MAS would risk lagging behind in its response, while the little available space for accommodation within the current band could well be exhausted in a matter of days, if not weeks or months as can be judged from a sharp swing from 1% strong S$-NEER from the mid-point of the policy band (estimated per the Goldman Sachs Index on Bloomberg) to about 1% weaker currently.

The MAS’s response to the SARS crisis was an easing via a downward shift of the policy band with zero appreciation in July 2003. We consider this as a reliable guide to the response this time around and expect it at the forthcoming review in April. After all, it is damage control from the crisis, not outperforming it.

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Singapore 2020 Budget – Dealing with the viral crisis - ING Think
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