POLICYMAKERS in Singapore will face tough decisions on monetary and fiscal policies, as economic growth slows but inflation, while easing, stays fairly high, according to a new report.
By Magdalen Ng
Citigroup economist Kit Wei Zheng notes in the report that inflationary pressures can be curbed with a strong Singdollar, as this holds down import prices.
However, with the economy in the doldrums, a weaker Singdollar may be preferred by businesses and manufacturers, for example, as their exports become cheaper and more competitive, he said.
With these two opposing constraints, the Monetary Authority of Singapore (MAS), which uses the exchange rate as its monetary policy tool, will have a close call to make on whether to let the Singdollar continue to strengthen.
Mr Kit said in the report that Singapore's economy faces challenges from weakened demand in the advanced economies.
The Ministry of Trade and Industry has estimated that economic growth will slow markedly next year to come in between 1 and 3 per cent.
Inflation is expected to moderate from recent high levels, and is forecast at 2.5 to 3.5 per cent, but that is still above historical averages. Core inflation, which excludes accommodation and private transport costs, is projected to be 1.5 to 2 per cent.
Still, said Mr Kit, factors such as labour shortages will put upward pressure on inflation next year.
As unit labour costs continue to rise, profit margins of labour-intensive sectors will come under pressure, and it may only be a matter of time before firms pass on higher wage costs to consumers.
Monetary policy has been tightened - with the Singdollar allowed to appreciate - since last April. The central bank eased the policy in October, so the Singdollar could continue to strengthen but at a more gradual pace than before.
The general consensus among economists seems to be that given the downside risks to growth, the MAS is likely to be more biased towards further easing to neutral.
OCBC economist Selena Ling said: 'Given that they already eased monetary policy in October, and the dovish 2012 growth forecasts, the message is quite clear where the risk lies. What we want to do is to skirt a recession, so it will have to be a fine balance to tread.'
However, Mr Kit added that it will be a tough decision: 'If core inflation remains stable but non-core inflation remains sticky, and if gross domestic product growth in the next two quarters shows sign of bottoming, the odds of easing to neutral would recede.'
In the event that GDP growth continues to slide well into the first quarter of next year, with few signs of turning around, the case for an easing to neutral would be strongest.
A similar story can be told throughout Asia, as the troubled euro zone is Asia's largest trading partner, accounting for 5.2 per cent of Asia's GDP.
Europe is Singapore's largest non-oil domestic export market, and the largest foreign direct investor here.
Bank of America Merrill Lynch economist Chua Hak Bin expects central banks in Asia to step up monetary and fiscal easing next year, as growth concerns will outweigh inflation risks. Other than Singapore, only Thailand and Indonesia have eased monetary policy.
It is possible that the Singapore Government may choose to run a smaller surplus, or even a deficit next year, but the hurdles for a fiscal response on the scale of that seen in 2009 are high.
Mr Kit believes the thrust of fiscal policy for Singapore next year will likely be to keep business costs manageable through a variety of tax rebates and reliefs.