Singapore’s growth may fall below 1 percent should the U.S. and Chinese economies slump and the European crisis worsen significantly, the central bank said as it bolstered reserves to counter market turmoil.
The island’s current gross domestic product growth forecast of 1 percent to 3 percent is based on assumptions that there is no recession in the U.S., no significant escalation of the euro zone crisis and no hard landing in China, Monetary Authority of Singapore Managing Director Ravi Menon said today.
“If one or more of these assumptions do not pan out, Singapore’s GDP growth could dip below 1 percent this year,” Menon said in a briefing in the city state as the central bank released its annual report. “Growth momentum is clearly slowing.”
Policy makers across the world are girding for a deeper impact from Europe’s debt woes, with Singapore’s economy unexpectedly contracting last quarter and China and South Korea cutting interest rates this month. Europe was plunged into fresh market turmoil this week as the first call for bailout aid by a Spanish region sent borrowing costs surging, while Moody’s Investors Service lowered Germany’s rating outlook to negative.
Singapore’s central bank refrained from returning its profit to the government in the financial year ended March 31 as it strengthened reserves and capital, it said in the annual report. The authority reported a net profit of S$2.77 billion ($2.2 billion) in the year through March 2012, after a loss of S$10.9 billion in the previous period. Its total assets grew S$19.45 billion to S$319.2 billion in the same period, it said.
“This is a pre-emptive measure to strengthen the authority’s capital and reserves, in light of a volatile financial market environment,” it said in the report, referring to an increase in its issued and paid-up capital.
The central bank said in April it would allow faster gains in its currency to damp price pressures, diverging from most other regional economies that had left borrowing costs unchanged or eased monetary policy. Inflation in the island of 5.2 million people accelerated even as the economy shrank, fueled by rising housing and private transportation costs.
The Singapore dollar has climbed 2.8 percent this year, the biggest gainer after the Philippine peso among 11 Asian currencies tracked by Bloomberg. It was little changed at S$1.2612 against the U.S. dollar as of 12:54 p.m. local time.
The central bank’s policy stance remains appropriate, Menon said today. The authority estimated today inflation will be 4 percent to 4.5 percent this year, compared with the 3.5 percent to 4.5 percent range it forecast previously. Price gains may ease to about 4 percent this month, Menon said.
“Bringing down inflation remains one of MAS’s top priorities,” he said. “Slightly higher inflation does not mean runaway inflation. MAS will remain vigilant and calibrate monetary policy to ensure that this does not happen. We will not allow inflationary pressures to become entrenched or inflation expectations to build up.”
The central bank expects “continued tightness” in the housing rental market, as measures taken to increase housing supply will take some time, Menon said. Should demand remain resilient, the cost of vehicle permits is likely to stay high and present “upside risks” to the central bank’s inflation forecast, he added.
“The persistence in headline inflation has led to some questions about the efficacy of Singapore’s exchange rate- centered monetary policy framework,” Menon said. “MAS has studied this issue carefully. We are assured that the monetary policy framework remains effective and the current policy stance remains appropriate.”
While there is a limit to how far Singapore can use the exchange rate policy to contain inflation, it remains the most effective tool, Menon said.
“Too rapid a rate of appreciation of the Singapore dollar can significantly hurt our economic performance, especially in light of heightened uncertainty in the external environment,” he said. “The exchange rate is taking longer than usual to moderate inflation, but it remains our broadest and most effective anti-inflation tool.”
The central bank said it raised its issued and paid-up capital to S$25 billion. Its capital and reserves rose to S$35.15 billion as of March 31, from S$24.38 billion the previous year, it said.
Profit stemmed “mainly from interest income and gains from asset disposals, offset partially by the impact from the translation of the authority’s foreign assets into the stronger Singapore dollar,” it said. “For this financial year, there will be no contribution to the Consolidated Fund, nor return of profits to the government as the Authority bolsters its reserves.”
Safeguarding the real value of Singapore’s official foreign reserves in a more challenging and risky investment climate is an issue the central bank must contend with, Prime Minister Lee Hsien Loong said in November. Singapore’s reserves have climbed to more than $200 billion from $1.4 billion in 1971, Lee said.
The Monetary Authority of Singapore, Temasek Holdings Pte, Government of Singapore Investment Corp. were set up to manage the nation’s funds and assets taking on different risk levels, a finance ministry official said in March.
The government “systematically” reviews the risks in its overall investments, comprising GIC, the sovereign wealth fund, Temasek, the state-owned investment company, and the central bank to ensure there are no major overlaps, Josephine Teo, minister of state for finance, said in March.
Singapore’s returns from reserves added about S$7 billion a year to the city’s budget as the government seeks to spend more on infrastructure with an aging population, the Ministry of Finance said this month. The island’s constitution was amended in 2008 to allow the government to spend as much as 50 percent of long-term expected real returns on reserves ahead of increased fiscal spending, the ministry said.