Analyst More Bearish on Singapore

The Malaysian Insider - 20 March 2009

Economists at major foreign banks have slashed forecasts for Singapore’s economic outlook, as the slumping global economy batters its key export sector.

Goldman Sachs, for example, now believes Singapore’s economic output will shrink by 8 per cent this year compared with last year. It previously forecast a 4 per cent slide.

The United States bank is among the most bearish in terms of outlook.

Credit Suisse expects a 6.5 per cent contraction. Its earlier forecast was for a fall of 5 per cent. HSBC now sees a 7 per cent slide, after earlier predicting a 5 per cent retreat.

If that 7 per cent figure proves correct, it would easily be Singapore’s poorest performance since the data was first compiled in the mid-1970s, HSBC said.

All the downgrades came shortly after Minister Mentor Lee Kuan Yew raised the possibility that the economy could shrink by as much as 10 per cent this year.

Speaking earlier this month, Mr Lee said this could happen if Singapore’s exports continue to drop at the same speed as they did earlier this year.

They fell 24 per cent in February.

Analysts say that given the open nature of Singapore’s economy, the downturn would hit almost all sectors.

Goldman Sachs analysts argue that Singapore has one of the “highest exposures” to weakness in external demand. This is because the country has a high ratio of exports to overall economic output and because exports drive a large part of its domestic demand.

“We maintain our call that the Monetary Authority of Singapore is likely to weaken the Singapore dollar by shifting the policy band lower at its next scheduled policy meeting in early April,” they said in a report.

A weaker currency would make Singapore exports more competitive.

HSBC economist Robert Prior-Wandesforde said in a report that the Singapore economy is still in the process of adjusting after a period of excess, with the real estate bubble bursting and investment now contracting.

“In particular, it seems to us that capital spending has a lot further to fall in both absolute terms and as a percentage of gross domestic product,” he said.

“We would be surprised if it led any future upturn, and it could remain relatively soft for at least a couple of years.”

Other economists say these banks” new forecasts might not be “in the money”. In other words, the Singapore economy might not emerge in as bad a shape as suggested by the forecasts.