Singapore Devalues Currency After Record GDP Fall

Reuters – 14 April 2009

Singapore's central bank on Tuesday eased monetary policy for the second time since 2003 by effectively devaluing the currency as the government forecast a record economic contraction this year.

The Singapore dollar strengthened after the announcement as this policy option was the one most analysts had expected the Monetary Authority of Singapore (MAS) to take in order to weaken the currency to cushion the economy from the financial crisis.

The MAS re-centred the currency's secret policy band at the existing level of its trade-weighted index, a move economists estimate could imply a devaluation of anywhere between one and three percent.

The move came as Singapore's economy contracted a record 11.5 percent from a year earlier in the first quarter of 2009, more than a market median forecast of an 8.8 percent slump and deepening the trade-dependent city-state's worst ever recession. The government expects the economy to contract by between 6-9 percent this year.

"Given all these horrendous numbers, this policy change is not a big surprise. It is reflecting the free fall in external demand," said an economist at Malaysian bank CIMB in Singapore.

The country's gross domestic product in the first three months of the year fell at a seasonally adjusted, annualised pace of 19.7 percent, the ministry of trade said.

"MAS will therefore re-centre the exchange rate policy band to the prevailing level of the S$NEER, while keeping the zero percent appreciation path," the central bank said in its twice-yearly monetary policy statement.

The Monetary Authority of Singapore sets policy by managing the Singapore dollar in a secret trade-weighted band against a basket of currencies, instead of setting interest rates.