Chinese move on yuan could hurt S’pore economy

SINGAPORE — The Republic’s already vulnerable economic growth will take a hit if current volatility in the foreign exchange and stock markets persists for a longer period, economists said yesterday.

They told TODAY that such prolonged uncertainties will affect business and consumer confidence, which will slow down consumption and economic activities. If these happen, the broader economy may be further hurt at a time when global outlook remains sluggish.

The comments came after the People’s Bank of China (PBOC) yesterday cut the guiding rate for the yuan by another 1.6 per cent, just a day after it devalued its national currency by a record 1.9 per cent. That sent the Singapore dollar to a fresh five-year low against the greenback yesterday.

“I suppose China’s move reflects the still-sluggish global demand. There are downside risks to the current 2 to 2.5 per cent growth forecast for Singapore if the current volatility that affects the markets impacts consumption behaviour both in Singapore and outside,” said Mr Song Seng Wun, economist at CIMB Private Banking.

Singapore slashed the upper end of its previous 2 to 4 per cent annual growth forecast on Tuesday, amid ongoing risks from an uncertain external environment and a slowdown in global trade, and market watchers have cautioned of an equally cloudy outlook in the coming months.

“For an export-dependent country like Singapore, we will definitely see downward pressure in, say, the Purchasing Managers’ Index readings on new orders and new export orders, which, in turn, will have an impact on our production and export figures,” Mr Song said.

He added that the only sector that might potentially be “insulated” by such a turn of events is the construction sector, which is “highly immune” to external forces.

UOB economist Francis Tan singled out the semiconductor sector, which largely exports to China, as a vulnerable industry as the yuan depreciates against the Singapore dollar.

“The yuan is losing value, so relatively, we’re more expensive than them, and that reduces our export competitiveness relative to other nations that are supplying to China. So, we have to keep a lookout on how their currencies are doing with respect to the yuan compared with us. Tourism may also see an impact, especially in the number of Chinese visitors to Singapore,” Mr Tan said.

Adding to these risks is the rising Singapore Interbank Offered Rate (SIBOR) and Swap Offer Rate (SOR), which climbed to four-month highs yesterday. SIBOR charged past 0.9 per cent, while SOR rose above 1 per cent. The two rates are used to price mortgages and other consumer loans, thus a hike in their value can threaten consumption levels, economists said.

“This will add to the bad news, because people will have to spend more to service their loans,” Mr Tan said.

However, economists also pointed out that the economic impact from the current volatility may take some time to come through. Mr Edward Lee, Standard Chartered’s regional head of research for South-east Asia, noted that the Singapore dollar nominal effective exchange rate (NEER) has been trading downwards. This implies that the Republic has not lost its competitiveness.

“If we take a look at the Singdollar NEER, it has moved towards the bottom of the policy band, suggesting even more loosening of our monetary policy for the economy … If we use the Singdollar NEER as a guide to export cost competitiveness, the Singdollar actually weakened,” he said.