Weakness in euro could hit Singapore exports: Analysts

SINGAPORE – To spur growth and inflation in the eurozone, the European Central Bank (ECB) has taken measures to weaken the euro. These include interest rate cuts and bond-buying programmes. Since hitting a high of S$1.76 against the Singapore dollar in March, the euro has been trending downwards. As of 5pm today (Sept 11), it ended flat against the Singapore dollar, at S$1.63.

Analysts said a weaker euro may push up business costs for European MNCs operating in Singapore as the Singapore dollar remains firm. This could also affect the companies’ plans to relocate talent to Singapore.

It could also weigh on Singapore’s exports to Europe as goods become more expensive in Singapore dollar terms. The European Union (EU) is Singapore’s second-largest non-oil domestic export (NODX) market after China, and United Overseas Bank (UOB) said that NODX from Singapore to the EU declined 6.3 per cent on-year in the first seven months of 2014.

GREATER IMPACT ON SERVICES EXPORTS

UOB added that the impact on services exports could be greater. Mr Francis Tan, an economist with United Overseas Bank, explained: “The impact of a depreciating euro against the Singapore dollar is heavier on the services exports because other than ranking as one of the top few in terms of services export, the value add for each dollar of services export to Singapore is much higher.

“We know that for every dollar of services export, Singapore gets 51 cents of value add for services export. Whereas in NODX, we are only getting 34 cents, and the EU being our top services export region, this will certainly have some impact to the value added to Singapore’s economy.”

Said Mr Philip Wee, a senior currency economist in Economic & Currency Research at DBS Bank: “The important thing about the weak euro is that by fighting and preventing deflation, that is a contribution to eurozone growth which will be positive for the region.

“If you look at Singapore’s NODX performance to Europe, it actually rebounded in July. And if you look at the trends indicated by three-month and 12-month moving averages, they are looking to turn the bottom. So it is good if the ECB measures succeed in bringing up growth and for Europe to avoid a double-dip recession.”

Looking ahead, UOB expects the euro to stabilise at S$1.63 against the Singapore dollar by the end of this year. Meanwhile, the euro is US$1.29 against the US dollar and DBS Bank expects the euro to continue to dip further. DBS’ 12-month outlook is for the euro to hit US$1.25 against the greenback, but it could dip even further if growth and inflation in the eurozone do not pick up.

CHANNEL NEWSASIA