3 reasons why MAS is unlikely to tighten exchange rate policy

Thanks to continued tech boom.

February industrial production (IP) fell unexpectedly by 3.7% month-on-month, whilst IP ex-biomed contracted 3.4% mom, according to Citi. Citi analysts suspect these sequential declines may partly reflect complications to the seasonal adjustment process from moving holiday effects caused by the Chinese New Year.

Taking the January-February average SA levels adjusts for these effects, and shows that January-February IP levels came in 0.9% below 4Q, led by biomed. However, IP ex-biomed was still 3.9% higher compared to 4Q16, led by electronics and precision engineering, whilst chemicals fell.

Here's more from Citi:

Overall, the data suggests Singapore continued to benefit from the regional upturn in the tech cycle in 1Q.

MAS may now see 2017 GDP growth coming in at the higher end of the official 1-3% range, consistent with the findings of March’s Survey of Professional Forecasters, a modest upgrade from implicit forecasts of around 1.8% in October.

Incoming monthly data in January-February points to a flat to small sequential contraction in 1Q17 GDP growth of between 0 to -1% quarter-on-quarter SAAR (2.9% year-on-year), mainly a technical payback that erases less than a tenth of the step-up in 4Q.

Outside manufacturing, trade-related wholesale and transport/storage activities continue to expand in January-February. Outstanding loan volumes continued to expand in January vs 4Q, although softer market turnover activities could imply a sequential drag on financial services.

January-February property developer sales were more than double a year ago. However, retail sales and construction remained weak, although food and beverage activities rebounded somewhat after a weak 4Q.

Despite GDP levels outperforming MAS’s October 2016 forecasts, we see no reason to tighten in April. This is given (1) a likely pick-up in productivity and potential growth may keep the output gap negative in 2017, (2) further softening of the jobs market near-term could dampen demand pull inflation, and (3) MAS’s likely preference to gain more clarity on US fiscal stimulus before ascertaining if an upgrade to its baseline scenario is warranted.

That said, we would watch for changes to the October 2016 guidance of an “extended period” of a flat slope, with any removal providing MAS the option of tightening in October 2017.