MAS likely to focus on inflation than on exchange rate policy

DMG expects MAS to maintain its policy stance of a modest and gradual appreciation of the Singapore dollar NEER.

Here's more from DMG-OSK:

It is a toss-up as to which direction policy will lean in Oct as the MAS has a delicate job of balancing the need to support growth and to anchor inflationary expectations. As growth risks have risen, we cannot discount the possibility of a looser exchange rate policy. For the moment, we think that the focus of MAS is likely to be on inflation, which remains elevated and thus, would maintain its policy stance of a modest and gradual appreciation of the Singapore dollar NEER.

The government narrowed its full-year growth forecast to 1.5-2.5% from 1-3% due to continued “uncertainties and downside risks”. The global environment remains cloudy in 2H, even though there could be a boost from “domestic demand in emerging Asia…supported by accommodative policies” but this is likely to be offset by “slackening external demand”.

This is likely to weigh on domestic conditions in Singapore as reflected in the spillover in the weakness in the external sector to the services sector, including tourism- and finance-related segments. However, we expect support for the economy to come from continued strength in biomedical output (on the back of stronger pharmaceutical demand) and from healthy expansion in transport engineering and construction.

Already in the first six months of the year, pharmaceutical output has risen by nearly 24% yoy, though it is unlikely to match the 33% increase in 2011, while transport engineering was up 22% vs. 8.8% in 2011. Despite the government’s cautiousness, we are maintaining our 2012 GDP forecast of 2.6%.