Singapore’s monetary policy to keep bond yields high and strengthen SGD
Investors are keeping a positive outlook on locally issued bonds and overseas investments, as Singapore’s tightening of its monetary policy is anticipated to keep yields high and strengthen the Singapore dollar (SGD), experts said.
The Monetary Authority of Singapore (MAS) announced on October 14 that it would raise the slope of its Nominal Effective Exchange Rate, or S$NEER, after keeping it at 0% since the onset of the pandemic in March last year.
The decision came as the S$NEER has “broadly fluctuated within the upper half of the policy band, reflecting in part shifting sentiments around Singapore’s macroeconomic outlook as the pandemic evolved,” the MAS said in a statement.
The SGD has also depreciated against regional currencies and the US dollar over the past six months
Instead of using interest rates, the central bank manages monetary policy, by adjusting the slope, width and centre of the SGD exchange rate against a trade-weighted basket of currencies. This exchange rate is known as S$NEER.
NO SURPRISE
Invesco
A Reuters poll found that 11 of 13 financial institutions were taken by surprise by the move, but Freddy Wong, head of Asia Pacific fixed income at Invesco, begged to differ.
“The monetary policy tightening by MAS was not a surprise to us. Singapore exports and manufacturing sector have shown strong growth in 2021. The Singapore government also upgraded its 2021 GDP growth forecast from 4-6% to 6-7% on August 11. In the second quarter of 2021, Singapore GDP was only 0.6% below pre-Covid levels,” said Wong, who is based in Hong Kong.
The high vaccination rates in the city-state, at 82%, are also expected to support sustainable growth over time, he added.
Singapore-based Ng Kheng Siang, head of fixed income for Asia Pacific at State Street Global Advisors agreed that it was “not a total surprise”, as he understood the need for flexibility.
State Street Global Advisors
“Given growth uncertainty, one would generally expect an unchanged Singapore dollar nominal effective exchange rate (S$NEER) slope and band. However, we are also seeing rising commodity prices impacting the economy and hence would support a tighter monetary condition,” he said.
INVESTOR IMPACT
Ng added that the move will help lower the impact of higher imported inflation and dampen the overall consumer price index in the coming months.
“On the bond side of things, this may keep bond yields elevated for some time - influenced not just by the recent MAS policy guidance but also expectations of higher interest rates globally by major central banks,” he said.
Singapore-based family investor Stephen Chen said the raising of the slope would strengthen the SGD against the US dollar, which would make it cheaper for him to buy global assets or dollar-denominated assets.
“Unfortunately, I also hold USD- and HKD-denominated assets which have seen their value drop 1.2% month-to-date. [But] I will continue to increase my allocation to global investments outside Singapore,” he said.
“One such place is India which has had a great run year-to-date and over the years, in spite of Covid and currency devaluation. So currency is really not the biggest issue around. The more important question when investing in a risk asset class like equities is: where can an investor find growth?”
Invesco’s Wong agreed that the move will affect investors’ views on Singapore-issued bonds, but said that the performance of the currency would depend on more factors.
“From a global investor perspective, we believe that the monetary policy tightening is a reflection of stronger Singapore economic fundamentals. It makes us more comfortable on Singapore oriented risks, which is relevant for our investment considerations on bonds issued by Singapore issuers,” he said.
“We think the value of SGD depends both on the basket of currencies and how it is trading on its trading band to gauge the relative opportunities.”
SUSTAINED GROWTH
Wong and Ng agreed that the MAS will likely maintain the slope for the next few months, although Wong said that it might raise it further at its April 2022 meeting.
“The key factors that will drive this decision will be the state of the global economy expansion as Singapore is an open economy, and progress on further opening up of Singapore,” he said.
“It is important to keep in mind that MAS’s mandate is for price stability conducive to the sustained growth of the economy,” he added. “The overall tone of the Monetary Policy statement in October signalled solid confidence in Singapore’s economic growth prospects (output to return to potential in 2022) and further inflationary pressures (domestic and imported cost pressure), unlike the April 2022 statement which was more cautious about the downside uncertainties.”
State Street’s Ng added that the MAS is likely to assess factors such as domestic and global developments, GDP, overall inflation, the labour market situation, financing costs, and commodity prices before deciding what to do next with monetary policy.
“The path of re-opening and re-connecting of global economies may not be straightforward as we are only at the start of trying to resume normalcy from the Covid pandemic,” he said.