Singapore Economic Roundtable

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Francis Kennedy
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2 Singapore Economic Roundtable 8 November 2011 Saktiandi Supaat Head of FX Research Global Markets Maybank

3 Topics today Global and Regional Outlook Singapore Outlook & Domestic Monetary Conditions Optimal Policy Mix Challenges in a New Normal Domestic Environment Baumol-Bowen/Balassa-Samuelson Framework to Assess Medium-Term Exchange Rate Policy Outlook Fiscal Policy Management

4 Softening in external demand GDP Growth, y/y% CPI Inflation, y/y% Current Account, % GDP Fiscal Balance, % GDP 2011F 2012F 2011F 2012F 2011F 2012F 2011F 2012F G % 1.83% 2.47% 1.73% -0.83% -0.65% -6.37% -5.14% USA 1.70% 2.00% 3.10% 2.10% -3.10% -2.95% -8.50% -7.00% Japan -0.40% 2.50% -0.22% -0.21% 2.10% 2.60% % -9.10% Euro Area 1.70% 1.00% 2.50% 1.80% -0.50% -0.20% -4.30% -3.45% Asia 7.79% 7.45% 4.86% 3.90% 5.86% 5.18% -2.56% -1.98% China 9.30% 8.70% 5.20% 4.00% 4.00% 3.40% -1.90% -1.95% Hong Kong 6.00% 4.80% 5.20% 4.30% 5.40% 5.50% 2.00% 1.00% India 7.80% 7.50% 8.90% 8.50% -2.20% -2.20% -7.50% -6.50% Indonesia 6.47% 6.58% 5.60% 5.72% 0.20% -0.40% -1.80% -2.00% Korea 4.35% 4.55% 4.40% 3.20% 1.50% 1.40% -1.00% 1.00% Philippines 4.95% 5.65% 4.95% 4.20% 1.70% 1.30% -3.00% -2.00% Malaysia* 4.50% % 3.10% 2.60% 11.30% 10.80% -5.40% -5.30% Singapore** 5.30% 3.30% 4.55% 3.00% 19.80% 18.50% 1.00% 1.50% Taiwan 5.05% 5.00% 1.60% 1.70% 11.00% 11.00% -4.00% -2.50% Thailand 4.10% 4.70% 3.90% 3.85% 4..8% 2.50% -4.00% -3.00% Source: Bloomberg, Asian Development Bank, IMF * Maybank IB estimates (GDP growth, inflation, and fiscal balance), **

5 01-Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep-11 Jan-00 Aug-00 Mar-01 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Global Fundamentals: Looking Ahead YoY % Change - Trend Restored OECD Leading Indices G7 US China EZ Japan Maybank Global PMI G7 + China Source: OECD Source:, Bloomberg, CEIC

6 Challenging global economic outlook amid 4S risks Global growth Sustainability Solvency Eurozone sovereign debt crisis Systemic risk from financial sector exposures to Eurozone sovereign debt; capital flight & asset bubble in Emerging Market economies Stability (Black) Swans Eurozone break up?

7 Dec-89 Jun-90 Dec-90 Jun-91 Dec-91 Jun-92 Dec-92 Jun-93 Dec-93 Jun-94 Dec-94 Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Maybank Stress Index (MSTI): Still Risk-Off 50 Nikkei/junk bond collapse US Stock Market Downturn, Internet Bubble Burst Global Credit Crisis Scandinavian Banking Crises 20 Asian Crisis 10 ERM Crisis Source:, CEIC, Bloomberg

8 Global Monetary Policy Bias Shifts to Growth from Inflation.

9 Regional: Growth Shifting to Lower Gear, Inflation? Growth Momentum Tapers Off Inflation, whither to 9.7% 9.5% 6.5% Real GDP Growth in % change, y/y 7.5% 6.5% 4.9% 5.1% 4.2% 4.0% 3.4% 4.6% 3.4% 3.2% 2.6% 9.3% 3.4% 3.3% 5.4% 5.1% 6.4% 3.5% 4.3% 1.7% 3.1% 2.4% 4.5% 3.8% 4.8% 3.6% 3.3% 2.8% 5.0% CNY IDR KRW MYR HKD PHP THB SGD* 1Q Q 2011 Source:, Bloomberg *Avg 2Q and 3Q CNY IDR KRW MYR HKD PHP THB SGD H 2011 Source:, Bloomberg Regional growth may continue slowing in the next 2-3 Our recent Asian central bank monitors have best quarters ahead amidst signs of faltering global recovery in summarized all the key decisions and indicate that monetary the US (weak job market), EU (fiscal austerity), and Japan policy will, in the near - to possibly medium term - be (aftermath of tsunami and nuclear calamity). Tradeoriented economies may be more affected. The movement of the broad Asian dollar index (ADXY) has supportive of growth. CN and ID s growth remained largely stable, supported by been flattish and lost slightly around 0.7%. Nevertheless, its large market size and steady domestic consumption volatility is higher and expected to remain elevated going and comfortable fiscal positions. forward. One common theme going forward is the shift of concerns from inflationary risks to growth slowdown.

10 05 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q4 12 Singapore: Macroeconomic and Market Outlook 25% Near-Term Outlook 8% Counting More on Services 20% 15% 6% 10% 4% 5% 0% 2% -5% -10% -15% FORECAST 0% -2% Real GDP Growth Inflation (rhs) Source:, Bloomberg Our 2011 growth forecast currently stand at 5.3%, as 3Q is higher than expected due to a surprise rebound in manufacturing output. Our outlook for growth next year factors in much weaker global and regional demand, while unsettling risk appetite could hurt Singapore s financial services sector. Preliminary forecast for 2012 remains at 3.3%. Source:, Bloomberg Our assumption is for NODX to grow by 3.8% in 2012 given tighter fiscal situation in the US and potential impact of the slew of austerity measures in the Eurozone as well as snail-pace transition in the Chinese growth engine. We expect manufacturing output to slow to around 2.0% for the full year of 2012, down from an estimated 7.3% this year. For services sector, we are projecting a slight pullback to 4.3% next year from our forecast of 5.1% for 2011.

11 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Singapore: External Demand Outlook Gloomy? NODX Global Indicators Do Not Lift Much Hope Yet 80% 60% 40% in % change, y/y 09 contraction averaged 32.0% y/y % % % % % NODX Electronics Non Electronics Global PMI Book-to-Bill (rhs) Source:, CEIC Source:, Bloomberg We maintain our NODX of 3.8% in 2012 given tighter fiscal situation in the US and potentially slew of austerity measures in the Eurozone. The continued decline in the US Book-to-Bill ratio to 0.80 as of Aug 11 from above 1 for the first three quarters of 2010 could imply that the contractionary trend in the electronics exports is unlikely to see a reversal until at least the latter half of Slowdown in Chinese growth (2012 real GDP growth is expected at 8.6% next year, down from 9.3% forecasted this year, and after growing at a stellar rate of 10.4% in 2010).

12 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Singapore: Deciphering the Trend of Compositions NODX (by destination) NODX (by product) 60% 50% 50% 40% 30% 40% 30% 20% 10% 20% 0% G3 Economies Regional Economies Source:, Bloomberg Electronics Top 5 Chemicals & Petrochemicals Pharmaceuticals Source:, Bloomberg Share of product exports by destination, I-O Tables EP Top 50 Chemicals Pharmaceuticals G3 50% 35% 22% 26% 77% 80% Regionals 38% 57% 55% 56% 16% 9% ROW 12% 8% 23% 18% 7% 11% Source:, Singstat

13 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-90 May-91 Sep-92 Jan-94 May-95 Sep-96 Jan-98 May-99 Sep-00 Jan-02 May-03 Sep-04 Jan-06 May-07 Sep-08 Jan-10 May-11 Jan-90 May-91 Sep-92 Jan-94 May-95 Sep-96 Jan-98 May-99 Sep-00 Jan-02 May-03 Sep-04 Jan-06 May-07 Sep-08 Jan-10 May-11 Singapore: Inflation Remains Fired-Up? Headline and Core Inflation Key Components 10% in % change, y/y 10% %-point 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% -2% -4% -4% Headline Inflation Core Inflation Wages Growth Fueling Domestic Inflation? Housing (rhs) Transport (rhs) Others Maybank s TWI Inflation Domestic Drivers Remain 9% % change yoy, on both sides 20% 10% in % change, y/y 6% 3% 15% 10% 7% 0% 5% 4% -3% 0% 1% -6% -5% -9% % -2% Wages Growth Housing Inflation (rhs) Transport Inflation (rhs) Source:, CEIC Headline Inflation Inflation TWI

14 Mar-92 Dec-92 Sep-93 Jun-94 Mar-95 Dec-95 Sep-96 Jun-97 Mar-98 Dec-98 Sep-99 Jun-00 Mar-01 Dec-01 Sep-02 Jun-03 Mar-04 Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Will Unemployment Rate Still Remain Tight? Singapore Overall and Resident Unemployment Rate Wages Growth Fueling Domestic Inflation? % % change yoy, on both sides 20% % 15% % 10% % 5% % 0% % -5% % % Overall Unemployment Rate Resident Unemployment Rate Wages Growth Housing Inflation (rhs) Transport Inflation (rhs) Source:, CEIC Source:, CEIC

15 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Domestic Monetary Conditions Remains Conducive Singapore Monetary Condition Index 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% in % USD Onshore Dollar Funding Source:, BIS From Jan to early Aug 2011, our Singapore MCI was more positive as overall tight liquidity conditions remained in tandem with the modest and gradual appreciation of the SGD NEER. In mid-aug, there was a sharp drop in our Singapore MCI that were almost entirely driven by the exchange rate component over this period, as the 3M SIBOR rate was quite stable at about 0.44% but fell to 0.31% in August. Liquidity has since then improved slightly as the sharp drop in the SGD NEER has somewhat eased back to its mid-point. MYR SGD THB Source:, Bloomberg Onshore dollar funding stress did not look that obvious in Singapore due to its nature of a relatively deeper financial market as well as a function of its exchangerate centric policy, which may imply the dollar turnover would be higher in the city-state compared to its regional peers.

16 Jul-97 May-98 Mar-99 Jan-00 Nov-00 Sep-01 Jul-02 May-03 Mar-04 Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-10 Nov-10 Sep-11 7/Feb/11 7/Mar/11 7/Apr/11 7/May/11 7/Jun/11 7/Jul/11 7/Aug/11 7/Sep/11 7/Oct/11 7/Nov/11 7/Dec/11 7/Jan/12 7/Feb/12 7/Mar/12 7/Apr/12 Singapore: A Quest for Optimal Policy in Volatile Markets Wider Bands May Stay for Awhile Maybank SGD NEER Policy Outlook Episodes of Band Adjustments Volatility Index Q 12, USD/SGD: Q 11, USD/SGD: Source:, Bloomberg Band adjustment has been congruent with high volatility periods. During the Asian Financial Crisis, it took 18mths to reverse the band widening, whilst during Sep 11 it took 4 months. The current band widening (since Oct 2010) has not been reversed until now. Given historical precedence, the band widening may last as long, if not longer than 18 months. Source:, Bloomberg A slowdown in the external economy may happen but not sharp. Essentially the parameter of importance in current times is the bandwidth - to allow for the already wide band to absorb some of the uncertainty going forward. The moderation in the S$NEER appreciation signals the need to address growth downside risks. We think the major risks will be market related black swan events on the back of much weaker than expected Eurozone economy and food price pressures in the near term.

17 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Jul-90 Aug-91 Sep-92 Oct-93 Nov-94 Nov-95 Nov-96 Nov-97 Nov-98 Nov-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 SGD Interest Rates: Where do We Go from Here? in % (Dis)-Correlation between SIBOR and SOR Low Rates could Stay Until the Unwinding of ZIRP Policy 9.00 in % SGD 3M SOR SGD 3M SIBOR FFTR 3-month SIBOR Source:, Bloomberg SIBOR and SOR tend to correlate closely but the recent break indicates a more complex situation between any period of persistent dollar weakness and tight liquidity condition in the global and domestic financial markets. The recent negative turn of the SOR has caused jitters that the market is positioning heavily for SGD in light of the US losing its AAA rating and given Singapore s relatively sound economic fundamental as well as exchange rate policy that allows for gradual but modest appreciation of the Singapore dollar against its basket of currencies. Source:, Bloomberg Nevertheless, the MAS has recently said that its current policy stance of modest and gradual appreciation of the SGD NEER remains appropriate and that the MAS has no need to undertake any extraordinary measures in light of the recent negative turn in Singapore SOR. Historical precedence dictates a close relationship between SGD rates and the US rates. Thus, while the low rates have probably reach the bottom, it could stay low until mid-2013, barring any unforeseen shocks in the domestic liquidity conditions.

18 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Jun/00 Jan/01 Aug/01 Mar/02 Oct/02 May/03 Dec/03 Jul/04 Feb/05 Sep/05 Apr/06 Nov/06 Jun/07 Jan/08 Aug/08 Mar/09 Oct/09 May/10 Dec/10 Baumol-Bowen Effect: Tradables Labour Prod. Historically Higher Labour productivity higher in tradables sector YoY % Chg Labour Productivity - Tradables Labour Productivity - Non-Tradables 15% 10% Wage growth similar across sectors consistent with B-S effect Sectoral Wage Growth Mfg Cons Svcs 6.0 5% % -5% -10% ,500 4,000 3,500 Real Monthly Earnings: Manufacturing Real Monthly Earnings: Construction Real Monthly Earnings: Services Tradables: Manufacturing, Wholesale & Retail Trade, Transport & Storage Non-Tradables: Construction, Utilities, Others Hotels & Rest, Info & Comm, Fin, Business & Other Services 3,000 2,500 2,000 Source: estimates, CEIC

19 Medium-Term: Implied S$/US$ RER appreciation using B-S framework at least 2-2.5% p.a. next 2 years. Domestic Cost Pressures Remain? Impact of 1% chg in productivity differential on S$/US$ RER (5 year rolling window) Elasticity, LR SG-US productivity differential FORSHARE (LHS) OTHERFACTORS (RHS) RER (SGD/USD ) SG Labour Productivity Relative to US over next 2-3 years, Qtrly Growth Assumptions 3% 1.5% 1% 0% S$1.15/US$ S$1.17/US$ S$1.18/US$ S$1.19/US$ S$1.08/US$ S$1.13/US$ S$1.14/US$ S$1.17/US$ Average: Implied 2.5 % p.a appreciation in RER over Source: estimates, CEIC

20 Fiscal Policy Management Fiscal Multiplier Have Fallen in Recent Years Fiscal Multiplier Hypothetical Simulation on Fiscal Stimulus 1.0 in %-point Q 2Q 3Q 4Q 5Q 6Q 7Q 8Q 9Q 10Q 11Q 12Q Source: estimates. Scenario 1 (SGD20.5bn) Scenario 2 (SGD10bn) A re-introduction of the SGD20.5bn stimulus, if really necessary, could take a boost on growth trajectory as projected above. This time round global growth circumstances different from and domestic labour market situation remains tight compared to Job creation might not be affected as much as before but wage growth may still be restrained. Possible fiscal measures need to address longer term issues rather than solely to boost growth. (1)Longer term bang for the buck direct fiscal expenditure main objectives for future immigration, health, education, transport i.e. quality infant care, childcare and eldercare/long-term care, continued education subsidies government consumption expenditure for childcare education providers. (2) Enhance microeconomic efficiency (crowding-in effects) Enhancing competition, job employer matching, gradually downsize GLC involvement, enhanced SME financing schemes for micro-businesses, start-ups and sole proprietors. (3)Strengthen social compact/cohesion Enhance workfare schemes (i.e. cash rather than CPF), explore unemployment insurance and re -employment bonuses to reduce income inequality and soften blow of future downturns without creating moral hazard issues. Explore new funding inflows possibly re-look at utilizing land sales receipts - re-distribute land sales receipts as part of ad-hoc transfers rather than usual structural transfer approach.

21 Summary Economic and financial market outlook remains uncertain. Near-term balance of risk shifting from inflation to growth. But, medium term concerns - cascading effect of expected new normal domestic policy changes (i.e. changes to foreign worker inflows, etc), expected higher labour productivity growth and eventual upward wage adjustments, may exarcebate already existing expectations of a rise in the real exchange rate under Balassa-Samuelson (B-S) theorem. Evidence of the Baumol-Bowen effect productivity differentials between tradables and non-tradables in line with similar wage patterns in both sectors. Our estimates supports the B-S proposition that there is a strong positive link between the real exchange rate and productivity differential. In addition, our estimates suggest, a recent marginal increase in the productivity differential effects on the real exchange rate and thus raise concerns about domestic cost pressures in the medium term. At the same time global inflation rates remain high and unlikely for Singaporeans to accept the average inflation rate of trading partners in the new normal environment, if S$NEER is kept flat. Still argues for the need to have exchange rate policy and a trend appreciation of the S$NEER, given expected medium term scenario. Key focus should be made on policy coordination/calibration between manpower/wage policies, monetary and fiscal policies. The latter should be aimed at fiscal measures with lower leakage to significantly help enhance social compact in the long term as well as infrastructure projects to boost capital stock and facilitate private sector investment leading to capacity expansion.

22 Disclaimer This presentation is for information purposes only and is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this presentation. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies mentioned in this presentation. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Malayan Banking Berhad and/or its affiliates and related corporations (collectively, Maybank ) and consequently no representation is made as to the accuracy or completeness of this presentation by Maybank and it should not be relied upon as such. Accordingly, no liability can be accepted for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this presentation. This presentation may contain forward looking statements which are often but not always identified by the use of words such as anticipate, believe, estimate, intend, plan, expect, forecast, predict and project and statements that an event or result may, will, can, should, could or might occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward-looking statements. Maybank expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. This presentation copy may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of Maybank and Maybank accepts no liability whatsoever for the actions of third parties in this respect. This presentation is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

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