Economics SGD: neutral for a long time to come

Economics SGD: neutral for a long time to come DBS Group Research 7 April 2017 The Monetary Authority of Singapore (MAS) will hold its semiannual monetary review on 13 Apr. We expect no changes to the, width or mid-point of the SGD NEER band The economic outlook has improved of late but it is too soon to return to a currency appreciation Historically, consumer price levels had returned to previous peaks before neutral policies were terminated. The current CPI trajectory suggests this will occur in late-2017 or early-2018, about the same time that core inflation should return to 2% Moreover, real GDP growth tended to exceed 10% YoY before a positive was reintroduced into the band in past cycles. The current recovery has been uneven with no positive spillover into the job market as yet Given the 2-3% annual growth projected by the Committee on the Future Economy (CFE) for the next decade, the durability of the neutral stance should not be underestimated Following the adoption of the neutral stance a year ago, domestic rates have stabilized after two years of volatility Until Singapore returns to an appreciation, the prospect of more Fed hikes over the next two years should eventually keep USD/SGD supported with an upside bias DBS SGD NEER and band Indexed: 1-5 Apr 2013=100 106 104 102 100 98 Re-centre higher Narrow Steepen NEUTRAL POLICY 96 94 92 90 88 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Sources: DBS Research, Reuters data Philip Wee (65) 6878-4033 philipwee@dbs.com Refer to important disclosures at the end of this report 1

CPI hit previous peak before neutral ended CPI index is some way from previous peak CPI all items nsa, 2014=100 92 90 88 CPI all items nsa, 2014=100 100.5 100.0 A B 86 99.5 84 82 99.0 80 78 76 Re-centred lower 74 01 02 03 04 05 06 07 08 09 10 Sources: DBS Research, SG Department of Statistics 98.5 ed 98.0 97.5 13 14 15 16 17 18 Sources: DBS Research, SG Department of Statistics No hurry to abandon neutral stance According to the Monetary Authority of Singapore (MAS) monetary statement in Oct 2016, the neutral SGD stance would remain necessary for an extended period to ensure medium-term price stability. Unlike the last review in Oct 2016, there is no expectation for a downward re-centering of the mid-point of the SGD nominal effective exchange rate (NEER) band. With key inflation gauges having returned to their official forecast ranges, amidst upside surprises in recent GDP and export data, consensus (and DBS) expect no change in the mid-point, or width of the neutral SGD NEER band at the review in Apr 2017. Instead, the debate now centres on when the MAS might return to a of appreciation. We doubt that the MAS would drop the extended period reference and signal a shift at the next following review in Oct 2017. Historically, a return to a SGD appreciation came only consumer price levels returned to their previous peak and core inflation had returned to 2%. On current trajectories, these metrics seem unlikely to be reached until early-2018. Core inflation hit 2% when neutral ended MAS core inflation, % YoY Core inflation is still below 2% MAS core inflation, % YoY 7 6 5 4 3.5 3.0 2.5 2.0 A B 3 1.5 2 1 1.0 0.5 ed 0 0.0-1 Re-centred lower -2 01 02 03 04 05 06 07 08 09 10 Sources: DBS Research, Monetary Authority of Singapore -0.5-1.0 11 12 13 14 15 16 17 18 Sources: DBS Research, Monetary Authority of Singapore 2

Non-oil dom exports still below previous peak SGD bn, 3mth mov ave 17 16 15 14 13 12 11 10 9 Sources: DBS Research, International Enterprise Singapore NP ed 8 Re-centred 7 lower NP 6 00 02 04 06 08 10 12 14 16 18 Job market remains tough despite recovery Retrenched workers, persons 12000 10000 8000 6000 4000 2000 Re-centred lower 0 00 02 04 06 08 10 12 14 16 18 NP Sources: DBS Research, SG Ministry of Manpower ed NP Recent data better but not great The same story painted by inflation was also evident in other data such as nonoil domestic exports and real GDP growth. Beyond the better-than-expected headline numbers, the recent recovery has been uneven with no signs yet of positive spillover to job growth. For example, real GDP surprised when it expanded 2.9% YoY in 4Q16 after four quarters of sub-2% growth. Apart from returning to the ceiling of this year s official 1-3% target range, there was not much to shout about. By industry, the (YoY) contribution came mostly from the manufacturing sector in the goods producing industries. On the demand side, only government expenditure expanded. Since the 1997/98 Asian crisis, Singapore has returned to an appreciation only when real GDP growth had surpassed 10%. But this was the first time that the neutral stance was adopted in response to a pronounced slowdown, and not recessions. Earlier this year, the Committee on the Future Economy (CFE) recommended plans for a more collaborative economy that would grow by 2%-3% per year over the next decade. Against this background, the durability of the neutral stance should not be underestimated. The economy is not ready for a return to a SGD appreciation % YoY 20 15 AP (AP) 10 5 Real GDP 0-5 ed Private Consumption Re-centred lower Expenditure -10 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Sources: DBS Research, SG Ministry of Trade and Industry 3

Policy decisions and USD/SGD USD/SGD 1.46 USD appreciation USD depreciation SGD moves more with AXJ after US election Indexed: 8 Nov 2016 = 100 106 USD appreciation USD depreciation 1.44 1.42 1.40 1.38 1.36 1.34 1.32 ed 1.30 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Sources: DBS Research, Bloomberg data stance Unchanged 105 104 103 DXY index 102 101 USD vs AXJ* USD/SGD 100 Level at US presidential election 99 98 *AXJ: Asia ex Japan (calc from ADXY Index) 97 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Sources: DBS Research, Bloomberg data USD/SGD is a price-taker It is not a given that USD/SGD moves in tandem with SGD decisions. For example, the SGD did not weaken but rallied into the end of the appreciating SGD in Apr 2016. This owed to a weak USD from global risks dampening Fed hike expectations. Similarly, the SGD depreciated despite disappointment over the MAS s decision not to re-centre its band lower in Oct 2016. The greenback was strong because of the Trump-led rally ahead of the Fed hike in Dec 2016. As the US-led global recovery broadened to include Singapore and Asia ex- Japan (AXJ), the SGD NEER returned into the stronger half of its band this year. With the SGD closely aligned with AXJ currencies, its trade-weighted appreciation was confined mostly against the major currencies this year. More importantly, domestic interest rates started to normalize after the shift to a neutral stance a year ago. In addition to decoupling from USD/SGD, domestic rates finally fell below their US counterparts, an important pre-requisite for the eventual return to an appreciation. Until then, the prospect for more Fed hikes over the next couple of years will eventually keep USD/SGD supported with an upside bias. DBS SGD NEER and band Indexed: 1-5 Apr 2013=100 106 105 104 103 102 101 NEUTRAL POLICY 100 99 Jan-15 Jan-16 Jan-17 Sources: DBS Research, Reuters data SG interest rates have stabilized below US rates % pa USD/SGD 1.75 1.46 1.50 1.25 1.00 0.75 0.50 0.25 3M SGD SOR (left) Sources: DBS Research, Bloomberg data Fed Funds Rate (left) 0.00 Jan-14 Jan-15 Jan-16 Jan-17 1.44 1.42 1.40 1.38 1.36 1.34 1.32 1.30 1.28 1.26 1.24 1.22 4

GDP & inflation forecasts GDP growth, % YoY CPI inflation, % YoY 2014 2015 2016 2017f 2018f 2014 2015 2016 2017f 2018f US 2.4 2.6 1.6 2.7 2.6 1.6 0.1 1.2 2.3 2.3 Japan 0.3 1.2 1.0 1.0 1.1 2.7 0.8-0.1 0.5 0.6 Eurozone 0.9 1.9 1.7 1.6 1.7 0.6 0.0 0.2 1.3 1.4 Indonesia 5.0 4.9 5.0 5.3 5.4 6.4 6.4 3.5 4.5 5.1 Malaysia 6.0 5.0 4.2 4.5 4.6 3.1 2.1 2.1 2.7 2.5 Philippines 6.2 5.9 6.8 6.4 6.7 4.2 1.4 1.8 2.9 3.0 Singapore 2.9 2.0 2.0 2.8 2.5 1.0-0.5-0.5 1.2 1.8 Thailand 0.9 2.9 3.2 3.4 3.5 1.9-0.9 0.2 1.6 2.1 Vietnam 6.0 6.7 6.2 6.6 6.7 4.1 0.6 2.7 4.0 3.2 China 7.3 6.9 6.7 6.5 6.3 2.0 1.4 2.0 2.3 2.1 Hong Kong 2.5 2.4 1.0 2.0 2.1 4.4 3.0 2.6 2.4 2.5 Taiwan 4.0 0.7 1.5 2.5 2.3 1.2-0.3 1.4 1.2 1.0 Korea 3.3 2.8 2.8 2.5 2.5 1.3 0.7 1.0 1.8 1.6 India* 7.2 7.9 7.2 7.6 7.8 6.0 4.9 4.6 5.0 5.2 * fiscal year ending Mar Policy & exchange rate forecasts Policy interest rates, eop Exchange rates, eop current 2Q17 3Q17 4Q17 1Q18 current 2Q17 3Q17 4Q17 1Q18 US 1.00 1.25 1.50 1.75 2.00 Japan -0.10-0.10-0.10-0.10-0.10 110.9 113 114 116 117 Eurozone 0.00 0.00 0.00 0.00 0.00 1.064 1.05 1.04 1.04 1.04 Indonesia 4.75 4.75 5.00 5.00 5.00 13,328 13,551 13,614 13,677 13,740 Malaysia 3.00 3.00 3.00 3.00 3.00 4.44 4.50 4.54 4.57 4.60 Philippines 3.00 3.50 3.50 3.50 3.50 50.2 50.2 50.7 51.1 51.5 Singapore n.a. n.a. n.a. n.a. n.a. 1.40 1.44 1.44 1.45 1.45 Thailand 1.50 1.50 1.50 1.50 1.50 34.6 35.6 35.7 35.9 36.0 Vietnam^ 6.50 6.50 6.50 6.50 6.50 22,690 22,849 23,034 23,218 23,402 China* 4.35 4.35 4.35 4.35 4.35 6.90 7.02 7.11 7.19 7.28 Hong Kong n.a. n.a. n.a. n.a. n.a. 7.77 7.78 7.78 7.78 7.78 Taiwan 1.38 1.38 1.38 1.38 1.38 30.5 31.4 31.5 31.5 31.5 Korea 1.25 1.25 1.25 1.25 1.25 1,132 1,173 1,174 1,175 1,177 India 6.25 6.25 6.25 6.25 6.25 64.5 68.8 68.9 69.1 69.3 ^ prime rate; * 1-yr lending rate Market prices Policy rate 10Y bond yield FX Equities Current Current 1wk chg Current 1wk chg Index Current 1wk chg (%) (%) (bps) (%) (%) US 1.00 2.34-4 100.7 0.4 S&P 500 2,357-0.4 Japan 0.10 0.06-1 110.9 0.4 Topix 1,480-3.1 Eurozone 0.00 0.26-7 1.064-0.1 Eurostoxx 3,490 0.2 Indonesia 4.75 7.08 4 13328-0.1 JCI 5,680 1.6 Malaysia 3.00 4.13-2 4.44-0.3 KLCI 1,740-0.6 Philippines 3.00 5.16-28 50.2 0.0 PCI 7,565 3.2 Singapore Ccy 2.21 2 1.402-0.4 FSSTI 3,176 0.1 Thailand 1.50 2.65-5 34.6-0.7 SET 1,582 0.5 China 4.35 6.90-0.3 S'hai Comp 3,281 0.9 Hong Kong Ccy 1.61 161 7.77 0.0 HSI 24,274-0.5 Taiwan 1.38 1.05-5 30.5-0.8 TWSE 9,898 0.2 Korea 1.25 2.18 0 1131-1.1 Kospi 2,155-0.3 India 6.25 6.77 9 64.5 0.6 Sensex 29,927 1.3 Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations). 5

Recent Research SGS: FX tailwind at limit 7 Apr 17 IN: structural tailwinds to add to cyclical 31 Mar 17 upswing KR: is optimism justified? 29 Mar 17 IN: monetary on cruise control 27 Mar 17 TH: narrower C/A surplus a plus 21 Mar 17 SG: ensuring fiscal sustainability 20 Mar 17 Qtrly: Economics-Markets-Strategy 2Q17 9 Mar 17 Asia: Trump and the state of US-Asia trade 7 Mar 17 CN: the rise and rise (and rise) of the RMB 24 Feb 17 ID: next move is a rate hike 21 Feb 17 SG budget: building the future economy 21 Feb 17 CN: what to watch for as PBoC tightens 20 Feb 17 SG: upgraded 20 Feb 17 TW: Trump s policies and Taiwan 15 Feb 17 SG: shaping the future 6 Feb 17 FX: USD strength hits a roadblock 3 Feb 17 IN budget: a balanced approach 2 Feb 17 Rates: global rates roundup 2 Feb 17 TW: shifting into higher gear 27 Jan 17 SG: time to recalibrate 26 Jan 17 EZ: ECB stays defensive 24 Jan 17 ID: looking at an S&P upgrade 19 Jan 17 US: pop goes the headline 18 Jan 17 Asia cyclical dashboard 17 Jan 17 IN budget: stability over growth 12 Jan 17 Rates: SGS: US-dependent 10 Jan 17 IN: is oil the next headache? 13 Dec 16 Qtrly: Economics-Markets-Strategy 1Q17 8 Dec 16 ID: FDI much stronger than it appears 30 Nov 16 EZ: ECB challenged by higher bond yields 16 Nov 16 TW: 7 likely outcomes in 2017 15 Nov 16 Global: revenge of the demographic dividend 14 Nov 16 US: structural interest rate compression 2 Nov 16 FX: mid-quarter update 1 Nov 16 SG: down but not out 1 Nov 16 Rates: global rates roundup 31 Oct 16 TW: diversifying into Southeast Asia 21 Oct 16 CN: cyclical bottom 19 Oct 16 IN: assessing current account 18 Oct 16 improvement PHgov bonds: expensive (still) 11 Oct 16 SGD: sticking to neutral 7 Oct 16 EZ: not taper time yet 7 Oct 16 CN: avoiding the Minsky moment 6 Oct 16 IN: monetary committee lowers rates 4 Oct 16 Qtrly: Economics-Markets-Strategy 4Q16 15 Sep 16 CNH: SDR inclusion - right time, right place 8 Sep 16 IN: savings rate in need of a boost 2 Sep 16 IDR: towards further resilience 1 Sep 16 Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. 6