Asian Currency Research SGD: unappreciated

Asian Currency Research SGD: unappreciated DBS Group Research 22 May 214 Contrary to consensus expectations, the Singapore dollar did not fall past to the US dollar Over the past 2-3 years, the SGD has been stable vis-à-vis the USD and has appreciated in trade-weighted terms The central bank recently narrowed the SGD trading bands and has confined the SGD NEER to the stronger half of the band Singapore s GDP growth and current account surplus improved in 213 after two years of weakness Inflation has also fallen to 1-2% from 4-5% in 211-12 Looking ahead, the SGD has scope to resume its appreciation The SGD has appreciated in past US rate hike cycles Record high foreign reserves suggest record strength vs the USD (under ) To achieve this, the global recovery must be accompanied by a weaker USD, especially vs Asia ex-japan currencies Strong growth locally would provide additional support We expect to move into the - range in 2H15 stable in a narrowing range DBS SGD NEER in upper half of rising policy band 16 16 1.55 1.5 1.45 DBSf Consensus 1.55 1.5 1.45 14 12 14 12 1.1 8 9 1 1.1 9 9 Philip Wee (65) 6878-433 philipwee@dbs.com 1

did not rise above during Emerging Market volatility 1.34 1.32 1.28 1.26 1.24 DBS trade-weighted & policy band Upper half Lower half Fed tapers 1.34 1.32 1.28 1.26 1.24 1.22 Emerging Market volatility 1.22 Eurozone crisis 1.18 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 1.18 Contrary to consensus expectations, did not rise above Like it did when the Eurozone crisis erupted in September 211, the weak side of the policy band crossed above the psychological level during the volatility in emerging markets last year. Unlike the Eurozone crisis, and contrary to consensus expectations, the spot rate did not weaken beyond. Why? When the Eurozone crisis erupted in September 211, both the SGD and foreign reserves in Singapore recorded their worst monthly declines on record. surged from the bottom to the top of its policy band. As capital outflows drove sharply and quickly from to 1.32, foreign reserves plunged by SGD15.6 bn that month. To insulate Singapore from similar shocks in the future, the Monetary Authority of Singapore (MAS) implemented two important steps to minimize exchange rate volatility. First, it narrowed the SGD nominal effective exchange rate (NEER) policy band in April 212. Second, it held the SGD NEER in the stronger half of the policy band, which continued to rise / appreciate at a modest and gradual pace. Policy measures insulated SGD from market volatility 16 14 12 DBS SGD NEER and policy band Step 2 Keep SGD NEER in strong half of policy band 16 14 12 No plunges in SGD or FX reserves during 28 27 26 25 Eurozone crisis EM volatility Foreign reserves (USD bn, left) 1.5 1.1 Eurozone crisis Step 1 Narrow policy band 9 9 24 23 22 (inverted, right) Stronger SGD 2

European vs Commodity currencies 12 Indexed: Sep 211= Northeast Asian vs Southeast Asian currencies 12 Indexed: Sep 211= 115 USD vs Commodity FX (AUD, NZD. CAD) 115 11 11 USD vs SE Asia FX (MYR, THB, PHP) 15 15 USD vs European FX (EUR, GBP, CHF) 95 EU crisis USD vs NE Asia FX (CNY, KRW, TWD, HKD) 95 EU crisis The SGD was more stable than weak As a result, was stable in a 1.22-1.28 range, and foreign reserves rose to record highs. Normally, this would have pushed the SGD to record strength as well well below per dollar. So, why didn t this occur? The answer lies in Singapore s exchange rate policy, which keeps as a price-taker in global currency markets. At first glance, the SGD appeared immune to extreme volatility in the Japanese yen, Indian rupee and Indonesian rupiah last year. In reality, the impact was probably more secondary in nature, by spreading the sell-off from these currencies to vulnerable commodity and Southeast Asian currencies. Fortunately, these weaknesses were concurrently offset by European currencies recovering with their economies, and more resilient Northeast Asian currencies underpinned by record high foreign reserves and healthy current account surpluses. In summary, the stability of during could be attributed to one simple fact. There were no broad-based USD trends (up or down) against the four main currency blocs European, commodity, Northeast and Southeast Asian currencies for a sustained period of time. SGD mostly stable, tracking "less volatile" currencies 12 Indexed: Sep 211= Volatile Asian currencies 15 Indexed: Sep 211= 115 14 USD vs IDR 11 USD vs All Groups (NEA, SEA, EU, Commodity) 13 12 USD vs INR USD vs JPY 15 11 USD vs SGD 95 EU crisis 9 EU crisis 3

Positive Growth improves, inflation falls Currrent account surplus is turning the corner 4 1.55 55 2.4 35 3 25 2 15 1 5 Real GDP -5 CPI inflation -1 7 8 9 1 1.5 1.45 1.1 1.5 5 45 4 35 3 25 2 15 1 5 Currrent account (% of GDP, left) 4Q rolling sum basis -5 86 88 9 2 4 6 8 1 12 14 16 2.2 2. 1.8.8.6.4.2. SGD has scope to resume its appreciation Apart from record foreign reserves, other factors have supported the resumption of SGD appreciation. Historically, has fallen when GDP growth bottomed and rose above CPI inflation again. Ironically, the major turning point occurred at the start of last year. GDP growth rose to 4.% YoY in 2Q13 from a paltry 1.5% in the previous quarter, while inflation eased to 1.7% from nearly 4% for the comparable period. Growth stabilized at about 5.% in the three quarters ending 1Q14, while inflation eased further to 1.1% in 1Q14 from 2% in the previous two quarters. Although non-oil domestic exports remained disappointingly weak (six straight quarters of negative YoY growth into 1Q14), this did not stop real exports and industrial production from turning the corner, and contributing to overall GDP growth. The current account surplus also rose last year after narrowing for two years, to 18.4% of GDP in 213 from 17.4% in the previous year. If this trend continues, it would set the stage for to test its low seen in 211. Non-oil domestic exports slow recovery 12 1.7 Industrial production turning the corner 12 1.7 8 1.5 8 1.5 6 4 2 Non-oil domestic exports 12M mov ave, 3M MA 1.1 6 4 2 1.1-2 -4 5 6 7 8 9 1.9.8-2 Industrial production 12M mov ave, 3M MA -4 5 6 7 8 9 1.9.8 4

fell in most US interest rate hike cycles except in 1999-2 16 14 12 1 8 6 4 2 Strong US dollar policy 1995-2 1997/ Asian crisis Stronger SGD Fed Funds Rate (% pa, left) 85 86 87 88 89 9 91 93 95 97 99 1 2 3 4 5 6 7 8 9 1 2.4 2.2 2. 1.8.8.6 Final question can SGD appreciate in a US rate hike cycle? Except for 1999-, has fallen in every US interest rate hike cycle since the mid-1s. Fed hikes, especially at the start, were viewed as positive for the world economy because of the need to curb rising demand-side price pressures. There were two reasons why the SGD was weak in the late 199s. First, America adopted a strong USD policy in 1995 after Japan stopped, and then reversed the yen s appreciation. Second, the 1997/ Asian crisis led to a balance sheet recession. These factors led the US to become the world s main growth engine, and a reversal of capital flows from Asia to irrationally exuberant US stock markets. This was the fear experienced during last year s. Looking ahead, Asia will remain the growth engine of the global economy. Although last year s was no Asian crisis, it was an important wake up call for the region s economies to bolster external positions ahead of US rate hikes. As discussed earlier, cannot fall to new lows if other Asian currencies are weak. Finally, falls come easier when Singapore s growth is strong, especially when sustained above 5%. falls are likely when economic growth bottoms, rises above inflation, preferably above 5% again 5 2.4 4 3 Strong US dollar policy 1995-2 1997/ Asian crisis Stronger SGD 2.2 2. 1.8 2 1 CPI inflation Real GDP -1 85 86 87 88 89 9 91 93 95 97 99 1 2 3 4 5 6 7 8 9 1.8.6.4 5

GDP & inflation forecasts GDP growth, % YoY CPI inflation, % YoY 211 212 213 214f 215f 211 212 213 214f 215f US 1.8 2.8 1.9 2.2 2.4 3.1 2.1 1.5 1.8 1.8 Japan -.5 1.4 1.5 1.4 1. -.3..4 2.4 1. Eurozone 1.6 -.7 -.4.7 1. 2.7 2.5 1.3 1.1 1.3 Indonesia 6.5 6.2 5.8 5.8 6. 5.3 4. 6.4 6.4 5.6 Malaysia 5.1 5.6 4.7 5.2 4.8 3.2 1.7 2.1 3.5 3. Philippines 3.6 6.8 7.2 6.6 6.5 4.7 3.1 2.9 4.3 3.7 Singapore 6. 1.9 4.1 4. 3.6 5.3 4.6 2.4 3. 2.8 Thailand.1 6.4 2.9 1.8 4.8 3.8 3. 2.2 2.7 3.2 Vietnam 5.9 5. 5.4 5.7 5.7 18.6 9.3 6.6 5.4 5.5 China 9.3 7.7 7.7 7.5 7.5 5.4 2.6 2.6 3.5 3.5 Hong Kong 4.9 1.5 2.8 3. 3. 5.3 4.1 4.5 4.6 4.2 Taiwan 4.2 1.5 2.1 3.3 3.7 1.4 1.9.8 1.1 1.3 Korea 3.7 2.3 3. 3.5 3.8 4. 2.2 1.3 2. 2.8 India* 6.7 4.5 4.8 5.5 6.1 9. 7.4 9.5 8.2 8.8 * India data & forecasts refer to fiscal years beginning April; prior to 213, inflation is WPI Source: CEIC and DBS Research Policy & exchange rate forecasts Policy interest rates, eop Exchange rates, eop current 2Q14 3Q14 4Q14 1Q15 current 2Q14 3Q14 4Q14 1Q15 US.25.25.25.25.25 Japan.1.1.1.1.1 11.5 15 16 17 18 Eurozone.25.25.25.25.25 1.368 1.37 1.38 1.41 Indonesia 7.5 7.5 7.5 7.5 7.5 11,59 11,5 11,5 11,5 11,5 Malaysia 3. 3. 3.25 3.5 3.5 3.22 3.18 3.17 3.15 3.14 Philippines 3.5 3.5 3.75 4. 4. 43.8 43.4 43.2 42.9 42.7 Singapore n.a. n.a. n.a. n.a. n.a. 1.22 1.21 1.19 Thailand 2. 2. 2. 2. 2.25 32.5 31.5 31.3 31.2 31.1 Vietnam^ 7. 7. 7. 7. 7. 21,155 21,38 21,41 21,45 21,48 China* 6. 6. 6. 6. 6. 6.23 6.21 6.14 6.7 6. Hong Kong n.a. n.a. n.a. n.a. n.a. 7.75 7.76 7.76 7.76 7.76 Taiwan 1.88 1.88 1.88 2. 2.13 3.2 29.3 29.2 29. 28.9 Korea 2.5 2.5 2.75 3. 3. 127 125 11 995 99 India 8. 8. 8. 8. 8. 58.8 62. 62.3 62.6 63. ^ prime rate; * 1-yr lending rate Market prices Policy rate 1Y bond yield FX Equities Current Current 1wk chg Current 1wk chg Index Current 1wk chg (%) (%) (bps) (%) (%) US.25 2.53-1 8.1.1 S&P 5 1,888. Japan.1.6 11.5.1 Topix 1,15-2.8 Eurozone.25 1.42 5 1.368 -.2 Eurostoxx 3,18 -.1 Indonesia 7.5 8.2 7 1159.3 JCI 4,91 -.2 Malaysia 3. 4.5 3.22.1 KLCI 1,877 -.1 Philippines 3.5 4.26-7 43.8 -.5 PCI 6,762-1.7 Singapore Ccy policy 2.29-1 2.1 FSSTI 3,262.1 Thailand 2. 3.66 17 32.5.2 SET 1,43.5 China 6. 6.23 -.1 S'hai Comp 2,25-1.1 Hong Kong Ccy policy 1. -1 7.75. HSI 22,837 1.1 Taiwan 1.88 1.47-5 3.2. TWSE 8,862 -.1 Korea 2.5 3.38-6 127.1 Kospi 2,8 -.1 India 8. 8.77-6 58.8 1.5 Sensex 24,2 2. Source: Bloomberg 6

Recent Research India elections: Quick review 16 May 14 IN: Four key post-election priorities 9 May 14 Asia: Gamechangers 5 May 14 CN: Consumption opportunities in the 28 Apr 14 rebalancing process SG: Competitiveness matters 23 Apr 14 EZ: Time to bite the QE bullet? 22 Apr 14 ID: The to-do list 21 Apr 14 TW-CN services trade: 4 questions 17 Apr 14 CNH: Through-train coming 15 Apr 14 Asia cyclical dashboard: praise Europe! 11 Apr 14 IN: Assessing the El Nino threat 11 Apr 14 US: Unfrozen, just 1 Apr 14 CN: Defaults, liberalization and new market 8 Apr 14 benchmarks KR: Decoding 474 1 Apr 14 PH: Bond yields to continue north 31 Mar 14 IN: Election is about the economy, 28 Mar 14 not just markets ID: Consumption doubts unfounded 27 Mar 14 CNH: Fructifying trade finance activities 25 Mar 14 KR: Rate hikes not priced in 17 Mar 14 Qtrly: Economics-Markets-Strategy 2Q14 13 Mar 14 US: just weather woes? 12 Mar 14 Global risk: inflation or deflation? 4 Mar 14 CNY: Band widening just around the corner 28 Feb 14 JP: A long-term investor in Asia 26 Feb 14 HK: The decoupling of growth and 25 Feb 14 unemployment SG: A more calibrated budget 24 Feb 14 US: Housing risks rise further 24 Feb 14 TH: BOT on the hot seat 19 Feb 14 India budget: good & bad but not ugly 18 Feb 14 SG Budget - Strengthening inclusive growth 11 Feb 14 IN: Interest builds on vote-on-account budget 11 Feb 14 SG Budget - More targeted approach for 1 Feb 14 companies CN: It s not over for Chinese manufacturing 7 Feb 14 Asia: Capital backlash 6 Feb 14 IN: RBI builds on price stability mandate 3 Jan 14 ID: A closer look at FDI 29 Jan 14 MY: Inflation up, policy rate stable 22 Jan 14 IN: Inflation down, premia on front-end swap 2 Jan 14 rates to fall Asia: U-shaped consumption paths and non- 17 Jan 14 discretionary spending ID: Stable 16 Jan 14 JP: Has Abenomics impacted the rest of Asia? 15 Jan 14 Asia: Who s consuming? 13 Jan 14 Qtrly: Economics-Markets-Strategy 1Q14 12 Dec 13 KR: KRW it only gets stronger 22 Nov 13 IN: Caught in fiscal cross-currents 18 Nov 13 TW: Is Shanghai s FTZ a threat or 14 Nov 13 opportunity? CN: Gauging the likelihood of reform success 14 Nov 13 following the Third Plenary 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. 7