1. The Singapore economy is expected to grow at under 3% annually in coming years, its slowest rate in 6 years, due to external factors like China's economic slowdown. 2. Inflation in Singapore has been negative for 13 straight months, the longest streak since 1987, indicating that monetary easing may occur in early 2016. 3. Based on models like uncovered interest rate parity and technical analysis, the SGD is expected to depreciate further against the USD in 2016, with forecasts of the exchange rate reaching 1.48 by the end of 2016.

1. Amit Gaurav, CFA, FRM

3. Jan 03, 2016
Singapore Economy: at a glance

4. Interest rate:
1. Historically, Singapore has had a lower interest rate compared to US, indicating
potential appreciation in SGD against USD. But that leading edge over USD is gone now
for SGD since last 3-4 years.
GDP:
1. Singapore economy is bracing itself for sub-3% annual growth rate in coming years. It
would be first time in last 6 years that economy will post 2% growth rate in 2015 (it has
slashed its previous forecast of 2 to 4% annual growth) .
2. Economy is slowing due to various external reasons such as China’s deceleration,
weaker trade and poor growth in ASEAN region, ongoing and impending US rate hikes,
Oil price slump, etc.

5. 3. We need to be reminded of the fact that when China's growth plunged from 9.5% in
2011 to 7.7% in 2012, the rate of growth here also dropped by 50% over the same
period, from 6.2% to 3.4%. Though, such a decline is not expected in future but the
country is vulnerable to China’s economic slowdown.
Inflation:
1. MAS now expects inflation at 0.5% this year (2015) compared to its previous forecast of
0.5-1.5%.
2. MAS has admitted that wage inflation is still high.
3. In November 2015, Country has witnessed 13th
straight months of negative inflation rate
(the longest streak since 1987 crisis). It is giving an indication that monetary easing in
the offing in Q1 2016.
Singapore dollar nominal effective exchange rate (NEER):
1. Citing continued SGD depreciation since last 3 years and potential depreciation in the
future and growth slowdown, there is likelihood that the MAS will review its current
view towards NEER and ease the policy by changing the currency’s appreciatory slope to
neutral, from its current slightly appreciatory bias. Though, any aggressive monetary
policy loosening is not expected citing the impending US Federal Reserve Rate hikes in
2016.
2. SGD exchange rate has moved towards the bottom of MAS policy band, suggesting even
more loosening of monetary policy for the economy is on the cards.
Expectation for 2016
1. Based on Uncovered Interest Rate Parity (UIP)
2. Based on technical analysis
3. Based on factor model
1. Based on Uncovered Interest Rate Parity (UIP)

6. Uncovered interest rate parity says that exchange rate of the country with higher interest rate,
depreciates to minimize the impact of interest rate advantage.
Indicator 2011-End 2012- End 2013- End 2014- End 2015- End
Exchange Rate 1.2573 1.2498 1.2513 1.2671 1.41
3 Month LIBOR (US) 0.58 0.31 0.25 0.26 0.6
3 Month SIBOR (SGP) 0.39 0.37 0.4 0.46 1.13
Data of past few years also confirms the validity of UIP model. Though, it still does not conform
to this model fully because of some risk premium involved in USD/SGD rate (which makes the
market rate deviate from the model rate).
Based on UIP, expected future change in spot rate in 2016 is 1.44
[= 1.41 * (1 + 0.0113/100 * 4) / (1 + 0.006/100 * 4].
We add 400 pips of risk premium (citing unfavorable factors for Singapore economy in 2016
(lower GDP estimates) to arrive at our exchange rate estimate of 1.48 at the end of 2016.
2. Based on technical analysis
Key technical Indicators and its forecast:
Numeric Indicators Value Action
RSI (14) 52.7469 Neutral
MACD (12,26,9) -0.0006 Sell
ADX (14) 24.2121 Neutral
Momentum (10) 0.0073 Buy
Ultimate oscillator (7,14,28) 28.1985 Oversold

7. Analysis:
Most indicators are not giving a clear bullish or bearish signal. So, we need to wait for such
indicators to become bullish (further depreciation of SGD)
Key Levels Level
3rd Support 1.4057
2nd Support 1.4089
1st Support 1.4108
Spot Level 1.414
1st Resistance 1.4172
2nd Resistance 1.4191
3rd Resistance 1.4223