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Outlook: Inflation, Liquidity Flows Key Concerns for Singapore in 2011

by Jared Heng

Inflation and liquidity flows are expected to remain key concerns for Singapore in 2011, according to banking giants UOB and Standard Chartered.

In fact, Asia is struggling with the flood of liquidity, and various govern- ments in the region have been forced to cool their respective real-estate markets this year.

“Clearly, liquidity flows will remain a concern in 2011. More cooling measures remain real possibilities in the real-estate markets, while murmuring of more restrictions will continue in the FX (foreign exchange) space,” UOB Economic-Treasury Research said in its Quarterly Global Outlook report for 1Q2011.

In its Prospects 2011 report for Singapore, Citigroup noted that the excess liquidity that is driving up investment demand for property comes from domestic savings, rather than capital inflows.


Another key area of concern is inflation. Latest data from the Depart- ment of Statistics showed that Singapore’s consumer price index (CPI) increased by 3.8 per cent year-on-year in November, beating the 20-month high of 3.7 per cent in September.

The government forecasts headline CPI inflation in Singapore to average between 2 per cent and 3 per cent in 2011, with weak global economic conditions expected to cap external sources of inflation. The 2011 figures compare with a projected 2.5- to 3-per cent headline CPI inflation for 2010.

In particular, the government warns that food prices might face upward pressures in the next few months due to the recent spate of weather-related supply disruptions in various parts of the world.

UOB Economic-Treasury Research forecasts that Singapore’s CPI will grow 4.0 per cent year-on-year in 4Q2010 and moderate slightly to 3.7 per cent in 1Q2011. For 2Q2011, the country’s CPI is expected to gain 3.2 per cent, while the index is projected to grow 2.6 per cent and 2.7 per cent in 3Q2011 and 4Q2011 respectively.

UOB expects Asian central banks to be pushed to tighten monetary policy somewhat in the first half of 2011. However, it also notes that “higher yields will result in more liquidity inflows, thereby exaggerating inflationary expectation over time.”

“Overall, our call is that barring a large shock in the West, Asian asset prices will remain inflated in 2011, or even perhaps 2012,” UOB said.

Asian currencies, including the Singapore dollar, are expected to continue strengthening against the US dollar next year, albeit at a more incremental pace. However, UOB said that the EU’s problems might dampen risk appetite in the months ahead.

“We expect to see the US dollar/Singapore dollar pair trend down to around 1.25 at end-2011, from 1.28 in 1Q2011,” UOB said.

Alvin Liew, Economist at Standard Chartered Bank, also highlights inflation as a key challenge for Singapore in 2011. “CPI inflation, which was largely driven by higher car prices and housing costs in 2010, will switch to domestic drivers such as higher residential property rents and services costs in 2011,” he said. “And while imported inflation sources have been largely benign in 2010, we expect them to become more prominent in 2011, mainly via higher food prices.”

For 2011, Standard Chartered Bank expects inflation to average 3.4 per cent, slightly above the government’s forecast and far above the 10-year average of 1.4 per cent.

Liew said car prices could remain high in 2011 due to the expected fall in supply of car ownership certificates in February next year, “although the already-high base in 2010 should temper inflation pressures.”

GDP Growth

In its outlook report, UOB said it is maintaining its forecast of 5.0 per cent GDP growth for Singapore in 2011, which is within the government’s forecast of a 4- to 6-per cent expansion next year, but a significant moderation from the official projection of a 15-per cent increase for 2010.

Standard Chartered Bank’s and Citigroup’s projections also fall within the government’s forecast range, stating that Singapore’s economy should expand by 4.6 per cent and 5.5 per cent respectively next year.

Regarding the local sectors, UOB said some downside risks for 2011 could come in the form of continued weak final end-demand from the G7 economies affecting manufacturing, “although pharmaceutical output could surprise with a surge in production.” UOB forecasts manufacturing to register a single-digit growth rate next year.

However, tourism-related and financial services are expected to continue contributing favourably to Singapore’s economy in 2011, UOB said. This is in line with the government’s forecast that services will play a bigger role next year, supported by strong regional growth.

Standard Chartered’s Liew agreed. “These industries (the services sector, especially tourism-related and financial services) feed off rising regional domestic demand from China and ASEAN (The Asso- ciation of Southeast Asian Nations) and are expected to continue to benefit from the strength of the Asian consumer,” he said. “Notwith- standing the upgrading of Singapore’s manufacturing sector to higher-value activities, the composition of GDP is set to shift away from manufacturing and towards services.”

Standard Chartered expects services to account for 75 per cent of Singapore’s GDP in 2013, up from 64 per cent in 2008.

“The construction sector should contribute positively to growth in 2011, but the strong growth rates recorded in 2010 are likely to ease,” Liew said. “Public transport and infrastructure projects will be support- ive of industry in the next decade, with the government set to inject S$50 billion to upgrade the transport system.”

According to UOB, the Integrated Resorts, or IRs, are also set to bolster economic growth directly and indirectly, especially for retail trade, hotels and restaurants. A steady stream of tourist arrivals will also help to support the services sector.

Overall, the expected further expansion of Singapore’s economy next year will give rise to domestic cost pressures, particularly amid the tight labour market, UOB said.

Liew said that the government’s labour policy of restricting inflows of foreign workers will lead to wage pressures and higher services costs in 2011 and beyond.

In its Prospects 2011 report, Citigroup said that growth would be bolstered by a resilient services sector catering to regional demand and new capacity additions.

“Increase in labour demand from capacity additions and tightening of foreign worker inflows will likely keep wage inflation and service prices elevated, which along with (the) risk of higher commodity prices and rental pressures, should keep headline inflation above the MAS’s comfort zone of around 2 per cent in 2011,” Citigroup economist Kit Wei Zheng said.

Growth Volatility

“Growth volatility is likely to be a problem for Singapore, stemming from its over-reliance on external demand,” Standard Chartered’s Liew said. “GDP data from recent quarters showed swings from a 10-per cent year-on-year contraction to a 20-per cent expansion, driven by changes in the external environment. This volatility puts Singapore at risk of stagflation, albeit temporary, in 2011 if the world economy were to head towards a double-dip recession.”

He added that notwithstanding the volatility of export performance, Singapore’s small domestic market implies that external demand will remain a critical engine of growth.

In recent years, the country has enjoyed some success in diversifying its exports and manufacturing away from electronics-based produc- tion towards biomedical production, offshore marine engineering, and innovation- and technology-intensive industries. The nation has also supported further expansion of its services sector for greater contribu- tion to GDP growth.

Mergers and Acquisitions

Against the backdrop of a slow global recovery, Ernst & Young noted that worldwide merger-and-acquisition (M&A) deal volume was up only slightly by 3 per cent year-on-year as of December 1. While M&A deal value as of the same date rose 26 per cent year-on-year to hit US$1.9 trillion, it was still significantly below the all-time yearly high of US$4.7 trillion recorded in 2007.

In a recent statement, Ernst & Young said that M&As in 2011 “will be less focused on the urgent need to unbridle underperforming or non-core assets, and more about strategic deals.”

“We are seeing a new level of preparedness among corporates,” said Pip McCrostie, Global Vice-Chair for Ernst & Young Transaction Advisory Services. “Corporates have one foot on the accelerator and one foot on the brake looking for strategic fit when the time is right.”

McCrostie added that with companies having abundant cash on hand and confidence slowly returning to markets, deal activity is expected to continue increasing in 2011, “albeit in a moderate, targeted way.”

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