Singapore may weaken currency due to slowdown

Singapore's economy shrank the most on record in the last quarter of 2008 and the government forecast a five per cent contraction this year and a possible fall in consumer prices, which may prompt a one-off currency devaluation.

A government declaration that the economy was suffering its worst ever recession and official forecasts of a continued slump suggested to analysts the central bank could push down the centre of the trading band for the Singapore dollar, effectively devaluing it to help the key export sector.

The grim figures, largely a reflection of Singapore's exposure to the slump in global trade, also pave the way for an expansionary budget today as the government scrambles to shelter the economy from the worst global financial crisis in decades.

"The Singapore economy is going through its sharpest, deepest and most protracted recession," the Trade Ministry's Second Permanent Secretary Ravi Menon told journalists.

Government data showed gross domestic product shrank in the fourth quarter at a deeper-than-expected and seasonally adjusted rate of 16.9 per cent, the biggest fall on record and the third consecutive quarterly contraction. Provisional figures had reported a 12.5 per cent slump.

From a year earlier, gross domestic product fell 3.7 per cent. That left 2008 growth at just 1.2 per cent, an abrupt turnaround from a 7.7 per cent expansion in 2007 when the stock market, financial services and property prices were booming.

The government downgraded its view of the economy for the second time in just three weeks, reflecting the rapid deterioration in the global economy that has seen much of the developed world slip into recession.

Singapore now sees GDP falling between two per cent and five per cent this year, which would be the worst performance on record, with consumer prices flat to down one per cent.

"The official acknowledgement of deflation risks keeps alive a strong possibility that an eventual downward band re-centring could be on the cards in April," said Kit Wei Zheng at Citigroup, adding it could also restore some cost competitiveness.

The Singapore dollar fell to one-month low of 1.512 against the US dollar after the GDP data, compared with 1.51 before the data.

"I'm bearish for the Singapore dollar," said Irene Cheung, currency strategist at Royal Bank of Scotland in Singapore.

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