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Here's why monetary easing to boost exports a double-edged sword to Singapore economy
Rising domestic borrowing costs feared.
Retail trade firms with persistent erosion of profit margins amid rising labor costs and weak-end demand is presenting the Monetary Authority of Singapore (MAS) with policy conondrum. BNP Paribas warns that re-centering the SGDNEER lower could boost export earnings but is likely to spur borrowing costs.
Aggregate revenue growth for the roughly 22,000 retailers has been hard to come by. According to BNP Paribas retail trade firms posted 5-year nominal CAGR of 1.2% which likely reflects slower domestic growth and the impact of macro-prudential tightening.
On expenditures, the research firm noted that retailers have grappled with labour market policies spurring strong wage gains of 5Y CAGR of 7% and, more recently, rising debt service.
As a result, it estimates industry-wide pre-tax profits fell by 30% over the last 5 years. "Were it not for impressive cost-cutting to constrain operating cost growth (5Y CAGR of 4%), the outcome could have been much worse," it said.
According to BNP Paribas, similar trends in profit margins are evident in the rest of the service sector. Labour market data indicates firms are now attempting to pass the problem on to households by shedding jobs. In turn, these developments allude to slower wage income growth and a potential vicious cycle as highly-indebted households struggle with their own debt service, it said.
This backdrop poses a conundrum for the MAS. But while easing policy via a re-centring of the SGD nominal effective exchange rate lower may boost export earnings, BNP Paribas warned that it does little to address the underlying problem of weak final demand. Furthermore, in response to MAS easing, domestic borrowing costs may rise as foreign investors seek greater yield compensation to offset lost potential FX gains against a backdrop of reliance on wholesale funding by the domestic banking system," it added.
Yet, with Fed tightening already likely to increase debt service for businesses and highly-indebted households, MAS easing may deepen the demand rut and amplify the pincer movement on margins, said the research firm.
BNP Paribas suggested that the best course of action for the MAS to achieve policy objectives is to leave settings unchanged. "It may not reverse the growth situation, but it should avert a deeper downturn," it said.
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