Amid the Singapore Government's restructuring of the country's economy, external headwinds have been buffeting its fragile growth.
Asia's growth outlook has dimmed, led by the faster-than-anticipated deceleration in China, the economic giant of the region.
At the same time, the United States has not been importing as much as it did before, even as its economy is recovering.
As such, Singapore is seeing sluggish growth and may at best reach the 2 per cent estimate this year, even as domestic headline inflation has subsided significantly, with oil prices remaining low and asset prices — housing and cars — in the city-state, continuing their decline.
What will 2016 bring?
Ms Selena Ling, Head of Treasury Research and Strategy, OCBC Bank, says the prognosis for growth is unlikely to differ significantly.
Singapore's output gap next year may turn negative for the first time since 2009 and widen slightly again in 2017, according to the Monetary Authority of Singapore (MAS).
Overseas demand will be tepid, and manufacturing and export performance may suffer, she says.
"Intra-regional trade also remains lacklustre, and declining oil prices may continue to weigh on upstream oil and gas sector.
"The recent uptick in visitor arrivals may also not sustain, given that China and Asean economies are still slowing, which will have a knock-on effects on the retail and food and beverage industries," she adds.
That said, there are pockets of opportunities to trade with the new rising stars of South-east Asia— Cambodia, Laos, Myanmar, and Vietnam (CLMV). The CLMV countries are tipped to grow between 6.3 and 8.3 per cent next year.
Policy-wise, MAS also eased policy twice this year. In late January, the Singapore dollar nominal effective exchange rate (S$NEER) saw a slope reduction to take into account the crude oil price slump.
More recently, in mid-October, MAS decided to keep the Singapore dollar (SGD) on a modest and gradual appreciation path, with the width of the policy band and the level at which it was centred unchanged, but reduced the pace of appreciation slightly.
Ms Ling says this should be supportive of growth into 2016 while ensuring price stability over the medium term, even as the country's core inflation is expected to pick up gradually over the course of next year.
"Wage pressures could persist over the next 12 to 18 months given the tight labour market conditions and low unemployment rate," she adds.
Commenting on the October policy recalibration, MAS noted that "an even stronger policy easing…was clearly unwarranted, as the Singapore economy was neither experiencing an outright retraction in economic activity nor widespread price declines".
Given the waxing and waning of the broad US dollar, due to fluctuating market speculation over the timing of the US Federal Reserve Federal Open Market Committee (FOMC) interest rate hike, it is no surprise that most Asian currencies have seen relatively choppy trading for the year to date, Ms Ling notes.
The Singapore dollar, for one, started this year near the $1.32 region and took flight to cross the $1.43 mark by early October, although there was a pullback in April and again in October.
"Window of relief"
Notably, market speculation that MAS would ease domestic monetary policy settings again in April saw domestic short-term interest rates spike in response.
"Financial markets were basically re-pricing SGD interest rates to incorporate expectations of further US dollar (USD) strength against the SGD," she explains.
"In particular, the three-month Swap Offer Rate (SOR), which tends to be more responsive to liquidity conditions, hit 1.13 per cent in March and 1.56 per cent in September."
The three-month Singapore Interbank Offered Rate (SIBOR) has been relatively more stable compared to the SOR — having started the year at 0.46 per cent and then climbed to a high of 1.13 per cent in September — before stabilising at around 1 per cent as interbank liquidity remained flushed, she adds.
However, it is unclear how long the current window of relief for emerging market (EM) currencies will last.
Looking ahead, assuming that the Singapore economy does not deviate materially from the growth and inflation trajectory outlined, there should be less impetus for further policy adjustments, says Ms Ling.
Nevertheless, central bank differentials may continue to influence capital flows to emerging markets. As such, domestic short-term interest rates may therefore still remain susceptible when the FOMC finally decides to hike interest rates.
"Our forecast for the USD is for 1.4730 in 12 months' time, and for three-month SOR and SIBOR to be at 1.53 per cent and 1.50 per cent respectively," she says.
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In my view
Besides the USD-SGD cross, which other currencies do you like against the Sing dollar and why?
"I like the British pound (GBP) against the Sing dollar.
The Bank of England (BOE) is probably the only other G7 central bank apart from the US Federal Reserve (FOMC) that has any pre-conceived notions of normalising policy within the next 12 to 18 months.
BOE governor Mark Carney had previously suggested that the timing of a potential first post-crisis rate hike would become clearer around the turn of the year.
However, like FOMC, BOE policymakers' rhetoric has been cautious to suggest that a move is a possibility and not a certainty, and persistent headwinds imply the pace of any rate increases will be limited and gradual compared to previous cycles.
At this juncture, the timing of the first BOE rate hike remains further out in 2016.
In contrast, MAS had slightly flattened the S$NEER slope at its monetary policy review in October, following an earlier out-of-cycle flattening of the S$NEER slope back in January 2015 as well.
Structurally, GBP-SGD should gravitate higher on the back of divergent central bank postures."
Ms Selena Ling
Head of Treasury Research and Strategy, OCBC Bank Member, OCBC Wealth Panel