Standard Chartered Bank has downgraded its economic growth forecast for Singapore, saying that the economy will shrink by 2 per cent this year because of the impact of the coronavirus pandemic.
The bank expects the Monetary Authority of Singapore (MAS) to respond by easing its policy stance, allowing the local dollar to depreciate.
StanChart has cut the forecast from an earlier projection of a 0.8 per cent expansion in Singapore's gross domestic product.
"The widening coronavirus outbreak globally and increasingly strong, but necessary, containment measures worldwide have resulted in a sharp downgrade to our global growth projections," StanChart analysts Edward Lee, Divya Devesh and Jonathan Koh said in a report issued today (March 23).
The containment measures that may hurt growth include the recent restriction of all short-term visitors from entering or transiting via Singapore and the travel and movement restrictions imposed by Malaysia.
Oil prices dropped by about 50 per cent from US$50 per barrel on March 6, when an oil production deal between Saudi Arabia and Russia collapsed.
Meanwhile, stocks and bond markets swung sharply as several countries imposed lockdowns to contain the spread of the disease.
"We now expect the MAS to shift the slope of the Singapore dollar nominal effective exchange rate (SGD Neer) policy band to flat from +0.5 per cent per annum currently and also re-centre the SGD NEER policy band lower," the bank said.
StanChart also expects the MAS to shift the centre of its policy band to the prevailing SGD Neer level, now estimated at about 1.7 per cent below the middle of the band.
The Singapore dollar is likely to depreciate to about 1.47 against the US dollar and a re-centring lower of the policy band would open further room for SGD Neer weakness in the coming months, it said.
The bank has, however, raised its 2021 GDP growth forecast to 2.8% from 1.9% due to a more favourable base effect and considerable amount of fiscal and monetary stimulus implemented globally.