S'pore inflation to peak above 8%: Credit Suisse

http://www.businesstimes.com.sg/sub/...83201,00.html?

Published June 12, 2008

S'pore inflation to peak above 8%: Credit Suisse

By LYNETTE KHOO


(SINGAPORE) Inflation in Singapore is expected to peak above 8 per cent in May or June, but the risk of higher prices stifling economic growth is not imminent, a Credit Suisse economist said yesterday.

'High inflation is negative for growth but it will depend on real income decline,' the Swiss bank's emerging markets economics group director Cem Karacadag told BT.

'In Singapore's case, real wages are still holding up well,' he said. 'I do not think at this moment in time, we are at a level that will stifle growth.'

The government has raised its full-year forecast range for Consumer Price Index twice since the start of this year, with the latest hike taking the forecast to 5-6 per cent, up from 4.5-5.5 per cent after inflation hit a 26-year high of 7.5 per cent in April from a year earlier.

Elsewhere in Asia, food and oil-related items are also driving inflation to near or above double digits.

At a briefing yesterday, Mr Karacadag said that even if oil prices stabilise there is still inflationary upside because the oil price spike in May has not been fully transmitted, food prices are still rising and there are still cost pressures on the economy.

In countries where government controls mute the pass-through of higher oil prices to retail fuel prices, inflationary expectations may worsen in anticipation of discrete price hikes, he added. The recent 25-33 per cent hike in retail fuel prices by the Indonesian government, for instance, could push annual inflation there above 12 per cent in June.

Credit Suisse has raised its inflation forecasts for most Asian countries for 2008, lifting the forecast for Singapore from 4 to 5 per cent. The hike is greatest for Vietnam - from 10.7 to 22.1 per cent.

But with central banks in the region still wrestling with growth risks in the coming quarters, they are unlikely to rapidly appreciate their currencies to combat inflation, Mr Karacadag said. The pass-through impact that exchange rate has on inflation is also generally low.

'We think that policy responses will depend on the risks to inflationary expectations and the risk of second-round effects,' Mr Karacadag said. 'If oil prices keep rising, the risk is that policy falls behind and monetary tightening has to play catch-up later.'

But monetary tightening in Singapore appears to have some impact. The Monetary Authority of Singapore said last month that if not for the appreciation of the Sing dollar - which rose about 11 per cent against the US greenback last year, and a further 4-5 per cent so far this year - Singapore's 2007 inflation rate would have been 2-2.5 points higher.

'We expect MAS to maintain the current position and slope of its policy band until the next monetary policy statement in October,' Mr Karacadag said. 'If oil prices continue to rise and inflation stay higher for longer time, I do think there is a material possibility of them either steepening the slope or re-centring the band.'

If oil and food prices do not rise further and the second-round effects are avoided, inflation is expected to fall next year and economic growth is expected pick up across Asia ex-Japan, except in Vietnam, he added.

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Editorial

Published June 12, 2008

The changed investment climate


HAVING prospered in a low-inflation - even deflationary - environment over the last two decades, many investors are nonplussed at the prospect of the inflationary backdrop that is now the norm everywhere. Low inflation, and correspondingly low interest rates, were conducive to price-earnings expansion, and led to a re-rating of stocks and robust returns. That era might be ending. Consensus of opinion appears to be that the high prices of commodities, particularly oil and food, are here to stay, even if they may correct somewhat in the short run. Core inflation in Asia, ex-China and Indonesia, is the strongest since 1991.

The risk for the region is that it will suffer a de-rating in terms of expectations of economic growth and corporate earnings, as margins are eroded due to the inability of companies to fully pass through higher costs to consumers.

In this scenario of rising inflation, the conventional wisdom of avoiding bonds or a fixed-interest asset should apply. Yet, Singaporeans are flocking to structured credit notes that offer a fixed coupon and little upside potential, or to preference shares where the coupon is fixed. To be sure, such notes, bonds or shares offer better coupons than fixed deposits, which at their current rate of less than one per cent per annum only guarantee a steep erosion of spending power.

Investors may not fully understand that as inflation expectations ratchet up, the prices of bond-like assets will fall, as the market justifiably demands to be compensated. Thus, even for the strongest credits, the prospect of capital loss is real. As for inflation-protected securities, such as those issued by the US Treasury, there is much concern about the actual measure of inflation used; many analysts believe that such securities may understate the true inflation rate.

Yet, the conventional wisdom of investing in equities or commodities as an inflation hedge is also tricky. In the raw materials space, notwithstanding the sharp rise in the prices of both hard and soft commodities, more and more portfolios are including an exposure to these, even if a modest one. But timing is the big risk here; at their current high prices, commodities are not as good a buy as they were a year ago. As for equities, it's important to look at where conditions are most conducive to continued growth of stock prices. In this respect, selected emerging markets stand out, particularly resource producers rather than consumers.

The challenge of investing in an inflationary environment is particularly acute for the man-in-the-street who may not have access to good advice or to alternative assets. Individuals are further constrained in the risks they can take, given the fact that they frequently start with modest amounts of wealth. In this context, banks and insurance companies, which have long been custodians of the assets of the less wealthy, should come to the fore with simple, low-cost portfolios that offer a balanced exposure to markets in a risk-controlled way. The alternative of staying in deposits is a sure loser for an investor.