Singapore Interest Rates: The only way is up?

THE period of rock-bottom interest rates may be over, with some experts tipping that levels in Singapore are set to head north - but at a gentle pace.

The three-month Singapore Interbank Offered Rate (Sibor) - the level at which banks lend to each other - is at 1.3 per cent. That is still a remarkably modest rate, but it is up from the 12-month low of 1.25 per cent a few days ago.

It is also dramatically lower than the 3.1875 per cent in March last year, before rates began plunging.

Economists expect rate rises to be tiny, but home owners might think it smart to refinance mortgages before rates creep up.

The rates pressure is coming from the United States. The Sibor tends to track US rates, which are tipped to rise by 50 basis points by year end.

Dr Chua Hak Bin, Asian strategist at Deutsche Bank Private Wealth Management, said: 'I believe the short- term interest rate has bottomed out. Our rates track the US rates quite closely, and there is a sense that the Fed, after a 325 basis point cut, is due to raise rates soon.'

He expects rates to rise to 1.4 per cent in 12 months and to go back to above 2 per cent in three years.

OCBC Bank economist Selena Ling said: 'We would expect the short-term interest rate to rise to 1.5 per cent by year end. It won't rise sharply because the Monetary Authority of Singapore (MAS) is still on a tight monetary policy to combat inflation.'

But HSBC economist Robert Prior-Wandesforde sees things differently: 'We are not expecting a Fed hike before the end of this year, and I'm still looking for the three-month Sibor to fall to 1 per cent over the next few months. With the MAS thought to keep the Singapore dollar strong, this is encouraging foreign inflows, which in turn is depressing interest rates.'

One indicator of where short-term rates might be headed lies in the bond market, where long-term interest rates seem to have spiked.

The 10-year Singapore Government Securities bond yield was 2.73 per cent in the middle of last month, but has now risen to 3.6 per cent.

United Overseas Bank's treasury research head, Mr Jimmy Koh, said: 'We have inflation climbing in the region, making long-term rates move up. Over time, this could drag up short- term rates.'

He also noted that central banks in Indonesia and the Philippines have already started raising short-term interest rates.

Deutsche Bank's Dr Chua said: 'Long-term interest rates are determined by long-term views on growth and inflation. As risk appetite returns, these might move up faster than the short-term rates because of inflation risks, and the Fed may not be able to move as fast as we hope.'

Whatever the cause, rising interest rates affect everyone, from bank savers to homebuyers and retirees looking for a good return on their cash.

If the Sibor rises, so might bank deposit rates in time to come. A DBS Bank spokesman said: 'Our rates will move in tandem with market forces.'

Home owners might also think it prudent to switch to a fixed-term mortgage now as rates are linked to the Sibor.

Mr Prior-Wandesforde said 'it is worth thinking seriously about shifting to a fixed rate'.

He added: 'Although fixed-term mortgage rates haven't come down that much during the recent decline in short-term market rates, they also didn't rise as much as one would have expected during the period of rising short-term rates from 2005 to 2006.'

Singapore GDP Grows Less Than Initial Estimate; Inflation Rises

Singapore's economy expanded less than initially estimated in the first quarter, adding to concerns growth may ease in the coming months as global demand weakens and inflation accelerates.

Gross domestic product increased an annualized 14.6 percent in the first three months of the year, less than the government's April 10 estimate of 16.9 percent, the trade ministry said in a statement today. The economy shrank 4.8 percent in the previous quarter.

Asian countries including Singapore are expecting growth to slow in the coming quarters as surging consumer prices hurt spending and demand for exports weaken. Malaysia and the Philippines, which will be releasing first-quarter economic numbers next week, are expected to report slowing expansion.

"In an environment where oil and food prices are at very high levels, the outlook is cloudy for Singapore and the rest of Asia as we head into the second half,'' said Song Seng-Wun, an economist at CIMB-GK Securities Pte. in Singapore. "Inflation is a big worry and the top priority for most governments.''

Singapore's inflation rate is quickening at the fastest pace in 26 years, prompting the central bank's decision last month to allow the currency to strengthen further.

Consumer prices rose 7.5 percent in April from a year earlier, after gaining 6.7 percent in March, the government said today. It now expects 2008 inflation to average between 5 percent and 6 percent, from a previous forecast of range of 4.5 percent to 5.5 percent.

Malaysia, Philippines

Economists surveyed by Bloomberg News expect Malaysia's growth to have slowed to 6.4 percent in the first quarter from 7.3 percent in the previous three months. Philippine growth may have eased to 5.9 percent from 7.4 percent, a separate survey showed. Malaysia will release its first-quarter data on May 28, and the Philippines the next day.

Asia is almost twice as reliant on exports as the rest of the world, with 60 percent of shipments abroad ultimately destined for the U.S., Europe and Japan. The Japanese government yesterday cut its view on exports for the first time in three months and maintained its assessment that a recovery in the world's second-largest economy is pausing.

Some Asian governments and central banks are predicting growth will be at the lower end of their targets this year, or are cutting their forecasts even as they raise estimates for inflation.

Philippine growth may have slowed to as little as 5.2 percent in the first quarter as accelerating inflation dented consumer spending, Economic Planning Chief Augusto Santos said yesterday.

Oil Prices

Rising energy and food prices are also stoking inflationary pressures and crimping domestic consumption across the region. Oil has more than doubled in the past year, and prices of grains such as rice and wheat reached unprecedented levels in 2008.

From a year earlier, Singapore's economy expanded 6.7 percent in the first quarter after growing 5.4 percent in the previous three months, the government said.

The island's manufacturing industry grew 12.4 percent last quarter from a year earlier, accelerating from a 0.2 percent gain in the fourth quarter.

Pharmaceutical production by companies such as Merck & Co. rose almost 52 percent in the first quarter from a year earlier, government figures show, offsetting faltering electronics output.

'Remain Weak'

Singapore's electronics exports have declined for 15 consecutive months and the island's central bank in April said it expects the industry to remain weak. Electronics account for about 30 percent of Singapore's manufacturing and drugs make up around 22 percent.

Singapore's trade promotion body today lowered its forecast for export growth this year to between 2 percent and 4 percent, from an earlier range of 4 percent to 6 percent. Overseas shipments rose 0.6 percent last quarter.

Services climbed 7.5 percent in the first quarter from a year earlier, while the construction industry grew 14.7 percent, according to today's report.

City Developments Ltd., Singapore's second-largest real estate company, this month said it will delay sales of new residential projects. Confidence among prospective home buyers has been eroded by the subprime-mortgage crisis in the U.S. and the contraction in global credit markets, the company said.

Singapore home sales totaled 787 units in the first quarter, about half of the 1,449 sold in the previous three months, according to the city state's Urban Redevelopment Authority. Prices rose 3.7 percent, the smallest gain in a year.

NODX surprises with 5.4% gain

NON-electronic shipments came to the rescue, lifting non-oil domestic exports (NODX) to a surprising 5.4 per cent year-on-year gain in April, against market expectations of a 0.5 per cent dip.

Led by higher domestic exports of petrochemicals, pumps, metal manufactures and parts for tractors and motor vehicles, domestic shipments of non-electronic products bounced back from a 4.3 per cent drop to register a 9.8 per cent gain.

Exports of pharmaceutical items continued to fall last month, though not so sharply - they were down 11.7 per cent after tumbling 34.1 per cent in March, according to the latest figures released yesterday by the Government's trade promotion arm, International Enterprise Singapore.

Left to electronic exports alone, NODX, which declined 5.9 per cent in March, would have continued to head south in April.

Electronic shipments, which have been on the descent since February 2007, slipped 0.4 per cent last month.

'The contraction of electronic domestic exports was due mainly to lower domestic exports of telecommunications equipment, consumer electronics and bare PCB,' IE Singapore said.

Month on month, NODX also staged a recovery in April to post a seasonally-adjusted 1.6 per cent increase, against market expectations of a 0.5 per cent slide and after a 2.6 per cent drop in March.

But the prospects for NODX look less sunny than in March, when non-oil retained imports of intermediate goods (NORI) - a leading indicator - jumped 5.7 pert cent year on year. NORI rose just 1.9 per cent last month.

Month on month, NORI fell a seasonally-adjusted 6.6 per cent, following a 1.9 per cent rise in March.

Total trade continued to rise, up 21 per cent to $82 billion after putting on an 11 per cent gain in the previous month.

While domestic exports to Thailand and the US fell, shipments to the rest of Singapore's top 10 markets rose in April.

'The largest contributors to NODX growth were the European Union, China and Indonesia,' IE Singapore said.

Thanks to gains in electronic and non-electronic shipments, domestic exports to the EU jumped 27 per cent year on year, recovering from a 24 per cent drop in March.

Domestic electronics shipments to the EU, falling since December 2006, increased 8.7 per cent. Non-electronic exports to the EU - Singapore's biggest market - expanded 22 per cent, against 32 per cent in March.

Domestic exports to China swelled 19 per cent last month, springing back from a 6.3 per cent fall in March. Domestic shipments to Indonesia rose 20 per cent, following a 1.4 per cent dip the previous month.

Domestic exports to the US dropped 17 per cent in April, after falling 28 per cent in March. Shipments to Thailand also continued to fall, by 6.5 per cent. They declined 5.9 per cent the previous month.

Consumers continue to spend at stores in March

Consumers continued to spend at department stores, supermarkets and petrol stations in March, but held back on buying cars.

Sales at petrol stations rose 39 per cent on year in March, according to latest data by the Department of Statistics.

Supermarkets saw 16.7 per cent more sales, while sales at department stores rose 14.4 per cent compared with the year before.

Other segments that saw healthy sales included furniture and household equipment, telecoms apparatus and computers, and optical goods and books.

However, sales of motor vehicles fell 8.1 per cent in March compared with the same month last year.

Overall, retail sales rose 5.6 per cent in March from a year ago, following a 1.3 per cent fall in February.

But when adjusted for seasonal variations, retail sales actually fell 6.6 per cent in March compared with February. The decline reversed an 8.8 per cent rise in the previous month.

Excluding cars, which have more than a third weighting on the index, retail sales rose 12.5 per cent in March from a year earlier.

S&P's 'AAA' rating affirms Singapore's stable outlook

Standard & Poor's Ratings Services affirmed on Friday its 'AAA/A-1+' sovereign credit ratings on Singapore.

In a statement, Standard & Poor's said the outlook is stable.

The ratings reflect Singapore's enduring fiscal and external strengths and competitive economy, while taking into account the challenges it faces as a small and open economy.

Singapore's general government surplus is estimated at 8.8 percent of GDP in fiscal 2007 and averaged 8.0 percent of GDP between 2003 and 2007.

Standard & Poor's added that this level of surplus – one of the highest in the world – provides strong fiscal flexibility, which is needed for structural reforms such as the ongoing efforts to diversify the economy so that it would be less reliant on electronics exports and be more cost competitive.

CPI up by 6.7%, a 26-year high

THE rise in the consumer price index (CPI) hit 6.7 per cent in March from a year ago, with economists reckoning that the climb may still have a little way to go.

The CPI increase, a 26-year high, was largely driven by higher costs of food, housing, and transport and communication. Food prices rose 7.6 per cent compared to March 2007 as a result of costlier cooked food, rice and other cereals, milk products, fresh vegetables, seafood and poultry.

Higher accommodation costs and electricity tariffs caused housing cost to increase by 8.1 per cent year-on-year. Costs of transport and communication rose 7.9 per cent year-on-year from higher petrol prices, car prices and taxi fares.

For Q1 2008 as a whole, the CPI was 6.6 per cent higher compared to the year-ago quarter.

Against February though, the March CPI fell by 0.1 per cent.

Some economists noted that the CPI may inch up in the next few months. While 'we are getting close to the peak - inflation probably has a little further to rise yet - it could well hit 7 per cent in April', said HSBC economist Robert Prior-Wandesforde.

The pressure, however, is likely to ease in H2 2008. According to Mr Prior-Wandesforde, the impact of the Goods and Services Tax (GST) increase in July last year would have worn out by then.

In the same vein, Goldman Sachs economists Mark Tan and Michael Buchanan expected the CPI to peak at around 7 per cent in H1 2008. According to their report, the 6.7 per cent increase in the March CPI 'was just a touch below the consensus of 6.8 per cent year-on-year'.

The Ministry of Trade and Industry's forecast of CPI inflation for 2008 stands at 4.5-5.5 per cent. Mr Prior-Wandesforde, though, believed that the range may be breached. 'We are looking for a 6 per cent average,' he said.

He also pointed out that inflation is driven not just by supply-side factors, but by demand-side ones as well. In Singapore, 'domestic demand has been buoyant and is likely to remain so, given the country's extremely loose fiscal and monetary conditions', he said.

'Strong demand is not only pushing service sector inflation higher, but is also contributing to the strength in food and energy prices,' he added.

The Monetary Authority of Singapore had in April raised the policy trading band for the trade-weighted Singapore dollar, or S$NEER, to counter inflation.

'We estimate that the S$NEER has since moved close to the top of the new band,' says the Goldman Sachs report, and 'we still see further gains for the Singapore dollar, albeit at a more measured pace and increasingly subject to moves in the US dollar'.

March exports surprise with 5.9% dive

Singapore's key non-oil domestic exports (NODX) took a surprisingly sharp dive in March, demonstrating again the widening gap between export performance and the overall growth of the economy.

NODX fell 5.9 per cent year-on-year, against market expectations of a 0.3 per cent drop. It was the first drop in the year, after NODX climbed 2.8 per cent in January and 6.2 per cent in February.

Last month's decrease dragged NODX growth in the first three months (Q1) down to just 0.6 per cent, according to calculations by UOB Economic Treasury Research.

While the Q1 NODX showing is a welcome reversal from the 0.4 per cent dip in the final three months of 2007, it was set against a year-on-year growth estimate of 7.2 per cent for the overall economy.

Traditionally, export growth has led trade-dependent Singapore's economic expansion. But lately, the reverse has been more the case, indicating that the domestic sector - especially for services - is playing a bigger role in fuelling economic growth.

Last month's NODX also unexpectedly slipped by a seasonally adjusted 2.6 per cent from February. Analysts had projected a one per cent rise, after a revised 1.4 per cent decline.

International Enterprise Singapore, the trade promotion agency which released the latest trade figures yesterday, attributed the NODX drop in March to a decrease in electronic and non-electronic shipments.

The contraction in electronic domestic exports in March deepened to 8.5 per cent, after a 2.5 per cent dip the previous month. It was the 14th straight monthly decline.

'The contraction of electronic domestic exports was mainly due to falling domestic exports of parts of personal computers, integrated circuits and telecommunications equipment,' IE Singapore said.

UOB's economist Ho Woei Chen expects electronics domestic shipments to stay weak until the second half of the year, when monetary and fiscal stimulus in the US starts to boost the economy.

Non-electronic domestic exports were down 4.1 per cent after surging 12.8 per cent in March, as both pharmaceutical and petrochemical shipments fell. But Ms Ho feels that non-electronic NODX, in particular the volatile pharmaceutical exports, will continue to drive NODX expansion for the rest of the year.

Domestic shipments to Singapore's three largest markets declined. In fact, IE Singapore said that the top contributors to NODX's fall last month were the European Union, the US and Malaysia.

'While NODX to Japan, South Korea and Hong Kong increased, that to the rest of the top 10 NODX markets contracted in March,' IE Singapore said.

Domestic exports to the EU dropped 27 per cent, reversing the previous month's 4.9 per cent gain. Shipments to the US tumbled 28 per cent, worsening from February's 8 per cent fall.

Singapore's domestic exports to Malaysia declined 13 per cent and slipped 6.2 per cent for China.

Stronger Sing$ may weigh down interest rates

Amid the clouds of uncertainty hanging over some sectors, there is good news for home loan borrowers. Interest rates are poised to fall to levels last seen in 2003 following the move to let the Singapore dollar appreciate strongly in an effort to fight imported inflation.

The Monetary Authority of Singapore (MAS) will be busier than ever - intervening in the banking system to mop up some of the extra liquidity in order to moderate the pressure on interest rates.

Low interest rates might negate some of MAS's anti-inflationary measures by helping fuel domestic growth. But economists say MAS will stick to its guns of using the exchange rate as a tool to fight inflation given Singapore's open economy.

Last week, data showed that the economy grew a stronger than expected 7.2 per cent in the first quarter against 5.4 per cent in Q4, 2007. Inflation rose to a 26-year high of 6.6 per cent.

Analysts expect the three-month Sibor to fall to between 0.75 and 1.00 per cent by the fourth quarter of this year as capital flows are attracted here by a rising Singapore dollar.

The record low for three-month Sibor was 0.56 per cent reached in August 2003, when the US Federal Funds rate was at one per cent, said Citigroup economist Kit Wei Zheng.

Since last Thursday when the MAS decided to reset the Singapore dollar higher, the key three-month Sibor, which is the interbank interest rate, has fallen some 19 basis points to 1.25 per cent.

'Foreigners are betting the Singdollar will appreciate ... the band re-centring would reinforce the market perception that MAS wants the exchange rate to appreciate and increase investor expectations of returns on Singapore dollar assets,' said Mr Kit. This would exert downward pressure on short-term interest rates.

The Singapore dollar is now expected to rally to $1.31 by the end of the year against the US dollar. It was $1.36 yesterday.

It is not clear if MAS's move last week will ease inflation significantly given the persistently high commodity prices, record rents and higher transportation charges.

But the more immediate impact of a stronger local dollar could weaken the demand for exports and hurt the profits of foreign companies operating here, given that their costs are in local currency terms, said some economists.

'There will be a slowdown in exports, likewise for foreign companies, their profit margins will be impacted,' said Mr Kit.

United Overseas Bank's Suan Teck Kin thinks there would be a margin rise in inflows by investors to pick up some gains on the appreciating Singapore dollar, but 'overall, we might not see a wholesale rush of capital inflows'.

'This is because from a foreign investor's point of view, currency return is only one component of total return,' said Mr Suan. 'So if an investor believes there is more upside to the equity/ bond/property market and the upside is better than other parts of the region, then the capital will follow.'

Still, the market is bracing for more MAS interventions and sterilisations.

'Investors should expect the MAS to continue sterilising aggressively, so as to moderate the fall in domestic interest rates as a result of its forex interventions,' said Mr Kit.

MAS has been sterilising in unprecedented amounts.

In February, data showed that MAS sterilised or removed about US$8 billion from the banking system, the second largest amount since May 2006 when it was over US$9 billion, said Mr Kit.

This means that Singapore's reserves will continue its climb to record levels.

At the end of March, spot reserves reached S$245 billion, up S$18.8 billion from October, he said.

'Our reserves are always climbing, the same for many Asian countries,' he said.

S'pore's economy grew 7.2% in Q1

Singapore's economy grew an annual 7.2 per cent in the first quarter, faster than the 5.4 per cent expansion recorded in the previous three months, the government said on Thursday.

Last quarter's performance was also better than economists' average growth forecast of 6.4 per cent expansion.

On a quarter-on-quarter seasonally adjusted annualised basis, real gross domestic product for the first quarter of this year expanded by 16.9 per cent after dropping 4.8 per cent in the fourth quarter last year, the trade ministry said.

Growth in the first quarter was powered by the manufacturing sector which expanded an annual 13.2 per cent, picking up sharply from the 0.2 per cent recorded in the previous quarter, the ministry said.

'This was largely due to a surge in the output of the biomedical manufacturing cluster, following its contraction in the previous quarter,' it said.

The construction sector also posted double-digit year-on-year growth of 14.6 per cent in the first quarter although the pace was slower than the previous quarter's 24.3 per cent, the ministry said.

For the services-related sector, growth was estimated at an annual 7.6 per cent, slightly slower than the previous quarter's 7.7 per cent, it said.

'All in all, a good start to the year, but with demand in OECD countries likely to soften in the coming months, Singapore's growth could moderate going into the second-half,' said Song Seng Wun, an economist with CIMB-GK Research.

He was referring to the Organisation for Economic Cooperation and Development, whose members include major industrialised countries.

Any slowdown in the world's major economies will affect Singapore because of its dependency on external trade which is more than three times the size of its gross domestic product valued at $243.17 billion (US$179 billion) last year.

The global economic outlook is increasingly grim, the International Monetary Fund (IMF) said on Wednesday.

It said that global expansion is set to slow to 3.7 per cent in 2008 amid an unfolding crisis that began in the United States whose economy, the world's biggest, is likely in a 'mild recession'.

Singapore and other 'newly industrialised economies' should see 4.0 per cent growth, the IMF said.

According to government projections, Singapore's economy is targeted to grow between 4.0 and 6.0 per cent for the full year, slower than the 7.7 per cent of 2007.

The advance GDP estimates for the first quarter are based largely on January and February data. More detailed figures are due to be released next month.

S'pore pushes up currency to fight inflation

Singapore's central bank tightened monetary policy on Thursday to fight inflation by allowing its currency to go higher, and government data showed first-quarter economic growth was far stronger than expected.

The Monetary Authority of Singapore (MAS) conducts policy by steering the Singapore dollar within a secret trade-weighted band against a basket of currencies, not by adjusting interest rates.

It said it had moved the centre of the band up to the current level of the currency's trade-weighted nominal exchange rate.

After its announcement, the currency hit a record high of 1.3568 per US dollar, up around 1.7 per cent compared with before the announcement. It has gained 6 per cent this year.

Singapore's export-dependent economy, whose performance is seen by economists as a barometer of demand for Asian goods, expanded at an annualised, seasonally adjusted rate of 16.9 per cent in the first quarter, an advance estimate showed.

Drugs and electronics manufacturing led the way, pushing growth above economists' consensus forecast of 11.5 per cent.

Economists said the spurt gave the central bank room to tighten policy because it assuaged fears that a US recession would drag the US$166 billion Singapore economy into a sharp slowdown, although they saw growth easing from last year.

'The GDP figures were stronger than what the market had predicted and that gave the Monetary Authority confidence to tighten the policy,' said Joseph Tan, an economist at Fortis.

Mr Tan said he expected the Singapore economy to grow 5.7 per cent this year, near the top of the official 4-6 per cent forecast range but down from last year's 7.7 per cent.

The MAS can alter monetary policy by adjusting the pace at which the currency rises, by changing the centre of the band in which it trades, or by widening the trading band. Some economists said a shift in the band's centre was the most aggressive move.

In its twice-yearly policy statement, the MAS said: 'Against (the) backdrop of continuing external and domestic cost pressures, an upward shift of the policy band at this point will help to moderate inflation going forward, while providing support for sustainable growth in the economy.'

'There will be no change to the slope or width of the policy band,' it added.

Some economists said the stronger Singapore dollar boosted sentiment in other Asian currencies and lifted the yen.

Strategists raised their forecasts for the Singapore dollar , with end-2008 forecasts ranging from 1.30 to 1.35 per US dollar, a gain of up to 4.2 per cent from Thursday's record.

Occupancy at business parks hits five-year high

The average occupancy rate for business parks has hit a five-year high, crossing the 90 per cent mark.

According to a report by CB Richard Ellis (CBRE), the occupancy rate grew from 89.4 per cent at end-2007 to an estimated 90.2 per cent at end-March 2008, exceeding 90 per cent for the first time in five years.

This was attributed to the current tight availability of office supply in the CBD which saw financial institutions like Standard Chartered Bank, Credit Suisse and Citibank relocating part of their operations to Changi Business Park.

The office space crunch also pushed the average occupancy rate for high-tech space up by 1.3 per cent quarter on quarter to 94.1 per cent at the end of first quarter 2008.

CBRE director of industrial and logistic services Bernard Goh pointed out, however, that while the average occupancy rate for business parks is expected to grow, it would be at a 'less robust pace compared with high-tech space'.

'This is due to the healthy pipeline of upcoming business parks in the next four years,' he said.

Mr Goh said some six million square feet of business parks are expected to be completed from 2008 to 2011. In comparison, only 1.5 million sq ft of high-tech space is expected to come onstream in 2011, explained Mr Goh.

Correspondingly, Mr Goh expects the growth in rental for high-tech space to continue to grow at a healthy pace.

Average monthly rent for high-tech space rose 7.3 per cent quarter on quarter to $2.95 per square foot (psf) by end-March, up from the 5 per cent quarter on quarter increase seen in the first quarter of 2007.

DTZ Debenham Tie Leung also sees more business park development projects in the pipeline.

In a report released yesterday, it said that the potential supply of business park space was 2.7 million sq ft as at end-2007, 10 per cent of total potential supply of private industrial space.

DTZ also noted that average monthly gross rents for business/high-tech industrial space rose 7.7 per cent quarter on quarter to $4.20 psf per month.

Generally, private industrial stock increased marginally by 0.7 per cent quarter on quarter to 299 million sq ft as at end-2007, with about 1.69 million sq ft of net lettable area of new private industrial space added in 4Q 2007, said DTZ.

However, DTZ has projected 7.13 million sq ft of new supply of private factory space for 2008. Subsequently, it is projecting a further 8.35 million sq ft, 2.77 million sq ft and 1.38 million sq ft for 2009, 2010, and 2011 respectively.

Office occupancy dips for two consecutive quarters

ISLANDWIDE office occupancy dipped in the first quarter of 2008, easing half a percentage point quarter-on-quarter to 97.1 per cent. The dip followed a 0.1 point drop in Q4 2007 from Q3.

A report by DTZ Debenham Tie Leung also shows that the average occupancy of office buildings in Raffles Place dropped half a percentage point to 97.8 per cent in Q1 this year, while that in Marina Centre increased by 0.7 percentage point to 99.8 per cent.

DTZ attributed the slight dip in occupancy in Q1 2008 partly to the completion of two office buildings. The Central and VisionCrest Commercial added 538,100 sq ft of new office space that raised islandwide office stock one per cent quarter-on-quarter to 56.6 million sq ft.

It is understood that the new buildings are not fully leased yet.

The drop in occupancy is corroborated by data from the Urban Redevelopment Authority, which shows vacancy rates in the office sector - both private and public - remained at 7.3 per cent in Q3 and Q4 2007 after falling steadily since Q4 2003, when the rate hit 17.9 per cent in the wake of the Sars crisis.

Office rents have, however, continued to increase, with fresh record highs of $20 and $21 per square foot per month (psf pm) registered at 6 Battery Road and Republic Plaza in the first quarter of this year.

For prime office space in Raffles Place, average monthly gross rent was up 13.9 per cent quarter-on-quarter to $18.80 psf pm.

DTZ executive director Cheng Siow Ying said: 'Although some occupiers are beginning to exercise caution in their medium-term leasing requirements, demand continued to be supported (in Q1) by occupiers requiring space in the immediate near future.'

But she added: 'Growth in rental values is expected to moderate this year after a record increase in 2007.'

With an estimated 615,500 sq ft of space coming on stream, DTZ says 64 per cent has been pre-committed.

It notes that potential supply between 2008 and 2012 is forecast at 10.2 million sq ft of net lettable area, with 23 per cent having been pre-committed. This excludes an estimated 484,000 sq ft of space that will be demolished for redevelopment.

The impending supply will likely have an impact on occupancy rates.

Cushman and Wakefield (C&W) said the prime office vacancy rate was 1.1 per cent at end-2007 based on its basket of properties. It projects overall occupancy rates for 2008, 2009 and 2010 of 93.5 per cent, 95 per cent and 93 per cent respectively.

C&W managing director Donald Han said he has noticed that 'take-up is not as fast'. However, he reckons that the outlook will remain positive until after the first half of 2009, with Grade A office rents rising a further 16.5 per cent this year.

After that, he believes 'there will be more anticipation with tenants signing leases at moderated rents'.

Purchasing index slips to lowest level in 5 years

While recent industrial output figures have been promising, one key manufacturing indicator has skidded.

The purchasing managers' index (PMI) - usually seen as an early barometer of manufacturing - not only dipped into the contractionary zone in March, but is also at its lowest level in almost five years.

After nine months of expansion and one month at the 50-point threshold, the index lost 0.9 of a point last month to 49.4, denoting contraction. The last time the PMI was this low was May 2003.

The electronics PMI also lost half a point in March but is still hovering in the black at 50.7.

According to the Singapore Institute of Purchasing & Materials Management (SIPMM) - which polls purchasing executives at more than 150 manufacturing firms every month to produce the indices - a decline in new orders, output, imports and employment led to the drop in the March PMI.

Electronics manufacturers apparently enjoyed brisk demand from domestic - but not overseas - customers.

The PMI is supposed to be a leading indicator of manufacturing. But the recent numbers - which show slowing momentum since December last year - appear to be out of sync with official industrial output figures, which rebounded strongly this year.

February's industrial output growth was particularly strong, raising the first two months' growth average to a robust 11.5 per cent - and prompting hopes of strong first-quarter GDP data.

But March's PMI come-down does not bode well, if indeed it is indicative of manufacturing performance. Perhaps the link between the PMI and the official industrial production index should soon become more apparent.

According to SIPMM executive director Janice Ong, manufacturers remain cautious about the business outlook and do not wish to over-commit themselves in stocking up raw materials or finished goods. Hence the big drop in March output after 10 months of expansion.

Even electronics manufacturers enjoying stronger demand and growth prospects are 'still managing their business activities with extreme care' and are loathe to over-stretch their resources.

Flatted factory rents boosted by office space crunch too

BUSINESS park space is not the only industrial sector benefiting from the spillover effects of the office space crunch.

According to a report by Colliers International, the light industrial factory segment is also beginning to experience some of this spillover effect.

Monthly gross rents of prime conventional flatted factories in central Singapore for Q108 increased by 11.8 per cent for ground floor space and 10.6 per cent for upper floor space on a quarter-on-quarter (QoQ) basis to $2.36 psf and $1.77 psf respectively.

The QoQ increase in rents for Q108 were also higher than the increases in Q407 which saw ground floor space and upper floor space both increase by 6 per cent. Colliers director (industrial sales and leasing) Tan Boon Leong said demand from 'qualifying office users' had resulted in the increased popularity of conventional flatted factories in the Bukit Merah/Alexandra Road locality. He added: 'The proximity to the CBD has made these industrial properties an ideal alternative for qualifying office users, especially those who do not require exceptionally high building specifications, and are looking for cheaper business premises.'

Colliers believes some of these users are likely to come from the service industries including design agencies, IT-related support firms, and engineering firms. Mr Tan said that demand for such space was so high that newer and more modern flatted factories such as Cendex Centre and E-Centre commanded average monthly gross rents of $3.20-$4 psf in Q108.

Cendex Centre, which is on Lower Delta Road, also saw units selling at an average of $610 psf, with the highest price of $680 psf achieved in February.

As such, Colliers projects rents for conventional factories to increase by up to 15 per cent for the rest of 2008. High-specification industrial space and business park space will, however, remain star performers in the industrial sector with rents expected to rise up to 20 per cent for the rest of the year due to the spillover demand from the office sector.

Average monthly gross rents for high-specification industrial space rose 16 per cent in the quarter to $3.98 psf with popular space in Alexandra Road and Changi Business Park commanding average monthly gross rentals of around $4.80 psf.

Strong demand for logistics space from third party logistics service providers and industrialists also saw average monthly gross rents of prime warehouse space rise 13 per cent for ground floor space and 7.5 per cent for upper floor space in the quarter to $2.35 psf and $1.72 psf respectively.

Average power prices fell last year despite oil hikes

AVERAGE Singapore electricity prices dipped in 2007 after climbing for two consecutive years, a just released market report by the Energy Market Company showed. This is despite sharply higher oil prices and record high electricity demand here last year.

This was attributed to efficiency gains and increased competition among the generating companies (gencos), spurred by the entry of new player Keppel Merlimau Cogen.

This led to the average Uniform Singapore Electricity Price dipping by 6 per cent to S$124.57/MW hour last year, after climbing from $82.35 in 2004 to $109.90 in 2005 and $132.42 in 2006.

The fall in average electricity price came despite the oil benchmark for the electricity industry here - 180 centistoke high sulphur fuel oil - rising by 18.7 per cent from 2006.

In tandem with higher GDP growth, electricity demand here also rose, the EMC report said, with peak demand rising to 5,782 MW in 2007 from 5,452 MW in 2006.

EMC chairman Tan Soo Kiang noted that overall, the electricity market performed well in 2007 showing 'continuous growth, ongoing changes and increased competition'. This 'helped keep electricity prices competitive as efficiency gains and competition among the generating companies cushioned the impact of high oil prices on electricity prices', he added.

The market attracted new investment in generation capacity with total installed capacity up 19 per cent since 2003. In fact, the entry of new genco Keppel Merlimau Cogen (with 498 MW capacity) last year was one of the factors that led to the fall in the average electricity price here, he said.

Keppel Merlimau's entry boosted availability of electricity offered - to above 4,900 MW - from more efficient combined cycle gas turbines here. This contributed to lower electricity tariffs. On the other hand, steam turbine offer availability shrank a further 1.4 per cent last year.

The EMC report also noted that new investment and market players will be entering Singapore following Temasek Holdings' divestment of the three biggest gencos here.

This has already started with China's largest power producer, the China Huaneng Group, buying over Tuas Power for $4.2 billion last month. The 2,670 MW genco recently told BT that it was planning to 'repower' its steam turbines with investments in either more cost-efficient combined cycle gas turbines or coal-firing units.

Next will be the sale of the largest genco here - Senoko Power (3,300 MW) and PowerSeraya (3,100 MW). Intra-industry, the entry of newcomer Keppel Merlimau, which captured a market share of 6.4 per cent last year, reduced the incumbents' share.

While Senoko (29.7 per cent) continued to claim the highest market share, this was down 2.49 per cent from 2006. Tuas Power (24.5 per cent) and Semb- Corp Cogen (9.4 per cent) were similarly affected with reductions of 1.6 per cent and 1.4 per cent respectively. The impact on PowerSeraya (27.7 per cent market share) was more moderate, the EMC said, with a 0.62 per cent decline in generation market share.

In total, $5.26 billion of electricity was traded in Singapore's wholesale market, or 1.43 per cent, marginally less than in 2006.

S'pore's Feb factory output falls 2.3% from Jan

Singapore's February manufacturing output unexpectedly fell a seasonally adjusted 2.3 per cent from January, data showed on Wednesday, reflecting weaker-than-expected performance by the pharmaceuticals sector.

From a year earlier, factory output in February rose 10 per cent, the Economic Development Board said in a statement, compared with a market forecast for a 9.1 per cent rise.

Electronics production, which accounts for a third of Singapore’s total factory output, rose 5 per cent in February on a seasonally adjusted basis, the EDB said.

Five economists in a Reuters poll had forecast output would rise a seasonally adjusted 1.5 per cent in February from January, on predictions that strong gains in pharmaceuticals would offset weaker electronics production.

However, some economists said it was too early to bet on a recovery in the lacklustre tech sector, which lagged growth in Singapore's overall economy last year.

'The figures show that we got a rebound in the first quarter, putting off a technical recession,' said Song Seng Wun at CIMB. 'The financial turmoil in the markets may only hit home going into the second half of the year.'

Manufacturing accounts for about a quarter of Singapore's US$164.7 billion, trade-dependent economy in 2007.

Singapore's inflation hits 6.5% in Feb

The Consumer price index (CPI) rose 6.5 per cent in February from a year earlier - just shy of the 25-year high of 6.6 per cent reported in January - as the cost of housing, food, transport and communication increased, data released yesterday by the Department of Statistics (DOS) shows.
This prompted the Ministry of Trade and Industry to issue a second statement in two months saying that underlying inflation remains stable, as indicated by the three-month moving average (3MMA) CPI, which grew 0.8 per cent month- on-month in February.

It noted that 3MMA, which picked up in the middle of 2007, has stayed around 0.8 per cent since then.

'The underlying inflation momentum is expected to decline during the course of the year,' it said.
The ministry issued a similar statement in January when the CPI surged to a 25-year high.

Led by more expensive accommodation and electricity tariffs, the cost of housing jumped 8.8 per cent in February from a year earlier.

Food prices rose 6.7 per cent on the back of higher prices for cooked food, milk products, fresh poultry, fruit and bread.

Higher petrol prices, taxi fares and car prices drove costs of transport and communication by 7.6 per cent year on year.

On a month-on-month seasonally adjusted basis, the CPI rose 0.2 per cent in February from January. For the first two months of this year, the CPI increased 6.6 per cent from a year earlier.

Economists note that while an upside risk to the CPI remains, an expected easing in the second half of this year will allow the index to fall within the government's official forecast of 4.5-5.5 per cent. Hence, monetary tightening by the Monetary Authority of Singapore in April is unlikely, they say.

'Clearly, the downside risk to growth is probably greater now,' said Citi economist Kit Wei Zheng. 'With policy makers being aware of that, I think further tightening is not the way to go.'

Mr Kit said he expects the CPI to stay above 6 per cent in the first half of this year before moderating to around 4 per cent in the second half when the effect of the two percentage point hike in goods and services tax wanes and the high base of comparison for commodity prices in the second-half 2007 kicks in.

'While the year-on-year figure looks rather daunting, exaggerated by the low base a year ago, we can take comfort that the rate of growth is stable or slowing,' added CIMB-GK regional economist Song Seng Wun.

CIMB-GK is keeping its full-year CPI forecast the same as the government's estimated range, while Citi recently raised its projection from 5 per cent to 5.4 per cent.

Across different income groups, the top 20 per cent of households have felt the most heat from the higher inflation climate, according to DOS's household survey.

The CPI for the top 20 per cent income group rose more sharply, from 0.4 per cent in 2006 to 2.3 per cent in 2007 on the back of higher costs of holiday travel, car and petrol, which have relatively larger weightings in this group than the lower-income groups.

This compares with a 2 per cent year-on-year increase in the CPI for the lowest 20 per cent income group and middle income group, from 1.8 per cent and 1.1 per cent in 2006.

For the whole of last year, the inflation rate for general households - the central 90 per cent of households by expenditure - was 2.1 per cent compared with one per cent for 2006, as the cost of food, holiday travel, accommodation (rented and owner-occupied), university tuition fees, taxi fares and petrol rose. The CPI rise also reflected a one-off increase in GST in July last year.

S'pore's Feb CPI rises 0.2% from Jan

Singapore's consumer prices rose an expected seasonally adjusted 0.2 per cent in February from January, Government data showed on Monday, while annual inflation edged lower from a 25-year high seen the previous month.

From a year earlier, prices rose 6.5 per cent in February - off January's 6.6 per cent - reflecting higher costs for housing, food, transport and communication, the Department of Statistics said in a statement.

In a separate statement, the Trade Ministry said it was keeping its 2008 inflation forecast of 4.5-5.5 per cent.

'The underlying inflation momentum is expected to decline during the course of the year,' the ministry said.

Most economists had expected annual consumer prices to stay around 6.5 per cent in February as strong demand during the Lunar New Year holiday supported food and clothing prices.

Central banks across the world from China to the United States are fighting rising inflation as higher oil and commodity costs push up consumer prices.

A sub-index for housing costs jumped 8.8 per cent in February from a year ago while food prices, which carry the largest weighting in the index, rose 6.7 per cent.

The statement does not include seasonally adjusted figures for the sub-indices.

Electricity to go up by 5.7% in next quarter on higher oil prices

ELECTRICITY tariffs will go up by an average of 5.7 per cent from April 1 to June 30 due to higher fuel oil prices.

The hike, which is pegged to a higher forward fuel oil price of US$74.40 (S$103) per barrel, will mean an increase of 1.26 cents per kWh, said a statement from SP Services on Wednesday.

The forward fuel oil price is 12.25 per cent higher than the US$66.28 per barrel for the current quarter.

The electricity tariff is reviewed quarterly and adjusted accordingly in line with the fluctuation in the cost of electricity.

For the current quarter ending March 31, electricity tariffs went up by an average 5.94 per cent or 1.24 cents per kWh.

The tariff adjustments have been approved by industry regulator Energy Market Authority, said SP Services.

Feb non-oil exports rise 7.3%; electronics slide

SINGAPORE'S non-oil domestic exports put up a stronger showing in February, according to the latest trade figures released yesterday by the International Enterprise Singapore.

But last month's export gains - which came as the government trimmed its economic growth forecast - failed to impress because the year-on-year 7.3 per cent expansion, up from 2.8 per cent in January, was below expectations.

Private sector economists were looking for about a 9.4 per cent jump in non-oil domestic exports (NODX) on average.

'Due to the low base effect, we expected the year-on-year increase in NODX to just reach double digits in February,' said Sherman Chan of Moody's Economy.com in a brief report.

Month on month, NODX fell a seasonally adjusted 0.4 per cent in February, reversing an 8.4 per cent rise in the previous month.

As the American economy looks set to go into recession, the outlook for NODX in the months ahead is one of moderation, even though non-oil retained imports (NORI) of intermediate goods point to stronger production.

NORI rose 8.8 per cent last month, against a 0.1 per cent dip in January, according to IE Singapore.

NODX was also still expanding below its long-term potential.

'The underlying trend of NODX, as measured by the three-month average, appears to be turning once again but still remains largely in the doldrums,' said Prakriti Sofat of HSBC Bank in a note to clients.

According to IE Singapore, on a three-month moving average year-on-year basis, NODX rose 1.6 per cent in February, after a 1.7 per cent fall in January.

Moody's Economy.com forecasts that the United States will slip into recession in the first half of this year and that external demand for Singapore products will soften. 'As tech demand tends to be more income-elastic, Singapore's flagship electronic exports look set to remain sluggish in the near term,' it said.

Electronics domestic shipments continued to head south in February, declining for a 13th straight month. They dropped 1.3 per cent despite a low base.

'The decline of electronics domestic exports was due to falling domestic exports of consumer electronics, telecommunications equipment and bare PCB,' IE Singapore said in its report.

The outlook for electronics domestic exports is tipped to stay weak in the first half as the global economy becomes more uncertain, according to Ho Woei Chen of UOB Economics-Treasury Research.

But last month's NODX was still better than January's, thanks to stronger non-electronic domestic shipments that expanded by 14 per cent, up from 6.2 per cent the previous month.

'Growth of non-electronic NODX was led by higher domestic exports of pharmaceuticals, metallic ores and scrap, petrochemicals and measuring instruments,' IE Singapore said.

NODX shipments to the US, which fell 4.4 per cent in January, tumbled 5.2 per cent last month - the worst showing since September 2007. And there is little reason to expect improvement soon.

Domestic exports to Malaysia and Indonesia, among the major markets, also decreased.

But shipments to the European Union - Singapore's biggest market - bounced back from a 25 per cent fall in January to post a 5 per cent increase in February. According to IE Singapore, the top contributors to NODX growth last month were Hong Kong (up 37 per cent), Japan (up 24 per cent) and South Korea (up 28 per cent).