Emerging markets are out of favor this year with heavy losses piling up in the space. The biggest bump was seen recently on increased chances of the Fed tapering QE3 and its impact on emerging market capital flows.
Additionally, the widening current account deficits, rising inflation, sluggish export and political disorder are dulling the appeal of emerging markets. The rising U.S. Treasury yields and the threat of turmoil in Syria spilling over have added further woes to these nations. These trends have pushed investors out of the emerging market securities, especially the currencies.
As such, emerging market currencies and related ETFs have been plunging against the U.S. dollar and other developed market counterparts. Among these, Asian currencies like Indian rupee, Indonesian rupiah, Brazilian real and Thailand baht have been the worst hit by this trend (see: all the currency ETFs here).
The news has also hurt developed market currencies in the region, such as the Singapore dollar. This currency is heavily dependent on trade, so weakness in some of its key neighbors can have a negative impact on this city-state.
In such a backdrop, the Singapore dollar, as represented by the CurrencyShares Singapore Dollar Trust (FXSG) is also bearing the burnt, having fallen more than 2% in August. This slump has led to widespread concerns about whether the currency ETF would rise on the recovering global economy or if it will follow its neighbors.
Basically the movement of the any country currency depends on its economic growth prospects. So, let’s dig into the Singaporean economy and its growth prospects in detail to find the answer.
Singaporean Economy: Bright Spot
Singapore – the business hub of Southeast Asia – appeared back on track in the second quarter buoyed by a series of solid economic data that suggested bad times might be over for this nation.
The economy rebounded nicely after the slowdown in the last two years, posting growth of 3.8% year over year in the second quarter. This marked the strongest growth in three years and a remarkable improvement from 0.2% growth in the first quarter.
This impressive performance was mainly driven by an unexpected surge in the manufacturing and service sectors. The manufacturing sector grew 0.2% against 6.7% contraction in the previous quarter while the service sector rose from 2.7% to 5.5% in the second quarter (read: Are Singapore ETFs Back on Track?).
Based on the recovering economy, the Singaporean government lifted the growth outlook from 1–3% to 2.5–3.5% for this year and the central bank slashed its inflation forecast for 2013 to the range 2–3% from 3–4% predicted previously. As such, the nation is seemingly recovering from the twin attacks of slow growth and heightened inflation.
Further, the nation is running at low inflation (1.6% in Q2), impressive unemployment (2.1% in Q2) as well as strong trade surplus (19% of GDP) compared with many of its neighbors that made it a compelling choice for investment.
Being a trade dependent economy, Singapore’s growth is vulnerable to the declining exports to Europe, Asia and the U.S. A sharp slowdown in China’s economy, continued weakness in Europe and the imminent winding down of the massive U.S. economic stimulus measures would remain the major headwinds to exports and economic growth in the second half of the year.
The biggest risk to the country’s growth story is the possible housing bubble. The household debt and property prices are rising at an unprecedented level, posing significant threat to the country’s financial system. The Singapore household debt increased from 64% of GDP in 2007 to 77% of GDP currently, just behind South Korea (88%) and Malaysia (80.5%).
However, unlike America or Japan, this situation seems under control, with the government taking several steps to cool down property market and safeguard households from being over leveraged.