Money supply growth to support the Singapore economy
and stock market
7 June 2001
The latest money supply figures provided by the Monetary Authority of Singapore (MAS) show healthy increases for all three monetary indicators.
M1, or narrow money, which consists of cash in circulation and current accounts, jumped almost 12 per cent year-on-year, after a growth of 8 per cent in March and 11 per cent in February and January.
M2, which consists of M1 plus fixed deposits and negotiable certificates of deposit, rose 4.7 per cent in April, after year-on-year growth of 2.2 per cent in March and 1 percent in February.
M3, which comprises M2 plus time deposits with finance companies, grew 3.2 per cent year-on-year in April, after a marginal 0.8 per cent growth in March. M3 had declined 0.2 per cent in February and 1.2 per cent in January. April's M3 was 0.7 per cent higher than that in March and was also the highest for the past few years.
The apparent turnaround in money supply trends suggests that the trend of continual downward revisions in the forecasts of Singapore's economic growth rate for 2001 may be coming to an end. Based on the latest MAS survey of professional forecasters, the consensus estimate of Singapore's real GDP growth rate for 2001 is 3.5 percent. Growth in M1 of 8 percent or more have more often than not in the past been associated with better GDP growth rates. So the strong growth in M1 suggests that a weaker economic growth rate is unlikely unless M1 deteriorates again.
Of greater interest to investors is that the end of the downward revisions to forecasts of Singapore's economic growth rate and the corresponding improvement in visibility for corporate profits may give investors the confidence to get back into the stock market. Therefore, there is a high probability that the stock market will bottom soon -- if it has not already done so -- and that it will end the year higher than current levels.
Based on valuation, the Straits Times index (STI) is easily worth over 2000 points. However, how fast the STI moves to its fair valuation depends on the growth rate of the economy and corporate profits. The stock market movement over the rest of this year depends as much on next year's economic outlook as this year's. The current forecast for 2002 real GDP growth is 6 percent. While an improvement over 2001, it is only average by Singapore's standard. It may not excite investors enough to push the STI up over the 2000 level. Therefore, the STI will probably end the year between 1900 to 2000, or around where it started it.
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