Singapore may overtake China as Asia's fastest-growing economy this year, increasing the attractiveness of the city state's stocks and putting pressure on policy makers to check inflation with a stronger currency.
Gross domestic product of the Southeast Asian island will rise 10.8 percent in 2010, according to the median of 13 estimates in a Bloomberg News survey before the July 14 second- quarter GDP report. By comparison, Goldman Sachs Group Inc, BNP Paribas and Macquarie Group Ltd have cut estimates for China to at most 10.1 percent in recent weeks.
An acceleration in pharmaceutical output and the opening of two casino resorts boosted growth in the first half, the result of Singapore's efforts to diversify sources of expansion beyond electronics exports. The push to bolster services may sustain the economy and support investment that spurred the island's benchmark stock index to outperform counterparts in Chinese mainland, Taiwan, Japan and Australia this year.
"Singapore has unique growth characteristics of its own as a function of having some new areas of growth," said Manraj Sekhon, the London-based head of international equities at Henderson Global Investors Ltd, whose firm oversees about $94 billion in assets, including shares in Singapore companies.
Henderson has "meaningful positions" in Singapore-based companies such as Wilmar International Ltd, the world's largest palm-oil trader, and Keppel Corp, the biggest maker of shallow- water rigs, he said. Its holdings of Singaporean stocks, also including CapitaLand Ltd and casino operator Genting Singapore Plc, are "close to the highest positions we've had," he said.
Singapore's benchmark stock index has climbed 28 percent in the past year, more than Hong Kong's Hang Seng and Taiwan's Taiex, while the Shanghai benchmark has fallen 22 percent.
Faster growth may prod the Monetary Authority of Singapore to do more at its next policy review in October, according to Kit Wei Zheng, an economist at Citigroup Inc in Singapore. Wage pressures are increasing and inflation may reach 5 percent by the end of 2010, from 3.2 percent in May, he said.
"There are now higher odds for the MAS to tighten further in October via a steeper appreciation" of the Singapore dollar, he said. Citigroup, which predicts Singapore's GDP will advance 12.5 percent this year, says there are upside risks to its forecasts and the expansion may be as much as 15 percent.
The central bank uses the Singapore dollar instead of interest rates to manage inflation, and on April 14 allowed a revaluation and shifted to a stance of gradual appreciation. The currency rose as much as 1.2 percent on the day of the MAS announcement, before slipping the following month as Europe's debt crisis threatened to slow the global expansion.
Against the US dollar, Singapore's currency strengthened 0.4 percent to S$1.3836 as of 4:30 pm local time yesterday, compared with a high for the year of S$1.3649 on April 30. It may advance to S$1.36 by year-end and S$1.33 at the end of 2011, according to the median forecasts in Bloomberg News surveys.
Singapore's ties to the global economy mean it's unlikely to escape the impact of any renewed slowdown. Governments in Europe are embarking on austerity programs to cut budget deficits and households in some of the world's largest economies are holding back spending, clouding the outlook for the rebound.
"Some cracks are starting to show in the global economy," said Alvin Liew, a Singapore-based economist at Standard Chartered Plc. "Drugs and tourists likely boosted second- quarter growth above the first quarter but a Jekyll-Hyde year may see a weaker second half. Life can become very unpredictable" if you rely on pharmaceuticals and "start dabbling in casinos," he said.
The performance of Singapore's pharmaceutical industry is volatile as production swings by companies such as Sanofi- Aventis SA can cause industrial output to fluctuate.
Prime Minister Lee Hsien Loong's government has raised the island's GDP forecast twice this year as tourists arrive in record numbers, companies increase hiring and vessels leave the city's ports carrying more cargo. The economic rebound has caused inflation to accelerate as rising demand stokes home and car prices.
Singapore is likely to become Asia's fastest-growing economy this year, according to Credit Suisse Group AG and Oversea-Chinese Banking Corp. Forecasts for the island's expansion this year range from 9.7 percent to 13 percent among the economists surveyed by Bloomberg.
Estimates by Goldman, BNP Paribas, Macquarie and China International Capital Corp for China's 2010 growth range from 9.5 percent to 10.1 percent. The government in Asia's second- largest economy is scheduled to release second-quarter GDP figures on July 15.
The last time Singapore's GDP rose more than China's was in 2000, according to data compiled by the International Monetary Fund.
Singapore's manufacturing increased an average 45 percent in the first five months of 2010, after declining an average 13 percent in the same period last year. Pharmaceutical output has at least doubled every month from March to May.