The Monetary Authority of Singapore has given locally domiciled asset managers a pat on the back, describing their 1.2% year-on-year dip in overall AUM for 2011 as “not bad” considering market volatility.

However, in releasing its annual report for the year to end-March 2012, MAS revealed that while it had made foreign investment gains of S$12.1 billion ($9.6 billion) for the 12 months, its profit stood at just S$2.8 billion because of the strength of the Singapore dollar.

The dollar appreciated against most currencies during the year – 0.3% against the US dollar and 6.4% against the euro – although it weakened 0.4% against the yen.

Singapore has maintained a tight monetary policy for the past two years to counter rising inflation. The CPI All-Items inflation jumped from 2.8% in 2010 to 5.2% in 2011 before moderating slightly in the first five months of 2012. Core inflation (which excludes the cost of accommodation and private road transport) was 2.2% in 2011 and 3% to May 2012.

Since April 2010 MAS has set its trade-weighted dollar policy band on a gradual appreciation path, and in April this year it increased the slope of the policy band further.

The authority’s managing director, Ravi Menon, told a results conference that if appreciation had not taken place, CPI-all items inflation would have hit 6.5-7% this year, against the 4-4.5% that MAS is projecting.

“We were concerned when core inflation came in at 3.1% in the first quarter of this year,” confirmed Menon. “This reflected high commodity prices and the pass-through of strong wage growth in 2011.”

However, he noted that core inflation had moderated in the second quarter to 2.7% and said it was likely to ease further to approach 2% by the end of the year – against a historical average of 1.7% – amid falling food and petrol prices.

“In sum, the exchange rate is taking longer than usual to moderate inflation, but it remains our broadest and most effective anti-inflation tool,” added Menon.

In terms of the nation’s GDP outlook, the authority is forecasting whole-year growth of 1-3%, despite a first half in which the economy expanded 4.2%.

That comes amid what Menon described as a synchronised global economic slowdown, and even then its forecast is based on no recession in the US, no major escalation of the eurozone crisis and no “hard landing” in China.

He did acknowledge that the key risk facing Singapore’s economy and financial system was the eurozone crisis, adding the city-state had to be prepared for a more adverse turn of events.

The eurozone is Singapore’s largest export market, and its exports to the zone have been declining since the third quarter last year.

MAS sees the possibility of larger and more volatile capital flows, which could put upward or downward pressure on the Singapore dollar.

While Menon says financial institutions have limited direct exposure to peripheral Europe, he concedes that if the crisis spreads to the bloc’s core then the contagion would be larger.

Nevertheless he described Singapore’s financial centre as well positioned for growth, largely through activities tied to Asian demand.

“Asia’s demand for financial services will continue to be driven by rapid urbanisation, the demographics of a growing middle class and the rise of regional multinational companies in need of funding,” said Menon.

He noted that at the end of last year Singapore-based asset managers had total assets of S$1.34 trillion. While this represents a 1.2% drop from 2010, he suggested it was not bad considering the weak performance of global equity markets and market volatility in general.

“We have seen a more diversified base of asset managers offering a greater variety of investment strategies,” he stated, noting that the number of investment professionals in Singapore increased 15% last year.

“And we continue to see strong interest from global fund houses seeking to set up or expand their Asian presence.” He added that 26 of the top 30 global asset managers had a presence in the Lion City.

As evidence of Singapore’s progress and potential, he also pointed to a 9% year-on-year increase in the outstanding stock of corporate debt (in local and external currency) to S$203 billion as at the end of 2011. The authority has moved to deepen this market.

Menon noted, too, that Singapore dollar bond issuance remained steady at S$25 billion last year, compared with S$26 billion in 2010, while non Singapore-dollar bond issuance grew 110% over the period.

Overall MAS saw its total assets rise by S$19.4 billion to S$319.2 billion in the financial year ended March 31, 2012. Total liabilities increased by S$8.7 billion to S$284 billion as the amount owed to the government and currency in circulation grew.