1.1 The Singapore authorities would like to thank the IMF team for the 2013 Article IV Consultation. The authorities would also like to express their appreciation to the Financial Sector Assessment Program (FSAP) team for a rigorous and comprehensive assessment of Singapore’s financial system. The discussions in both instances were constructive.
2 Recent Economic Developments and Outlook
2.1 The Singapore economy expanded through H1 this year, supported by the strengthening pace of activity in developed countries. Growth slackened in Q3 2013, however, with preliminary estimates indicating that GDP may have contracted by 1.0% in on a quarter-on-quarter, seasonally-adjusted annualised basis. This reflected both a broad-based cyclical pullback following the strong Q2 performance, as well as fresh external uncertainties—particularly over the timing of US Fed tapering and the challenges faced in some emerging market economies in the transition to less accommodative global monetary conditions.
2.2 Singapore’s near-term outlook will be mainly influenced by the divergent growth momentum in the advanced and emerging market economies. On balance, the external environment should be supportive of a pick-up in the Singapore economy. However, the authorities remain alert to the downside risks, as several legacies from the crisis remain unresolved globally even as new pressure points have emerged. The global recovery could be jettisoned by events such as a disorderly market response to the unwinding of unconventional monetary policies and/or a sharper than expected deceleration in real activity in China. On the domestic front, supply-side constraints could translate into larger-than-expected increases in business costs and constrain the upturn.
2.3 All in, Singapore’s GDP growth is projected at 2.5-3.5% for the whole of 2013, and is unlikely to be significantly different next year. This does not, however, rule out intermittent volatility in view of the uneven and still-fragile external demand conditions.
2.4 Inflation was modest in recent quarters due to benign cyclical factors. External price pressures were largely muted while domestic cost pass-through to consumer prices was generally contained. As a result, MAS Core Inflation, which excludes the costs of accommodation and private road transport, moderated for five consecutive quarters and averaged 1.6% in H1 2013. CPI-All Items inflation fell to 1.6% in Q2 2013 from 4.0% in the preceding two quarters as car prices also corrected sharply. More recently, however, businesses have passed on more of their cumulative cost increases to consumers alongside an improvement in economic conditions. As a result, MAS Core Inflation and CPI-All Items inflation rose to 1.7% and 1.8% respectively in Q3, with the latter being driven also by a recovery in car prices.
2.5 Over the next few quarters, while imported inflation is expected to remain subdued, the pass-through of higher domestic business costs to consumer prices could intensify as the economy gradually improves. MAS Core Inflation is thus expected to rise into 2014, and average 1.5-2% in 2013 and 2-3% in 2014. CPI-All Items inflation should also come in higher, and will be susceptible to swings as car prices adjust to vehicle-related policies. CPI-All Items inflation is projected at 2.5-3% for the whole of 2013, and 2-3% in 2014.
3 Monetary and Fiscal Policies
3.1 Singapore’s overall macroeconomic policy setting has been formulated to balance cyclical considerations with regard to growth and inflation, while facilitating the ongoing longer-term restructuring of the economy. MAS has maintained its current monetary policy stance of a modest and gradual appreciation of the S$NEER (Singapore dollar nominal effective exchange rate) policy band since April 2012, including in its latest policy announcement in October 2013. While short-term external demand uncertainties have emerged recently, domestic inflationary pressures remain at the fore given the tight labour market. The slight tightening bias of the prevailing policy is appropriate for anchoring inflation expectations and guarding against a wage-price spiral.
3.2 Singapore’s monetary policy framework is sufficiently flexible to accommodate short-term financial market volatility and external shocks to the economy, by allowing the S$NEER to adjust within its policy band. At the same time, the use of targeted macroprudential measures have been an important complement to monetary policy in responding to the unique circumstances presented by the extended period of low global interest rates, and to ensure sustainable credit practices and financial prudence in the economy (see section on Financial Sector Policies).
3.3 On the fiscal front, the FY2013 Budget announced in February continued to focus on supporting the economy’s ongoing restructuring process and fostering a more inclusive society. These included measures to incentivise businesses to improve productivity, and to mitigate the strains on cash flows during the transitional period. Further initiatives were introduced to promote social mobility and enhance progressivity. Pre-school subsidies for lower- and middle-income households were enhanced and more support was provided at school for disadvantaged students. In addition, there was an increase in the coverage and payouts of the Workfare Income Supplement Scheme which was introduced in 2007 to supplement the wages and retirement savings of low-wage workers and to encourage them to stay employed. The tax structure for properties and cars was also made more progressive, while one-off transfers were provided to households to alleviate the cost of living. These measures have resulted in a slightly expansionary fiscal stance in 2013.
3.4 The authorities would like to highlight the importance placed on both equity and financial sustainability, in the forward planning for increased budgetary expenditures such as in social spending. Singapore adopts a targeted approach to helping lower income groups through a range of government subsidies. For instance, while aggregate healthcare spending is largely privately financed, the government funds up to 80% of the bills of Singaporeans who are admitted to the subsidised wards in our public hospitals. This ensures that healthcare expenses remain affordable for all Singaporeans on a sustainable basis.
4 Financial Sector Policies
4.1 Singapore’s financial system was assessed in the FSAP to be well regulated and supervised. The locally-incorporated banks are in a strong financial position. Stress tests performed by both MAS and the FSAP team reaffirm that banks in Singapore remain resilient under adverse macroeconomic scenarios.
4.2 Over the last three years, Singapore saw an increase in credit growth but this has moderated more recently. The growth of non-bank loans given by Singapore banks was in line with economic growth in Asia and reflected Singapore’s role as a regional financial centre. Domestic credit growth was broad–based, spanning both household and corporate sectors. Singapore’s corporate and household balance sheets remain strong1, in particular with aggregate household cash and deposits alone exceeding household debt. While corporates in Singapore have increased leverage to finance business expansion amidst the low interest rate environment, the median debt-to-equity ratio is broadly comparable to those in similar economies and the median interest coverage ratio is amongst the highest in Asia.2
4.3 Nonetheless, the authorities have been concerned about pockets of vulnerability in the system. They have implemented various measures to encourage financial prudence by borrowers and strengthen credit underwriting practices by banks. These include restrictions on loan tenures and debt servicing ratios for property and motor vehicle loans, and restrictions on unsecured credit.
4.4 In particular, property-related measures have been calibrated to address the distinct sources of risk, and to minimise spillover effects of excessive property price cycles. The measures have been imposed on all banks, regardless of country of incorporation, as foreign bank branches account for a sizeable share of total housing loans. MAS complements these measures with rigorous supervision, including onsite credit inspections3 of the major banks in Singapore on a regular basis. The authorities remain vigilant and will implement additional measures where needed, while concurrently raising public awareness of the risks of imprudent borrowing.
4.5 Banks in Singapore are cognisant of the risks posed by their exposure to mortgages and conduct regular stress tests using severe property downturn scenarios. The mortgage risk weights applied by the locally-incorporated banks are appropriate to the asset quality in their portfolios. The overall non-performing loan (NPL) ratio on mortgages has historically been low, even during stress periods, and was 0.3% as at Q3 2013.4 This is partly because the bulk of these mortgages are for owner-occupied properties, for which the default experience has been low. The FSAP stress tests found the banks to be resilient even under severe property market stresses. In addition, Singapore-incorporated banks hold more capital for their mortgage portfolios as they are required to comply with total capital requirements that are 2% points higher than the Basel III minimum.5
4.6 As part of their macroprudential surveillance efforts, the authorities monitor the potential risks and impact that developments in global and domestic financial systems may have on macroeconomic and financial stability. This takes into account Singapore’s role as host to a large number of financial institutions with significant cross-border activities. In order to mitigate liquidity risks arising from the financial flows intermediated in Singapore, the authorities are looking to enhance the current risk-based Minimum Liquid Assets framework6 by adopting the Basel III Liquidity Coverage Ratio rules, with enhancements to suit domestic conditions.
4.7 Regarding cross-border issues, the authorities engage in a high level of cooperation with the home regulators of the foreign banks in Singapore so as to enhance their understanding of the banks’ overall risks. The authorities also participate actively in FSB-led initiatives on resolution and recovery planning for globally systemically important banks which aim to promote coordinated responses in crisis management.
4.8 Singapore’s resilience in the face of several financial crises is the best evidence of a track record of independent and effective supervision of financial institutions. MAS enjoys autonomy in financial supervision and its legal and institutional safeguards have worked well. As thinking on the appropriate institutional structures for effective supervision continues to evolve in various jurisdictions, the authorities will continue to review current arrangements to sustain a track record of supervisory resilience.
5 Medium-term Economic Restructuring
5.1 Beyond the short-term economic and financial developments, the ongoing restructuring drive is imperative for laying the foundations for a productivity-led growth model. The shift into higher value-added activities will help Singapore to stay relevant in an increasingly competitive global landscape.
5.2 The authorities have adopted a multi-pronged approach to facilitate the transition of the economy. First, measures to incentivise businesses to raise their productivity through process improvements and technological innovation have been put in place. Second, significant investments are being made in continuous education and training to upgrade the skills of workers. These efforts, alongside the higher education attainments of younger cohorts, will allow Singapore to reap a human capital dividend in future years that will offset the slowdown in labour force growth, as well as lift incomes.
5.3 Third, the authorities have taken steps to avoid an excessive reliance by businesses on low-skilled foreign manpower. Notably, foreign worker policies are being tightened in steps so as to raise the relative price of low-skilled foreign labour, and to provide firms the incentives to make necessary investments in physical and human capital. The approach is a calibrated one which considers the circumstances of each sector and each category of workers. It also ensures that Singapore remains open to foreigners with the requisite skills to complement the Singaporean core in its workforce. Companies are also given time to adjust as the measures are announced in advance and progressively implemented. In addition, a three-year support package, which includes the Wage Credit Scheme, was introduced to ease the transition costs for businesses.
5.4 As the economy restructures over time, the productivity improvements from a more efficient use of factor resources will help relieve supply constraints, support potential output and real wages. The initiatives to promote social mobility and reduce income inequality will enable all segments of the population to benefit from growth.
6 Final Remarks
6.1 The external environment has improved, but the authorities remain vigilant to continuing external risks. They have the wherewithal to respond in a timely and appropriate manner to secure macroeconomic and financial stability. The authorities welcome the positive assessment of the financial system, and will review the FSAP assessment recommendations and follow-up as appropriate.
6.2 Over the longer term, the focus is on a progressive restructuring of the economy, with policies being subject to frequent review and feedback to take into account the pace of adjustments among firms and workers. Indeed, because of the openness of the economy and its limited resources, Singapore has always had to continually upgrade its industries and exports to more capital- and technology-intensive production to secure its competitiveness in world markets.
6.3 Finally, the authorities are pleased to inform the Executive Board that they agree to the publication of the full suite of reports, covering the 2013 Singapore Article IV Consultation Report, Selected Issues Papers, Financial System Stability Assessment report, the Report on Observance of Standards and Codes and the Detailed Assessment Reports.
The household debt-to-income ratio was 2.1 times in 2012, comparable to the ratio in most advanced economies despite Singapore’s high home ownership rates. This was significantly lower than the peak of 2.6 times seen about ten years ago.
The median interest coverage ratio for the Singapore corporate sector remains healthy at close to 6 times.
Recognizing the potential risks in the credit environment, MAS conducted thematic inspections of banks’ underwriting standards on residential mortgages in late 2012.
In addition, the average loan-to-value ratio of all outstanding mortgages is 47.5%. On an overall basis (i.e. combining both retail and wholesale exposures), the average risk weights of the locally-incorporated banks are around 45%, as at Q2 2013, on the higher end of average risk weights among banks globally.
Singapore has fully implemented the Basel III capital requirements, two years ahead of the timeline prescribed by the Basel Committee.
The risk-based Minimum Liquid Assets framework requires every bank to hold a minimum percentage of its qualifying liabilities in liquid assets.