This Selected Issues paper examines the behavior of savings and investment from an Asian and Singaporean perspective. It builds and estimates two econometric models that relate savings and investment to a range of macroeconomic and structural variables. The paper examines the relationship between labor market developments and private consumption behavior, and notes that employment uncertainty did have a significant negative impact on consumption and raised precautionary savings. It also examines quantitative, industry-level measures of the intensity of domestic competition in the manufacturing and services sectors during the past two decades in Singapore.


This Selected Issues paper examines the behavior of savings and investment from an Asian and Singaporean perspective. It builds and estimates two econometric models that relate savings and investment to a range of macroeconomic and structural variables. The paper examines the relationship between labor market developments and private consumption behavior, and notes that employment uncertainty did have a significant negative impact on consumption and raised precautionary savings. It also examines quantitative, industry-level measures of the intensity of domestic competition in the manufacturing and services sectors during the past two decades in Singapore.

I. Savings and Investment: An Emerging Asian and Singaporean Perspective1

A. Introduction

1. In the aftermath of the 1997 crisis, emerging Asia’s saving-investment balance shifted from a small deficit to a significant surplus, mainly reflecting a fall in investment. Several factors contributed to this decline, including a buildup of excess capacity in the run-up to the crisis, the bursting of the real estate bubble, corporate over-leveraging partly resulting from the widespread currency depreciation, and a postcrisis macroeconomic environment characterized by increased uncertainty.2

2. The subsequent very sluggish investment recovery has led to sustained current account surpluses. While the sharp drop in investment in the immediate aftermath of the crisis could be expected, it is more difficult to explain the very sluggish investment recovery in most countries in the region. With some of the important factors behind the initial drop ebbing and a prolonged period of strong economic growth following, investment should expectedly have picked up and Asia’s postcrisis large saving-investment surplus should have declined. Instead, eight years after the crisis, emerging Asian countries have, with few exceptions, investment rates well below their precrisis peaks and falling short of their historical averages.

3. Singapore is no exception to the postcrisis investment drought. While Singapore was not affected as severely by the Asian crisis, it still experienced a sharp reduction in construction-related investment. Moreover, since the Asian crisis, domestic investment rates have been held down by additional external shocks hitting the economy (the bursting of the technology bubble in 2000/01 and the SARS outbreak in 2003) and the rise in outward investment, including by the government. However, since Singapore was running large current account surpluses well in advance of the Asian crisis, its savings-investment balance should also be seen in a longer-term context. The saving-investment balance has been consistently improving since the early 1980s reflecting the transition to an industrialized economy with the associated expansion of the savings base and less need for investment growth to build up productive capacity and infrastructure. Moreover, the deliberate pursuit since the 1980s of a very prudent fiscal policy to build up fiscal reserves combined with demographics have supported savings.3

4. Empirical analysis at the regional level and for Singapore points to an ‘investment drought’ as an explanation for the increase in the savings-investment imbalance in the post-Asian crisis period, rather than a “saving glut.” In particular, our cross-country analysis finds, coinciding with the Asian crisis, a structural break in the relationship between investment and its determinants, which does not find a counterpart in the savings equation. Evidence of investment drought is also found in the country-specific analysis for Singapore, although the high savings rate in Singapore is an important factor in explaining the savings-investment surplus over the long term.

5. Looking ahead, the saving-investment gap is expected to narrow. Private savings are expected to decline as the economic expansion in emerging Asia, including Singapore, continues. Moreover, over the medium term, aging is expected to lower savings as the average propensity to save decreases, although households might choose to save more in the period immediately before aging becomes more prominent. Public savings, however, might increase as governments prepare for the impact of aging, although this is not expected to play a material role in Singapore given the already very high levels of fiscal reserves. Investment is expected to increase as many of the factors inhibiting investment growth fade, although it might be difficult to reach pre-Asian crisis levels of investment.

B. Background

6. current account balances of Asian countries have shifted significantly over the past decade (Figure 1). In the years immediately prior to the crisis of 1997-98, emerging Asian economies were running current account deficits equivalent to over 1 percent of GDP on average (and over 3 percent when excluding China and Singapore). Singapore, on the other hand, ran large current account surpluses in excess of 15 percent of GDP. After the crisis, current account balances in emerging Asian economies swung to large and sustained surpluses, averaging around 3 percent of GDP since 1998. In the case of Singapore, the current account surpluses also increased, averaging 18 percent of GDP over the same period. The counterparts to the adjustment in current account balances are movements in underlying saving and investment behavior.

Figure 1.
Figure 1.

Emerging Asia and Singapore: Saving-Investment Trends

Citation: IMF Staff Country Reports 2006, 151; 10.5089/9781451834253.002.A001

7. Saving rates have been relatively stable in Asia, albeit at higher levels than in other regions. Over the past 15 years, gross savings in Asia have averaged around 30 percent of GDP, about double the level in the United States, and 50 percent higher than in the Euro area:

  • In emerging Asia (excluding China and Singapore), savings dipped slightly during the Asian crisis, reflecting a sharp and sustained decline in public sector savings, but was subsequently offset by an increase in private savings above the precrisis levels.

  • Singapore’s saving rate has been very high relative to other countries, including in the postcrisis years. Savings (both public and private—as derived by IMF staff) increased more or less without interruption from the mid-1980s to around the onset of the Asian crisis when they fell back to the levels prevailing in the late 1980s. Much of Singapore’s private savings are undertaken by corporations (including Government-Linked-Companies (GLCs)) at around 25-30 percent of GDP, reflecting the large share of profits in national income. Household savings are comparable to international levels at around 8-10 percent of GDP, of which net savings through the mandatory saving program (CPF) accounts for around 2½ percent of GDP. However, households save a relatively large portion of their disposable income, around 20 percent.

8. Investment in Asia as a whole dipped during the Asian crisis and has failed to return to precrisis levels. That said, investment has been, and still is, higher than in other regions:

  • Investment rates in emerging Asia (excluding China and Singapore) collapsed sharply during the crisis (by 8 percentage points of GDP between 1996 and 1998). Investment rates have remained depressed since the crisis, having risen by only 2 percentage points of GDP from 1998 levels with private investment still below precrisis levels. Domestically financed investment has experienced the sharpest decline; after dipping slightly, FDI has returned to precrisis levels.

  • In Singapore, investment started falling around the time of the Asian crisis, driven mostly by a drop in construction-related investment. Historically, investment increased rapidly during the 1970s as the economy transitioned to NIE status and as large infrastructure investment was undertaken. The investment rate subsequently fell significantly during the 1980s as large infrastructure investment was completed and investment to build up productive capacity slowed. The investment slump was reversed during the 1990s with construction investment again picking up strongly, resulting in a large buildup of residential and office supply prior to the Asian crisis. With the onset of the crisis, investment fell and especially construction-related investment, while investment in equipment remained more stable. The technology bubble burst in 2000/01 pushed the decline further, as investment in equipment and inventories, especially by the important electronics sector, fell. Interestingly, real investment rates fell less than nominal rates, particularly in the case of equipment investment where investment rates have increased recently. This possibly reflects the drop in capital equipment prices (including IT) also experienced in other countries and reflecting relative technological progress.


Singapore: Real Gross Fixed Investment

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 151; 10.5089/9781451834253.002.A001

9. These developments point to an ‘investment drought’ in emerging Asia and Singapore, rather than a ‘saving glut’ as an explanation behind the rise in the savings-investment balance in the post-Asian crisis period. As noted above, the adjustment in investment in the immediate aftermath of the crisis dwarfed the drop in savings. In a longer perspective, the decline in investment of 3 percentage points of GDP between the 1990-97 average and 2004 in emerging Asia (excluding China) almost fully explains the increase in the saving-investment balance over this timeframe, with the private sector bearing the bulk of the adjustment.

C. Explaining Developments in Savings and Investment

10. This section conducts a quantitative analysis of the determinants of savings and investment. First, a cross-country analysis is undertaken to get a sense of developments in emerging Asia (including Singapore) relative to the rest of the world and to gauge the importance of the Asian crisis on the determinants of savings and investment. Second, regressions are run for Singapore to assess the possible importance of country-specific factors.

Empirical Analysis

Cross-Country Regression

11. This section examines the behavior of savings and investment in a panel of countries. It builds and estimates two econometric models that relate savings and investment to a range of macroeconomic and structural variables. The models build on a large empirical literature on the determinants of savings and investment. In particular, they borrow heavily from the specification recently used in Cardarelli and Terrones (2005).

12. The empirical estimation employs a dynamic panel methodology. The GMM approach developed by Arellano-Bond (1991) produces an unbiased estimator while including a lagged dependent variable and allowing the constant term to change across countries and over time. Time-varying and country-specific constant terms are necessary because of the high degree of macroeconomic heterogeneity of the countries in the sample and the substantial economic development occurring over the sample period.

13. A data set covering 45 industrial and developing countries from 1971-2004 is used. Both models are estimated for the full set and then for a sub-set of nine Asian countries, including Singapore.

14. In the savings equation for the full sample, the following variables proved significant (Table 1, column 1):

Table 1.

Savings (GMM Estimator, country- and time-specific fixed effects)

article image
  • Higher per capita income growth is associated with higher saving rates. A sustained one percent increase in per capita output growth is associated with only ½ percent increase in the saving rate.4

  • Higher public savings only partially offset private savings. The coefficient of the public saving rate is positive and significant implying that the Ricardian equivalence does not hold. In the long run, a 1 percent sustained increase in public savings is associated with a 0.7 percent increase in total savings.

  • Saving rates tend to be lower in countries with high credit-to-GDP ratios. This may reflect lower precautionary savings in countries with more developed financial systems and, hence, easier access to credit.

  • Terms of trade shocks are positively associated with the saving rate. This behavior is consistent with the permanent income hypothesis to the extent that these shocks are often perceived as temporary.

  • Finally, saving rates are negatively associated with population aging. This is consistent with the life cycle consumption model. In the long run, a 1 percentage point increase in the elderly dependency ratio is associated with an decrease in the saving rate of about 1.2 percentage points.

15. The results for Asia differ significantly from those for the full sample (Table 1, columns 2 and 3). High saving rates are still associated with fast output growth, although with a larger long run multiplier. However, most of the coefficients that enter significantly the full sample regression do not appear to matter in our Asian sample. For example, consistent with a Ricardian behavior, public savings do not appear to affect total savings. Moreover, savings appear to be positively associated with the real interest rate. Furthermore, only some of these differences appear to depend on postcrisis behavior.5

16. In the investment equation for the entire sample two coefficients, in addition to that for the lagged dependent variable, turn out to be significant (Table 2, column 1):

Table 2.

Investment (GMM Estimator, country- and time-specific fixed effects)

article image
  • Higher investment is associated with stronger per capita output growth. This coefficient may reflect demand shocks and changes in productivity, but is also affected by an obvious reverse causality bias. The positive coefficient is also consistent with the accelerator model. The results imply a long-run multiplier of about one.

  • Higher investment is also associated with increased availability of bank credit. This reflects the reliance of firms on external finance. In particular, the availability of bank credit has often been identified as a precondition for the development of SMEs.

17. Overall, results for Asia are consistent with those for the full sample. Thus, higher investment is associated with faster output growth and faster credit growth. However, a high credit-to-GDP ratio, reflecting a highly developed banking system, has a negative impact on investment rates (Table 2, column 2) for Asian countries. While this could be explained as an effect of convergence—more advanced countries have more developed financial systems, but also lower investment rates—it appears to be related to the Asian crisis.

18. The Asian crisis seems to have caused a structural break in the relationship between investment and its determinants (Table 2, column 3). In particular:

  • The elasticity of investment to GDP growth increases after the crisis. The coefficient for the postcrisis period (obtained as the sum of the overall coefficient and the coefficient for the interacted term) is almost twice as large as for the precrisis period. This may reflect increased reliance on retained earning by corporates and risk averse behavior of corporates and lenders.

  • The real cost of capital is negatively correlated with investment in the postcrisis period.6 This result suggests that monetary conditions play a more important role in the postcrisis lower-growth environment than in the booming period before 1997. It is consistent with country studies, such as Mallikamas, Thaicharoen, and Rodpengsangkaha (2003), which indicate that monetary policy has played a complementary role in supporting investment in the postcrisis recovery.

  • High credit-to-GDP ratios are associated with low investment rates in the postcrisis period. This could reflect that countries with more developed banking systems suffered more during the crisis. This helps explain the negative sign of this coefficient in the restricted regression and its insignificance when allowing for a structural break.

19. While further quantitative analysis of the factors behind the structural break goes beyond the scope of this paper, a more qualitative assessment can shed some light on this:

  • Over-investment in the early 1990s may have led to over-capacity which continued to act as a drag on investment well after the onset of the Asian crisis. In the run-up to the crisis, a number of countries and sectors—for example, construction in Singapore, Thailand, and Malaysia, and manufacturing in Korea—saw the emergence of bubbles. The overhang of capacity created during the boom has, consequently, depressed new investment for a prolonged period.

  • Heightened macroeconomic uncertainty in the postcrisis period also likely depressed the investment climate. The coefficient of variation of consensus estimates on GDP growth and investment growth increased sharply after 1997.7 Unfortunately, the limited length of this series did not allow us to include it in the regressions. A specification including the coefficient of variation of GDP growth for the 5-year window preceding each observation returned a negative coefficient, although it was not statistically significant.


Emerging Asia: GDP Consensus Forecast

Citation: IMF Staff Country Reports 2006, 151; 10.5089/9781451834253.002.A001


Emerging Asia: Investment Consensus Forecast

Citation: IMF Staff Country Reports 2006, 151; 10.5089/9781451834253.002.A001

  • Corporate restructuring may also have depressed investment. The Asian crisis hit the corporate sector hard, leading to widespread bankruptcies, expanding debt burdens, and collapsing sales. The immediate priority for corporations was to restructure their finances and operations. This involved restructuring and paying down debts, revamping operations, and improving efficiency. In this situation, demand for new investment was reduced. A structural change in these economies, such as a change towards less capital and more skill- and knowledge-intensive sectors could also have played a role.8 For Singapore, there was furthermore an issue of substitution of domestic with foreign investment (including by the government) as part of the economic diversification and companies’ attempts to deal with increased competition by establishing operations abroad in low-cost countries. However, despite the improvement in the health of the larger corporate sector in emerging Asia, other key sectors remain weak. The small-and medium-sized enterprise (SME) sector was hit especially hard by the crisis and, given the domestic focus of its operations, benefited little from exchange rate depreciations. Moreover, SMEs’ access to private financing dried up, as banks became particularly hesitant to lend to small scale enterprises with less healthy balance sheets. For a number of reasons, including a squeeze on profits arising from reliance on domestic demand and competition from China, SMEs have made slower progress in restructuring than larger export-oriented corporations.


Emerging Asia: Corporate Leverage

(Liabilities in percent of assets)

Citation: IMF Staff Country Reports 2006, 151; 10.5089/9781451834253.002.A001

Singapore-Specific Regressions

20. Looking at determinants of savings and investment in Singapore, suggests that many of the same factors found in the cross-country study have indeed been at play here too. Using a simple Ordinary-Least-Square methodology for an annual data set covering 1975–2004, we ran several specifications with variables specific to Singapore and not available for the cross-country study. A selection of these specifications is presented in Table 3:

Table 3.

Singapore: Savings and Investment Functions - OLS Regression Results

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21. Savings appear to be influenced by a number of factors, structural and transitory:

  • Fiscal policy seems to have played an important part in determining savings, more than elsewhere. While one should not read too much into the exact size of the coefficient, the high level would imply that there does not appear to be much private sector off-set from higher public savings. Indeed, a private savings specification does not find a significant relation between public and private savings. An explanation for this could be that the private sector does not necessarily expect or is uncertain about the timing and extent of the distribution of the fiscal reserves being built up, obfuscating any Richardian behavior. Moreover, credit constraint could have prevented the private sector from borrowing against future distributions of fiscal surpluses.

  • Demographics have also supported savings. With an increase in the number of people in the working age population during the observed period, savings have benefited from the associated increase in the propensity to save among workers compared to the young (often with no incomes) and the elderly (drawing down on their saved incomes).9 The presence of low income replacement rates for pensions in the mandatory CPF savings scheme together with rising health care costs, could also have contributed to increasing the importance of demographics as the marginal propensity to save per working age person in Singapore, consequently, could have risen.

  • Higher income growth is reflected in higher savings. As Singaporean companies and households earn more money, they are likely to set more money aside to smooth consumption, and as more reach higher levels of income, the propensity to save furthermore, increases.

  • Wealth effects and uncertainty likely also play a role. The negative coefficient on the change in real house prices could both reflect a wealth effect and precautionary behavior. With the rise in house prices in the run-up to the Asian crisis came an added sense of wealth and strengthening of consumption, while the drop in house prices since the late 1990s had the opposite effect. Changes in house prices could also capture more generally the uncertain economic environment in the years following the Asian crisis. While incomes fell in the aftermath of the Asian Crisis and savings were depleted to smooth consumption, these were partly compensated for by precautionary savings in response to the more uncertain environment. Household savings might also have increased recently due to the higher income uncertainty associated with the increased use of variable wage contracts.

  • Other factors have also likely been at play. Private savings have likely also been held up by the mandatory savings scheme, which could have led to high savings, especially among liquidity-constrained households.10 However, the liberalization of withdrawal rules and numerous changes to contributions have made this relationship less stable.11

22. Investment seem more cyclically determined than savings, reflecting also more sector-specific developments:

  • The cost of capital plays a role in determining investment. The negative relation between the cost of capital and investment suggests importance of the interest channel of monetary policy, particularly when looking at real investment and for the private sector.

  • Investment responds positively to the availability of credit. This suggests that the investment, at least in part, depend on external financing and are not just generated through changes in profitability.

  • Conditions in the property market have also driven investment. A positive coefficient on the lagged level of real house prices testifies to the significance of real estate bubbles driving the investment cycle, especially for private investment.

  • The post-Asian crisis period signified a downward correction in the level of the investment function. This possibly reflects a combination of factors such as increased uncertainty and a more lasting correction in construction-related investment following over-investment in the precrisis period, and a subsequent unwinding of excess capacity. Some evidence also suggests that the Singapore firms chose to build up profitability and de-leverage, potentially reflecting tightened access to external financing as well increased financial prudence among companies. Moreover, it might also have played a role that Singaporean firms during this period increasingly channeled funds abroad (through direct investment and ownership acquisitions) to seek out new markets and move operations to low cost economies to cope with an increasingly competitive environment. The short times series did not, however, allow us to use postcrisis slope dummies.


Singapore: Real Estate Capacity

(Vacancies in thousands of square meters)

Citation: IMF Staff Country Reports 2006, 151; 10.5089/9781451834253.002.A001


Singapore: Profitability and Liquidity Position

Citation: IMF Staff Country Reports 2006, 151; 10.5089/9781451834253.002.A001

  • Sector analysis reveals some heterogeneity across sectors, but also common factors.12 Relative to other sectors, private construction investment is more impacted by conditions in the real estate market. The availability of credit also plays a role, which could reflect the strong lending to this sector in the run-up to the Asian crisis and the dependence of small contractors/sub-contractors on bank financing. The same factors, with the exception of real estate conditions, seem to play a determining role for real private investment in transport. For investment in machinery and equipment, largely carried out by the important electronics sector, external conditions such as trade determine the level of investment. Alternative specifications (not shown), including global semi-conductor sales, show the importance of the global IT cycle. Moreover, general business confidence also affects the investment in machinery, testifying to the cyclical nature of these investments. In all three cases, the post-Asian crisis signified a downward shift in the investment rate beyond what can be explained by the other factors, although for machinery investment the bursting of the technology bubble in 2000 was a more decisive factor.

D. Looking Ahead

23. Underlying trends point to a narrowing of the saving-investment balance, as saving declines and investment recovers. The sharp swing in the saving-investment balance came in response to forces unleashed by the Asian crisis and in the case of Singapore also the bursting of the real estate and the technology bubble. As these forces dissipate further, underlying influences are likely to lower savings and raise investment.

24. Private saving rates are expected to decline modestly as the economic expansion in the region continues and, over the medium-term, as the population ages. As economic uncertainty dissipates with the continued healthy economic conditions in the region, including in Singapore, households and corporates should feel less inclined to hold precautionary savings. Over the medium-term, household saving should diminish as populations age and the average propensity to save fall. However, these demographic changes may not hit in full force for many years. While the share of the workforce in the overall population is already past its peak in Korea, this share will peak in Singapore in 2010, in China between 2010 and 2015, and in India and the Philippines after 2035. During this more immediate pre-aging period, households might continue to save in anticipation of aging and especially in the absence of an expansive social safety net providing high income replacement rates for retirees and high coverage of health care costs.

25. Against this decline, public savings are expected to rise as authorities across the region deal with high debt levels and prepare for aging. Fiscal consolidation is needed in emerging Asia, although specific consolidation plans have not yet been elaborated in many countries. As individuals do not fully reduce their savings to offset increased public savings (i.e., full Ricardian equivalence does not apply), public sector developments in Asia will tend to support high saving rates. However, in Singapore the already high level of fiscal reserves provides a cushion against the fiscal impact from aging and no significant savings are needed on this account.

26. With many of the factors weighing down investment lifting, the investment rate should begin to pick up. Corporate restructuring appears well advanced with bankruptcy rates having fallen sharply and debt ratios below precrisis levels in a number of countries. The process of operational restructuring is still ongoing, as firms seek to raise the return on assets and equity, but corporate balance sheets have been substantially rehabilitated. Ongoing problems in the SME sector remain a drag, but there is some evidence that the restructuring process is slowly reaching this sector as well. In addition, the overhang of excess capacity has narrowed, with capacity utilization rates approaching precrisis levels. In Singapore, for example, vacancy rates for office and residential space have dropped, but remain above precrisis levels, and the property prices appear to be trending upward, albeit only slowly. For Singapore, fixed investment is expected to rise as the investment environment improves with the strengthening economic conditions, including the strengthening global IT cycle, and the implementation of a number of large construction projects such as the integrated resorts with casinos and the financial and business centers. However, a number of factors could possibly serve to hold down the rise in Singapore’s investment rate: (i) aging will lower the prospective number of new home buyers and, thereby, investment in new residential building, (ii) the private sector, including GLCs, and the government (through Temasek and GIC) will likely continue to channel investments abroad to tackle the increased competition in the region and diversify the economy; and (iii) the nominal investment rate might be held down by the impact of technological progress on equipment prices (including IT), holding down the investment deflator relative to the GDP deflator. Moreover, a shift towards less capital and more skill- and knowledge-intensive sectors could also keep a lid on the investment rate.


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Prepared by Giovanni Dell’Ariccia and Leif Lybecker Eskesen.


See for example IMF: Asia Pacific Regional Outlook, September 2005.


See Monetary Authority of Singapore (2004)) for a discussion of long-term trends in the savings-investment balance.


Long-run multipliers are calculated as the ratio of the right-hand variable coefficients over one minus the coefficient of the lagged dependent variable.


A specification including interacted terms was estimated to allow the slope coefficients to vary after 1997. Each interacted term is the product of a dummy variable taking value 0 until 1997 and 1 afterwards and one of the explanatory variables from our main specification. Statistically significant coefficients for these terms indicate the existence of a structural break in the relationship between the dependant variable and its determinants in conjunction with the 1997 crisis.


This is measured as the product of the real interest rate and the relative price of capital (defined as the investment deflator over the GDP deflator).


See also Faruqee and Hussein (1995) and Monetary Authorities of Singapore (2002) for discussion of savings determinants.


Running the regression in first differences to control for the existence unit-roots confirm the above results. The demographic variable and the lagged dependant variable become insignificant. This could reflect the longer-term relationship between demographics and savings. However, the fact that both the saving rate and the working-age population have followed a general upward trend could also have given rise to a spurious relationship between these variables in the level regression.

Singapore: Selected Issues
Author: International Monetary Fund