IMF Executive Board Concludes 2015 Article IV Consultation with Singapore

Outlook and risks. As Singapore prepares to celebrate its 50th anniversary in August, its economy continues to perform well. Despite the slow pace of the global recovery and a gradual decline in domestic credit growth and housing prices, projected economic growth of about 2.9 percent in 2015 is consistent with full employment and price stability. Growth is projected to slow down in the medium term, consistent with reduced reliance on foreign workers and rapid population aging. The authorities’ new growth model takes into account Singapore’s physical resource limits and aims to boost labor and land productivity. Risks to the baseline are tilted to the downside: Singapore’s highly open economy is exposed to external shocks, most notably slower global growth and the side effects from volatility in global financial markets. Domestic vulnerabilities, including elevated private indebtedness, can amplify the impact of external shocks. Policies. In January, in response to a decline in expected inflation and a more uncertain outlook for growth, the Monetary Authority of Singapore (MAS) reduced the pace of appreciation of the nominal effective exchange rate (NEER) band. The more benign near?to medium-term inflation outlook warrants the relative easing of monetary policy. The monetary policy framework is robust and flexible but rising domestic leverage and heightened global interest rate and exchange rate volatility warrant heightened vigilance in assessing the balance of forces between the various channels of monetary policy. Singapore continues to maintain high regulatory and supervisory standards. Recent macroprudential measures have contributed to smoothing the cycle for credit and house prices. The budget’s focus on boosting productivity, equality of opportunity, and inclusiveness is laudable, while the fiscal impulse is opportune given cyclical conditions. Restructuring and population aging. Building on Singapore’s success and faced with high income inequality and the physical limits of a city state, the authorities have re-engineered the country’s growth model to boost productivity while reducing reliance on foreign workers. The restructuring entails lower steady state growth and a shift in the functional distribution of income toward labor. Incentives provided for firms to increase productivity-enhancing investments and for Singaporeans to upgrade their skills should help ensure a successful transition. But slower potential growth and a lower share of profits in income could affect those investments, and gains in productivity could be realized only slowly. Flexibility in the application of foreign worker policies and continued review of incentives are warranted. The authorities are recalibrating fiscal policies with associated inter?and intra- generational impacts in order to proactively deal with Singapore’s rapid population aging, enhance inclusiveness and reduce inequality, while remaining true to the principles of individual responsibility and sound public finances.

Abstract

Outlook and risks. As Singapore prepares to celebrate its 50th anniversary in August, its economy continues to perform well. Despite the slow pace of the global recovery and a gradual decline in domestic credit growth and housing prices, projected economic growth of about 2.9 percent in 2015 is consistent with full employment and price stability. Growth is projected to slow down in the medium term, consistent with reduced reliance on foreign workers and rapid population aging. The authorities’ new growth model takes into account Singapore’s physical resource limits and aims to boost labor and land productivity. Risks to the baseline are tilted to the downside: Singapore’s highly open economy is exposed to external shocks, most notably slower global growth and the side effects from volatility in global financial markets. Domestic vulnerabilities, including elevated private indebtedness, can amplify the impact of external shocks. Policies. In January, in response to a decline in expected inflation and a more uncertain outlook for growth, the Monetary Authority of Singapore (MAS) reduced the pace of appreciation of the nominal effective exchange rate (NEER) band. The more benign near?to medium-term inflation outlook warrants the relative easing of monetary policy. The monetary policy framework is robust and flexible but rising domestic leverage and heightened global interest rate and exchange rate volatility warrant heightened vigilance in assessing the balance of forces between the various channels of monetary policy. Singapore continues to maintain high regulatory and supervisory standards. Recent macroprudential measures have contributed to smoothing the cycle for credit and house prices. The budget’s focus on boosting productivity, equality of opportunity, and inclusiveness is laudable, while the fiscal impulse is opportune given cyclical conditions. Restructuring and population aging. Building on Singapore’s success and faced with high income inequality and the physical limits of a city state, the authorities have re-engineered the country’s growth model to boost productivity while reducing reliance on foreign workers. The restructuring entails lower steady state growth and a shift in the functional distribution of income toward labor. Incentives provided for firms to increase productivity-enhancing investments and for Singaporeans to upgrade their skills should help ensure a successful transition. But slower potential growth and a lower share of profits in income could affect those investments, and gains in productivity could be realized only slowly. Flexibility in the application of foreign worker policies and continued review of incentives are warranted. The authorities are recalibrating fiscal policies with associated inter?and intra- generational impacts in order to proactively deal with Singapore’s rapid population aging, enhance inclusiveness and reduce inequality, while remaining true to the principles of individual responsibility and sound public finances.

On July 15, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Singapore.1

As Singapore celebrates its 50th Anniversary this August, its economy continues to deliver strong noninflationary growth will full employment. Growth moderated to 2.9 percent in 2014 from 4.4 percent in 2013, on the back of the slow global recovery, domestic restructuring, and the turning of credit and housing cycles. Inflation declined to 1 percent in 2014 from 2.4 percent in 2013. In response to lower expected inflation and a more uncertain growth outlook, the Monetary Authority of Singapore (MAS) reduced the pace of appreciation of the nominal effective exchange rate in January 2015. Private sector credit growth and house prices continued to ease, supported by the total debt service ratio (TDSR) framework. Singapore’s financial markets have been resilient to the volatility associated with diverging global monetary conditions. The current account surplus rose by 1.2 percentage points to 19.1 percent of GDP in 2014.

Growth is projected to remain steady at about 2.9 percent in 2015. Activity will be supported by accommodative macroeconomic policies, lower energy costs and a gradual recovery in external demand. The relative easing of monetary policies in January should help export-oriented sectors. Fiscal policy is being recalibrated to deal with a rapidly aging population and to maintain Singapore’s competitive edge while also fostering equality of opportunity and inclusiveness. It will also deliver a sizable impulse in 2015, providing added insurance to real activity. Headline and core inflation are expected to average 0 and 1 percent in 2015, respectively, before both rising to 1.8 percent in 2016. The current account surplus is projected to increase by about 1.3 percent of GDP, on the back of lower oil import prices. As a city state with a very open economy, Singapore’s economy is exposed to external shocks, including slower growth in advanced and emerging economies and side effects from volatility in global financial markets.

These risks could be exacerbated by elevated levels of private indebtedness, but the authorities have ample policy and response space.

The economic restructuring underway aims at reducing reliance on foreign workers and is expected to ultimately raise capital-labor ratios and productivity growth but is subject to transition costs. The current account is expected to moderate over the medium term with the drawdown of accumulated pension savings in response to aging. Additional government spending to strengthen health care and other infrastructure and make the distribution of consumption more even within and across generations is also expected to contribute to the easing of the current account surplus going forward.

Executive Board Assessment2

Executive Directors commended the authorities’ consistent pursuit of sound macroeconomic and pro-growth policies, which have resulted in impressive increases in living standards over the past half century. They noted that following a moderation last year, economic growth is expected to remain stable in 2015. However, as a highly open economy, Singapore is exposed to external risks, including a protracted slower growth in advanced and emerging economies and volatility in global financial markets. Directors encouraged the authorities to be vigilant and maintain prudent policies, while noting that Singapore’s strong fundamentals and ample buffers can help absorb external shocks. More broadly, Directors supported the authorities’ efforts to restructure Singapore’s growth model and address income inequality, raise labor productivity, and deal with population aging.

Directors welcomed the authorities’ expansionary fiscal stance and relative easing of monetary policy in January in view of subdued inflation prospects and downside risks to growth. They considered that monetary policy should continue to respond flexibly to evolving inflation and real sector developments.

Directors commended the authorities’ continued maintenance of high regulatory and supervisory standards in the financial sector, including progress in implementing the FSAP recommendations. They welcomed the moderation in credit growth, progress in reducing foreign currency liquidity risk, and the modest and gradual price adjustments in the property market. At the same time, they called for continued vigilance in view of the high levels of household leverage and corporate debt. In this regard, they welcomed the authorities’ plan to monitor developments in credit and asset markets and to adjust macroprudential tools as necessary.

Directors also recommended continuous efforts to bring the AML/CFT framework in line with enhanced international standards.

Directors supported the authorities’ aim to transition the Singapore economy to a new growth model to boost productivity while reducing reliance on foreign workers. They agreed that investment in infrastructure and education and healthcare facilities will help underpin productivity and growth, while incentives to upgrade skills and enhance business practices should facilitate the transition. Directors highlighted the merit of a flexible and pragmatic approach to restructuring, including potential adjustments to foreign worker policies and investment incentives, as needed, in light of experience.

Directors supported the authorities’ efforts to reduce income inequality, raise labor force participation, and strengthen pensions and health care amid a rapid aging of the population. They welcomed recent reforms to the defined-contribution pension system, including budget support for pensioners with lower incomes and measures to raise the adequacy of retirement incomes. They recommended further enhancements to the Central Provident Fund, and looked forward to the conclusions of the authorities’ review of additional measures to enhance retirement savings.

Directors took note of the staff assessment that Singapore’s external position is substantially stronger than is consistent with medium-term fundamentals. They acknowledged that Singapore’s status as a trading hub and financial center, as well as its very high per capita income, rapid population aging, and pension system, are non-standard factors relevant to its external assessment. They noted that the drawdown of pension savings, additional age-related spending, and lower immigration are expected to help reduce the current account surplus over the medium term.

Singapore: Selected Economic and Financial Indicators, 2011–16

Nominal GDP (2014): US$308 billion

Main exports (percent of total domestic exports): Electronic products (19%); chemical roducts (17%)

GDP per capita (2014): US$56,287

Population (June 2014): 5.47 million

Unemployment rate (2014): 2.0 percent

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Sources: Data provided by the Singapore authorities; and IMF staff estimates and projections.

On a calendar year basis.

Overall balance excluding investment income, capital revenue, and interest payments.

In months of following year’s imports of goods and services.

Increase is an appreciation.

1

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.