Press Release No. 14/476

Press Release: IMF Executive Board Concludes 2014 Article IV Consultation with Singapore

October 17, 2014

On September 22, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Singapore.

Singapore’s economy has continued to perform well. Growth recovered to 3.9 percent in 2013, from 2.5 percent in 2012. Net exports accounted for almost half of the growth, while private and public consumption contributed the other half. A rising trade surplus pushed up the current account of the balance of payments to 18.3 percent of GDP in 2013, from 17.5 percent of GDP in 2012. A series of targeted, escalating macroprudential policies contributed to cool the housing and car permit markets. This helped push down headline inflation to 2.4 percent on average in 2013, from 4.6 percent in 2012. Singapore’s financial markets have so far absorbed bouts of volatility associated with expectations of U.S. tapering and the spike in global risk aversion early this year with limited impact. While corporate loan growth remains firm, housing loan growth has moderated, aided by the June 2013 launch of the new total debt servicing ratio framework (TDSR) and the expectation of higher interest rates in the medium term. Property prices have leveled off and housing transactions moderated. The nonperforming loan ratio of domestic banks remained stable at about 1 percent.

Growth decelerated in the first two quarters of 2014 and is expected to moderate to around 3 percent during 2014−2015, narrowing the positive output gap. Recovering demand in advanced economies is likely to be offset by the ongoing real appreciation of the dollar and the gradual tightening in global monetary conditions. Meanwhile, the planned further slowing inflow of foreign workers, as part of the ongoing economic restructuring, could moderate potential growth and lower competitiveness. Core inflation is projected to average about 2.4 percent during 2014−15, reflecting relative price adjustments to facilitate the ongoing economic restructuring.

The medium-term outlook will be shaped by the success of the authorities’ ongoing economic restructuring program and policy responses to the rapid pace of population aging. Potential GDP growth is projected to slow in the next few years on slower labor force expansion, and then recover gradually as faster labor productivity growth takes hold, reaching about 3¼ percent in the medium term—well below the pace during 2000−08. A tighter labor supply due to a slowing inflow of foreign workers in the near term and population aging in the medium term will boost wages. With productivity gains unlikely to fully compensate, core inflation will increase temporarily and—together with continued nominal appreciation of the dollar—push up the real effective exchange rate, dampening export growth, and contributing to a gradual narrowing of the current account surplus over the medium term.

The baseline projections are subject to a variety of risks. As a very open economy, Singapore is particularly exposed to external risks related to a protracted period of slower growth in advanced and emerging economies, a continued buildup and eventual unwinding of excess capacity in China, an abrupt surge in financial market volatility as investors reassess underlying risks, and geopolitical risks. The restructuring program could set the stage for a new era of sustainable growth. However, productivity improvements might take some time to materialize and may not fully offset the effects of declining labor force growth.

Executive Board Assessment²

Executive Directors congratulated the Singaporean authorities on the success of their macroeconomic management in supporting strong economic activity while keeping inflation under control. They also welcomed the ambitious medium-term economic restructuring plan, which could set the stage for a renewed period of sustainable growth. Nevertheless, Directors noted considerable challenges facing Singapore, particularly those related to trading partners’ growth slowdown and global financial market volatility. They stressed the need for continued vigilance to risks and spillovers in the financial and housing sectors, and further efforts to promote external rebalancing, address demographic challenges, and reduce inequality.

Directors broadly concurred that, given cyclical conditions, the current monetary stance, with the targeted rate of currency appreciation, is appropriate to anchor inflation expectations. They supported the complementary use of macroprudential policies as needed to contain asset prices and promote prudent lending and household deleveraging.

Directors recognized the medium-term needs to strengthen the social safety net and alleviate transition costs of the economic restructuring plan. Therefore, they saw merit in a modest fiscal stimulus in this year’s budget geared toward social and infrastructure spending in support of reforms to boost productivity, enhance health care and retirement benefits for the elderly and low-income households, and promote inclusiveness more generally. These reforms would also help address the challenges from population aging and prospective workforce decline.

Directors agreed that Singapore’s financial regulation and supervision frameworks are among the best globally. They welcomed progress in implementing key short-term recommendations in the Financial Sector Assessment Program Update, and encouraged the authorities to implement the remaining recommendations. They emphasized that strengthening foreign-currency liquidity management at banks remains a priority. Directors supported ongoing efforts to comply with evolving international regulatory standards and strengthen the regime against money laundering and the financing of terrorism.

Directors took note of the staff’s assessment that Singapore’s external position—though subject to high uncertainty—appears to be substantially stronger than warranted by fundamentals, suggesting the importance of continued efforts to boost domestic demand and narrow the current account surplus over time. Directors agreed that the planned increase in public spending, ongoing steps to reduce reliance on foreign workers, and continued appreciation path of the nominal effective exchange rate would facilitate external rebalancing.