Press Release No. 17/306

On July 13, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the 2017 Article IV consultation [1] with Singapore, and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis. [2]

Singapore’s economic growth momentum has improved since late 2016, supported by a recovery in global electronics trade. Real GDP grew by 2.7 percent in the first quarter of 2017 (year-on-year). However, the recovery has not yet been broad based and private domestic demand, particularly private investment, remains subdued. Labor market conditions have softened with two consecutive years of weak net employment generation, although wages have increased and income inequality, as measured by the Gini coefficient, has declined. Following higher energy and utility prices, consumer price inflation turned positive after nearly two years of negative readings. The current account surplus, as a percent of GDP, has remained elevated.

Faced with structural shifts abroad and at home, including a rapid population aging, Singapore is pursuing an ambitious technology-driven, innovation-based growth model for the future. A high-level Committee on the Future Economy has recommended transforming Singapore into “pioneers of the next generation” through increased global integration, digitalization, and further enhancement in enterprise capabilities and worker skills. However, considerable uncertainties remain. Against this backdrop, Singapore’s growth is projected in a 2½–3 percent range over the medium term, with the growth rates rising as improvements in productivity take hold. In the near term, real GDP will grow by about 2¼ percent in 2017 and 2½ percent in 2018. Private domestic demand will provide greater support to growth, contributing to a rise in inflation to 1–1½ percent average rate by 2018. Risks to the near-term growth outlook stem mainly from external sources.

Executive Board Assessment

In concluding the 2017 Article IV consultation with Singapore, Executive Directors endorsed staff’s appraisal, as follows:

Singapore has embraced a new growth model for a world of rapidly advancing digital technologies and automation. The strategy is to turn Singapore into a labor-lean economy with less reliance on foreign workers and growth based on innovation, digitalization, and continuous investment in skills. Economic and social policies to make growth more inclusive and tackle population aging have advanced appreciably in recent years and are still evolving, complementing the economic transformation drive. Singapore’s track record of longer-term orientation in policy making, strong implementation capacity and proactive embrace of technical change accompanied by policies to mitigate the disruptive potential of automation on employment provide a measure of assurance about the outcome of its structural transformation.

Singapore’s transition to a new growth model has had to cope with structural and cyclical headwinds. Lower potential growth is related to aging, tightening of foreign worker inflows and slow productivity growth. And while a cyclical upswing has lifted growth recently, it remains concentrated in the export-oriented sectors. The labor market has softened despite rising real wages in 2016, with redundancies rising and manufacturing shedding labor. The contraction of employment was reflected in the hiring of foreign nondomestic workers and unemployment has risen only modestly. After nearly two years of subzero readings, inflation has turned positive.

Growth and inflation are expected to firm gradually. The improved global outlook along with rising public spending are projected to spill over to private domestic demand. As the authorities’ restructuring plans take hold, medium-term growth is expected to be in the 2½–3 percent range. This should push inflation gradually toward the authorities’ medium-term objective.

Risks to the growth outlook are broadly balanced. Notwithstanding the recent trade recovery, economic and geopolitical risks have risen and could affect Singapore’s highly open economy. The main external risks stem from the adverse impact of more inward-looking policies in the US and a slowdown in major emerging economies. On the other hand, spillovers from higher-than-expected growth in the US could lift near-term growth. Tightening in global financial conditions, including more rapid-than-expected normalization of US monetary policy and significant further strengthening of the US dollar, could adversely affect segments of the household and corporate sectors with elevated debt service burdens. On the domestic front, uncertainty surrounding the structural transformation could hold back investment, productivity, and undermine improvements in income inequality.

Singapore’s external sector is assessed to be substantially stronger than warranted by medium-term fundamentals and desired policies. The current account surplus, which rose in 2016 and is projected to rise further in 2017, should moderate over the medium term as rising public expenditure on infrastructure, healthcare and other aging-related items and firming private capital formation lift investment. Private sector saving, on the other hand, may be propped up by interactions between Singapore’s population aging and rising longevity.

Supportive macroeconomic policies are welcome. Fiscal policy has become more expansionary in recent years. Higher outlays on healthcare and other aging-related spending, on transportation infrastructure, innovation, and targeted transfers to promote inclusion, worker retooling and lifelong learning are appropriate given the ongoing structural shifts in the economy. This has also helped in lowering income inequality. Regarding monetary policy, staff concurs that no NEER adjustment is needed in the near term and welcomes the MAS’ provision of forward guidance in recent monetary policy statements. Normal shocks can be accommodated by exchange rate movements within the NEER band. Fiscal policy should be the first line of defense in case downside risks materialize, including inflation undershooting the medium-term objective because of weak domestic demand or lower oil prices.

Singapore could employ some of its ample fiscal space to further boost demand and enhance its social insurance arrangements. Additional near term fiscal stimulus—bringing forward infrastructure investment and expanding existing budget transfers to targeted groups—would boost domestic demand, help close the output gap and address the large external surplus. There is also scope to strengthen Singapore’s permanent social insurance arrangements, including by introducing time-bound unemployment insurance. This is needed to help address uncertainty created by the ongoing transformation to a labor-lean, innovation-based economy in which product life cycles and job tenures are shorter and labor churn more intense. Also, while recognizing the authorities’ efforts to make the fiscal system more progressive, staff sees merit in a broader debate on whether future increases in government spending should be financed by raising taxes or by bringing on budget a larger share of the government’s permanent investment income. Consideration could also be given to gear the fiscal rule to the business cycle rather than the term of government.

The authorities’ financial sector and macro prudential policies have ensured financial stability. While elevated household and corporate sector leverage warrant continued monitoring, banking sector health remains sound, backed by high capital, liquidity, and profitability ratios and still-low non-performing loans (NPLs). Macroprudential policies, including fiscal-based measures, have helped in cooling off the property market and limiting households’ overall indebtedness. Staff welcomes the March 2017 relaxation of seller’s stamp duties. Further cautious relaxation of cyclical measures could be considered, including the elimination of the discriminatory nature of the ABSD, as systemic risks stemming from the housing sector continue to dissipate. However, structural measures, such as the TDSR, should be maintained as part of the broader macroprudential policy framework. Staff also welcomes the authorities’ leadership on global financial sector regulation, fintech and cybersecurity.

Singapore is aspiring to transition to a new digital economy while preparing for population aging. The strategies for economic transformation are backed by top-tier human and physical capital and by policies to foster inclusion, promote lifelong learning, and skill and family adaptation, which should all help to mitigate disruptions related to technological change and aging. However, challenges remain in improving productivity and boosting innovation. In particular, skill enhancement programs should be frequently reviewed to ensure that they deliver outcomes suitable for the future economy. Greater risk taking and the pursuit of entrepreneurship by the younger generation may also require a cultural shift and persistent and comprehensive nurturing, including through the education system. Further, policies should encourage new firms and general-purpose growth strategies rather than industry specific plans.

Singapore can play an active role in the diffusion of innovation in ASEAN. Singapore-based entrepreneurs can play a lead role in successfully scaling innovation in the region and helping mitigate the considerable disruption to ASEAN jobs expected from the transition to the new digital economy. As ASEAN chair in 2018, Singapore could spearhead new avenues to encourage people-to-people connectivity in the region, if need be even on a bilateral basis with other willing ASEAN countries.