30 July 2016

IMF gives Singapore economy thumbs up

The Executive Board of the International Monetary Fund (IMF) has concluded its Article IV consultation* with Singapore for 2016, noting that the Singapore economy continues to perform well despite being impacted by a combination of cyclical and structural factors, originating both at home and abroad.

Growth moderated from 3.3% in 2014 to 2% in 2015. It was 2.2% in the first half of 2016. Unemployment has remained low, but net employment generation slowed rapidly in 2015 and headline inflation has stayed below zero since late 2014. In response, macroeconomic policies have become more accommodative, spearheaded by monetary policy easing and an expansionary budget. Financial sector and macroprudential policies have ensured financial stability. On the external front, lower global energy prices contributed to a higher current account surplus in 2015, though the surplus declined in the first quarter of 2016.

Growth is projected to moderate slightly to 1.7% in 2016, as the full impact of the global shocks experienced in 2015 is felt, and is expected to recover to 2.2% in 2017. Economic activity will be supported by accommodative policies, along with low energy prices and the ongoing global recovery. However, near-term risks are skewed to the downside, including from slow global and regional growth and spillovers from renewed global financial volatility. Headline and core inflation are benign, expected to be -0.3% and 0.8% in 2016, respectively, before rising to 1.1% and 1.4% in 2017 on gradually recovering energy and commodity prices. The current account surplus is expected to moderate over the medium term amid rapid population ageing and reforms to boost domestic demand, including through better health care, pensions, and other social insurance arrangements.

Structural policies continue to focus on moving toward an innovation-based economy that relies less on labor and more on productivity growth, especially in the non-traded sector. Policies focus on targeted support to businesses to promote automation, innovation, and internationalisation. The government is also raising investment in infrastructure and other long-term capital projects and rolling out policies to improve access to education and health care, particularly for the elderly.

Executive Directors observed** that Singapore’s highly open economy enjoys strong fundamentals and continues to perform well, and commended the authorities for their skillful management. Directors noted that Singapore’s strong external position and ample fiscal space allows the authorities to adjust policy settings in response to slower growth and external risks stemming from protracted lower growth in advanced and emerging economies and global financial market volatility. Directors considered the authorities’ expansionary fiscal policy stance and further easing of monetary policy in April as appropriate, in view of the weaker‑than‑expected inflation and growth developments. They agreed that the current accommodative fiscal stance is providing welcome support to activity and applauded the authorities’ willingness to act quickly in response to evolving conditions.

However, a number of Directors saw scope for additional fiscal stimulus to boost domestic demand, close the output gap, and provide insurance against elevated downside risks to growth. In this context, a number of Directors underscored that the current fiscal rule has served the country well for many years, while a number of others saw merit in considering aligning it to the business cycle. Turning to monetary policy, Directors considered that current policy settings are appropriate. They agreed that clear monetary communications are desirable, particularly to avoid short‑run instability. While some Directors considered that more frequent elaboration of inflation prospects would be beneficial, a number of other Directors recognised merits in the authorities’ current approach, which has served the country well and should be retained.

Directors observed that Singapore is at the mid‑point of a decade long restructuring to a knowledge‑based economy. They welcomed the authorities’ more targeted approach to supporting automation, innovation and productivity, while expanding social insurance and safety nets. Directors urged the authorities to increase spending on research and development (R&D), promote private sector R&D, and support new, creative firms. They looked forward to the unveiling of initiatives by the Committee on the Future Economy, which was set up to position Singapore for the future and identify areas of growth.

Directors observed that Singapore’s financial cycle has turned and that credit growth to residents has moderated. They noted that macro prudential policies in place made a decisive contribution to containing household indebtedness and should be retained. Directors considered that high levels of corporate debt warrant caution and close monitoring, although risks are mitigated by companies’ high debt‑servicing capacity.

Directors recognised Singapore’s high regulatory and supervisory standards in the financial sector. They noted that banks have remained profitable with low non‑performing loans and large capital and liquidity cushions as they adjust to changes in the direction of capital flows and lower oil prices. Directors welcomed that the regulation and supervision of banks is being further enhanced, and emphasised the need for banks to remain vigilant. They noted the authorities’ continued efforts to align the anti-money laundering and countering financing of terrorism (AML/CFT) framework with international standards, and welcomed recent steps to strengthen its enforcement.

Directors noted the finding that Singapore’s external position is substantially stronger than is consistent with macroeconomic fundamentals and desirable policies, while acknowledging that considerable uncertainty surrounds the assessment. The current account surplus increased further in 2015, as buoyant consumption only partly offset the narrowing of the oil trade deficit. Fiscal expansion should help reduce the external imbalance in the near term. Rapid population ageing and policies to boost domestic demand and enhance inclusion, including better health care, pensions, and other social insurance arrangements, should over time lead to a significant reduction in Singapore’s external imbalance.

*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.

**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. Read the qualifiers used in summaries.