Public Information Notice: IMF Concludes Article IV Consultation with Singapore

March 26, 1999

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On March 15, 1999, the Executive Board concluded the Article IV consultation with Singapore1.


Following very strong growth during 1997, the Singaporean economy slowed down significantly as a result of the Asian crisis and a softening in the world electronics market. Although the impact of the crisis was initially muted by a buoyant world electronics market, more sizable effects materialized in 1998 when, in addition, world demand for electronics began to soften. Singapore’s regional links are strong, and the impact of the crisis was felt keenly through declines in regional bank lending and local stock and foreign exchange market activity, as well as by the collapse of intraregional trade which hampered growth in the commerce and transport sectors. A drying up of tourist arrivals also contributed to weakness in this and the retail sector. Manufacturing, meanwhile, experienced an outright contraction in 1998, reflecting not only regional spillovers, but also weaker electronics demand outside the region.

Growth therefore fell from 8 percent in 1997 to 1½ percent in 1998, and seasonally-adjusted output declined in the first three quarters of the year. Private consumption has slowed sharply, reflecting weaker sentiment, the deteriorating employment outlook, and wealth effects associated with steep stock and property price declines. Private investment was affected by the slump in residential property prices, although this was partly offset by an acceleration in public infrastructural investment. The external sector was a net contributor to growth, as imports of goods and services contracted more sharply than exports.

The current account—traditionally in very large surplus—rose further in 1998. The increase occurred in spite of a sharp slowing in exports, declining world prices for semiconductors and disk drives, and a collapse of regional demand for services exports. It was mainly the result of import compression together with a strong surplus in the income balance (including income on public sector assets held abroad). The capital account deficit—which has been sizable for many years reflecting Singaporeans’ strong propensity to save and the relative lack of investment opportunities at home—rose further in 1998, mainly as a result of banking sector net outflows (in part associated with the consolidation of Japan’s international banking activity) and some slowing of net direct investment inflows. Foreign exchange reserves rose to US$75 billion (9 months of imports) in 1998. This does not include other long-term government assets managed by the Government Investment Corporation, part of which are counterpart assets to the government’s liability to the Central Provident Fund.

Fiscal policy was eased substantially during the current fiscal year, partly in response to the economic slowdown. The 1998/99 (April/March) budget targeted a sharp increase in development spending and a halving of the primary operating surplus—the best available measure of the impact of fiscal policy on aggregate demand. Since the budget, a package of supplementary measures—equivalent to 1½ percent of GDP—was unveiled. The revised budget targets a primary operating deficit of nearly ½ percent of GDP, the first deficit since the recession of the mid-1980s. The supplementary measures include bringing forward infrastructure projects, and tax rebates and incentives for businesses. The authorities have also decided to suspend land sales originally slated for 1998 and 1999, given the weak sentiments in the property market. This will contribute to a sizable drop in capital receipts and the overall fiscal balance in 1998/99. The authorities announced in November 1998 a major package to reduce business costs through a halving of the employer Central Provident Fund contribution rate, voluntary wage reductions, and a variety of fiscal measures.

Executive Board Assessment

Directors noted that Singapore had faced difficult economic challenges, but that economic performance had nevertheless been favorable in many respects, and better than that of other countries in the region. Directors attributed this success both to Singapore’s traditionally strong fundamentals—including sizeable external reserves, flexible markets, and a well-supervised banking system—and to the prompt and pragmatic policy response to the Asian crisis—including the easing of macroeconomic policies and the adoption of structural measures to mitigate the rise in unemployment and improve the resiliency of the banking sector. Directors cautioned, however, that the period ahead would likely continue to present challenges to policy makers. The appropriate course would be to maintain a policy mix that supported growth over the near term, while positioning the economy for the rebound in external demand that was expected to follow.

On fiscal policy, Directors endorsed the significant easing that had taken place in 1998/99 and that was in prospect for 1999/2000. Although a stronger fiscal position would be desirable overthe medium term, in present circumstances the temporary emergence of primary operating deficits for the first time since the recession of the mid-1980s appeared justified on a number of grounds. First, the external shock that Singapore was facing had opened up a sizeable negative output gap and contributed to a sharp increase in unemployment and underutilization of capital. Second, Singapore’s tradition of conservative fiscal policies had provided a cushion in the form of a large stock of public sector financial assets and external reserves, which gave the authorities considerable leeway in present circumstances. Third, the authorities have recently reaffirmed their commitment to longer-term budget balance, with surpluses in years of strong growth. Directors considered that these factors gave confidence that Singapore’s track record of prudent fiscal management would not be jeopardized.

Directors endorsed the easing of monetary policy that had taken place since mid-1997. They generally welcomed the flexibility of exchange rate policy, which had facilitated adjustment to volatility in financial markets. Directors noted that if the recent deflationary price trends continued over the near term and fed into expectations, real interest rates—already high for this stage of the economic cycle—would rise further, and dampen an already anemic rate of credit growth. Directors encouraged the authorities to keep an open mind on further easing of monetary policy to support activity in the period ahead.

Directors considered that policy analysis could be enhanced by making more transparent the fiscal and monetary policy frameworks. They encouraged the authorities to improve data on consolidated public sector operations and on medium-term fiscal projections, as well as on external trade, reserves, and government assets held abroad. While the monetary policy framework enjoyed a high degree of credibility in financial markets, Directors nevertheless considered that heightened asset market volatility and recent inflation performance strengthened the case for further transparency of the objectives and intermediate target of monetary policy.

Directors strongly supported the steps taken to improve financial sector transparency by raising minimum disclosure standards for banks. They took note of the recent Monetary Authority of Singapore notice, that gave legal force to the new disclosure standards. Directors noted that continued close monitoring of financial institutions would be essential in uncovering risks at an early stage, particularly in the near term, when banks may experience further effects of the domestic and regional economic slowdown on the quality of their portfolios.

Directors endorsed the steps being taken to position the financial sector for the next wave of regional growth, including: easing restrictions on Central Provident Fund investments; placing additional public sector funds with private fund managers in Singapore; issuing additional government and statutory board bonds to develop the capital market; and relaxing restrictions on the availability of Singapore dollar credit facilities to nonresidents. At the same time, the cautious approach that had been taken to relaxing restrictions on the international use of the Singapore dollar was noted.

Directors considered that the available indicators continued to suggest that Singapore enjoyed adequate international competitiveness, but that the recent temporary measures to cutbusiness costs were nevertheless justified as a response to the external demand shock. Directors supported Singapore’s commitment to sustain competitiveness into the medium term by upgrading human capital and physical infrastructure.

Singapore: Selected Economic and Financial Indicators

1995 1996 1997 1998

(Change in percent)
Real economy
Real GDP 8.4 7.5 8.0 1.5
Real domestic demand 9.4 12.1 9.8 -4.2
CPI inflation 1.7 1.4 2.0 -0.3
Unemployment rate 2.0 2.0 1.8 3.2
Gross national savings (percent of GDP) 51.8 52.9 54.5 54.4
Gross capital formation (percent of GDP) 34.5 37.0 38.7 33.5
(Percent of GDP)
Public finance1
Revenue and grants 33.1 36.0 35.8 29.1
Expenditure, net lending, and fund transfers 21.4 27.6 26.5 29.1
Overall balance 11.6 8.4 9.3 0.0
Primary operating balance2 6.1 4.0 4.0 -0.5

(Change in percent)
Money and credit (end of period)
Broad money (M3)3 8.7 8.6 8.3 8.0
Credit to private sector4 20.3 15.8 12.7 8.0
Interest rate (three-month interbank, in percent) 2.4 3.4 6.6 1.8

(US$ billion)
Balance of payments
Exports, f.o.b. 118.5 126.0 125.7 110.4
Imports, f.o.b. -117.5 -123.8 -124.6 -95.7
Services and transfers, net 13.5 12.3 13.9 2.9
Current account balance 14.4 14.5 15.0 17.6
(In percent of GDP) (17.3) (15.9) (15.8) (20.9)
Overall balance 8.6 7.4 8.0 3.0
Gross official reserves5 68.8 77.0 71.4 75.0
(In months of imports) (7.0) (7.5) (6.9) (9.4)

(End of period)
Exchange rate
S$/US$ 1.414 1.400 1.676 1.661
Nominal effective exchange rate6 120.5 125.9 125.2 120.1
Real effective exchange rate6 113.6 117.9 117.0 107.1

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

1Fiscal year beginning April 1.
2Overall balance excluding net lending, capital revenue, investment income, debt interest, and fund transfers.
3Adjusted to include POSBank’s fixed deposits with MAS.
4Inclusive of POSBank loans for December 1998, following its acquisition by the Development
Bank of Singapore in November 1998.
5Based on Singapore dollar data converted to U.S. dollars using end-period exchange rates;
reserves in Singapore dollars valued at book cost.
6IMF Information Notice System monthly index (1990 = 100).

1Under 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 directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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