## 1. Rising Investment in Intangible Assets (cr18245) ## Source details **Canonical URL:** [1. Rising Investment in Intangible Assets (cr18245)](https://www.imf.org/-/media/files/publications/cr/2018/cr18245.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18245.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18245.pdf.json) --- ### Context and policy recalibration - Singapore one of the fastest growing advanced economies in the region in 2017 amid synchronized global expansion. - Inflation picked up since early 2017 but remained low. - Structural transformation to harness digital technologies amid population aging and tighter limits on foreign labor. - Policy adjustments: - MAS adjusted forward guidance in October 2017 and commenced monetary policy normalization in April 2018. - FY2018/19 Budget provides for a fiscal stimulus after a higher-than-expected budget surplus in FY2017/18. - Authorities continued ensuring financial sector stability and responded to property market developments with demand- and supply-side measures. - Political timeline: preparing for transition to a new generation of leaders ahead of the next general election that must be held by January 2021. ### Economic developments, outlook, and risks - Near-term outlook and risks: - Growth moderated after strongest three-year expansion in 2017; risks broadly balanced. - Private domestic demand recovering; inflation expected to creep up but remain manageable. - Key growth and demand figures: - Real GDP grew by 3.6 percent y/y in 2017 (2016: 2.4 percent); strengthened to 4.4 percent y/y in 2018Q1. - Private consumption grew by 3.1 percent in 2017 (2016: 1.7 percent); slowed to 2 percent y/y in 2018Q1. - Contribution dynamics (2017 and 2018Q1): - Recovery in private domestic demand supported services sectors. - Faster import growth in late 2017 more than offset initial net export contribution; in 2018Q1 net exports’ contribution turned positive. - Private fixed investment contribution grew; inventories increased due to higher wholesale trade and rise in intangible capital, partly offsetting lower private investment in buildings. - Public consumption contributed positively in 2018Q1; public investment fell on completion of infrastructure projects and lower public housing investment. - Construction sector experienced seven consecutive quarters of negative annual growth. - Labor market and productivity: - Labor force declined in 2017 for the first time since 2003. - Employment of residents grew in 2017; total employment fell due to decline in foreign work permit holders in construction and shipyards. - Overall unemployment rate declined over 2017 and stood at 2 percent in 2018Q1. - Overall labor productivity (value added per actual hours worked) improved to 4.5 percent y/y in 2017. - Real income from work has risen; income inequality among resident employed households below its peak but remains elevated. ### Role and rise of intangible capital (Box 1 findings) - Long-term trend and composition: - IPP stock grew to about 25 percent of GDP as of 2016. - Revisions in historical national accounts from 2011 largely supported by upward adjustments in private IPP investment. - Private sector accounted for about 92 percent of total IPPs in 2017. - Growth rates and contributions: - Singapore’s capital stock related to IPP grew by 11¾ percent annually over the past decade. - Average contribution of IPP capital to real GDP growth was 0.6 percentage points per annum in the past five years (double that of preceding one and a half decades). - Firm-level and industry evidence: - Orbis dataset (~900 companies; ~20 percent of corporate sector by assets) shows shift toward intangible capital since 2013. - Intangible capital stock in corporate sector accelerated at a 30 percent compound annual rate between 2013 and 2016. - Intangibles concentrated in a few industries; computer and electronic product manufacturing accounted for about one-half of total intangible capital stock in the corporate sector in 2016. - InfoComm and wholesale trade sectors also have high intangible shares; wholesale trade intangible share increased fast between 2014 and 2016. - Impacts: - Macro: intangible investment contributes to productivity and growth. - Micro: firms gain via commercialization of IP, process/organization innovation, branding/distribution, and enhanced technology absorption. ### Inflation, external sector, and valuation - Inflation developments: - Headline inflation averaged 0.6 percent in 2017 (2016: −0.5 percent). - Official core inflation averaged 1.5 percent in 2017 (2016: 0.9 percent). - First five months of 2018: headline inflation averaged 0.2 percent; MAS core inflation averaged 1.5 percent. - Staff projects headline inflation to average 1 percent in 2018; MAS core inflation projected to average 1.6 percent; medium-term headline inflation stabilizing at about 1¼ percent. - External balances and valuation: - Current account surplus close to 19 percent of GDP in 2017; about 18 percent of GDP in 2018Q1. - Staff assessment: 2017 CA balance substantially higher, by 2.5–8.5 percent of GDP, than warranted by fundamentals and desired policies. - Domestic policy gaps contributed 3.4 percentage points to CA gap, mostly from the fiscal surplus. - Real exchange rate assessed as undervalued by 4–16 percent in 2017. - Real effective exchange rate depreciated by 1 percent in 2017 and weakened further in early 2018. ### Financial conditions, housing, and sectoral vulnerabilities - Financial conditions: - FCI shows overall easing in 2017; some tightening in early 2018 with rising global rates and volatility. - Bank lending to businesses turned around; lending to nonresidents grew (trade credits to Greater China). - Housing and leverage: - Private residential prices recovered in 2017 for first time since 2013; up by 5.4 percent y/y in 2018Q1. - Share of foreign transactions stable at close to 7 percent over past six years (2011 peak 19.5 percent). - Vacancy rates declined slightly but remain elevated; supply pipeline increased after prior decline. - Private sector leverage stabilized but remains elevated. - Credit growth to domestic private sector: peaked at 20 percent y/y in late 2011; trended down to 3 percent y/y in 2018Q1. - Nonfinancial corporate sector debt at 150 percent of GDP by end-2017 (recent peak 160 percent of GDP). - Household debt about 72 percent of GDP (declined from peak 75 percent in 2014). - Household net wealth close to 400 percent of GDP; cash and deposits exceed total debt. - Average loan-to-value ratio of mortgages at 54 percent. - Banking sector: - Capital and liquidity buffers strong; profitability improved due to higher net interest margins and loan growth. - Asset quality improved; gross NPL ratios declined slightly in 2018Q1 after modest increases over prior two years. - Sectoral stress: transportation, storage and communication subsector peaked NPLs in 2017; vulnerable exposures in marine and offshore engineering recognized. - Banks’ exposure to property-market related sectors about 30 percent of total nonbank lending; gross NPL ratios: building and construction loans 0.8 percent; housing loans 0.4 percent. - Loss provisioning above 100 percent of unsecured NPLs; capital adequacy and leverage ratios well above regulatory requirements. ### Key staff projection (near-term) - Staff projects growth to moderate to 2.9 percent in 2018 but remain above potential. - Final domestic demand expected to be main driver of growth; momentum in electronics exports to remain healthy but more sustainable. - Headline inflation forecast to average 1 percent in 2018; MAS core inflation projected 1.6 percent. ### Policy risks (near term) - Upside risks: continued strong electronics trade; higher-than-expected spillover from U.S. fiscal stimulus. - Downside risks: growing U.S.–China trade frictions; regional policy uncertainties causing financial volatility; tighter global financial conditions increasing financing and refinancing costs and affecting property adjustment. --- ### Box 2 — Financial Conditions and Growth-at-Risk (GaR) in Singapore - GaR framework links current financial conditions to distribution of future growth outcomes. - One-year ahead growth distribution predictors: FCI, house prices, China’s output growth. - Benchmark model (quantile regressions): - Interquartile interval of forecasted real growth at end-2018: 2.1 to 6.5 percent. - Median forecast at end-2018: 3.5 percent. - Probability of recession declined from about 15 percent in 2017 to 8 percent in 2018. - 5 percent GaR improved from −2 percent at end-2017 to −0.7 at end-2018. - Caveat: Buildup of financial vulnerabilities over time can worsen outcomes; prolonged accommodative global financial conditions may raise recession probability three years ahead. - Methodology specifics (selected): - Forecast horizon h=4; quantiles estimated at .1, .25, .4, .5, .6, .75, .9. - Regressors lagged 4 quarters; parametric t-skew distribution used to fit full conditional distribution. - Key quantile regression coefficients: FCI Overall (change) negative across many quantiles (examples: −0.1202 at 0.1 quantile; −0.0697 at 0.5 quantile); Real GDP CHN positive and significant (examples: 1.4205 at 0.5 quantile). - Prepared by Adrian Alter (MCM). ### Risk Assessment Matrix — selected risks and policy responses - Policy uncertainty — Likelihood: Medium; Expected impact on Singapore: High. - Recommended: structural reforms; if domestic demand weakens substantially use temporary/targeted fiscal stimulus, loosen monetary policy (including recentering NEER band if shock large), recalibrate macro-prudential policy. - Retreat from cross-border integration — Likelihood: Medium; Expected impact: High. - Recommended: advocate multilateralism and trade openness; accelerate ASEAN integration efforts. - Weaker-than-expected global growth (China slowdown) — Likelihood: Low (short term)/Medium (medium term) for China slowdown; Expected impact: Medium to High. - Recommended: temporary/targeted fiscal support, loosen monetary policy if needed; monitor banks’ exposures to China and region. - Tighter global financial conditions — Likelihood: High; Expected impact: Medium. - Recommended: ensure prudent risk management, adequate liquidity/capital buffers; recalibrate macro-prudential policy; in extreme events use strong official reserves and swap lines. - Cyber-attacks — Likelihood: Medium; Expected impact: Medium to High. - Recommended: strengthen IT risk management, contingency plans, cross-border coordination; provide emergency liquidity/fiscal support if systemic. ### Housing market and macroprudential policy (selected) - Property accounts for 44 percent of total household assets; mortgage loans form three-quarter of household liabilities. - About 80 percent of residents live in HDB housing; 20 percent in private housing. - Property-related loans about 30 percent of banks’ loan books. - Supply and demand tools: GLS, LTV limits, SSD, ABSD, TDSR, fiscal measures. - Key dates and parameters: - Loan-to-Value (Jan. 2013): 80% for first home; 50% for second home (30% if tenure >30 yrs); 40% for third+ (20% if tenure >30 yrs); 20% for non-individual borrowers. - Total Debt Servicing Ratio (Jun. 2013): monthly repayments not to exceed 60% of gross monthly income. - Seller’s Stamp Duty (Mar. 2017): 12% if sold within 1 year; 8% within 2 years; 4% within 3 years. - Buyer's Stamp Duty (Feb. 2018 structure): 1% on first $ 180,000; 2% next $180,000; 3% next $640,000; 4% on remaining (over $ 1million). ### Long-run house price equilibrium findings (selected) - Estimated long-run relationship suggests current residential property prices are above fundamentals; deviations larger outside central area. - Empirical determinants: - Private residential supply: negative and significant coefficients (examples: −0.289***, −0.898***). - Construction cost: positive and significant (examples: 0.519***, 0.390***). - Real interest rate: negative and significant across specifications (examples: −0.083***, −0.046***). - Rental index: positive and significant (examples: 0.528***, 0.786***). ### FinTech highlights (Appendix VIII) - FinTech funding in Asia: - Cumulative fintech equity funding in Asia ~US$28 billion in 2017; China captured two-thirds. - Singapore-based FinTech companies received more than US$800 million (Singapore Life received ~US$50 million in 2017). - Productivity implications: - MAS estimated FinTech adoption could reduce banks’ cost-to-income ratios by ~15 percent across selected Asian economies; projected decline 13.9 percent for Singapore-based banks. - Example: DBS Digibank cost-to-income ratio ~34 percent vs ~55 percent for traditional banking. - UBS estimate: AI could increase bank revenue by 3.4 percent and reduce costs by about 4 percent over next three years. - Regulatory recommendations: - Monitor activities beyond entity-focused oversight; clear governance/integrity rules for data/algorithms/platforms; promote low leverage among new participants; address AML/CFT and cybersecurity; strengthen cross-border regulatory cooperation and MoUs. --- ### Fiscal policy, aging-related healthcare, and medium-term fiscal stance - FY2017/18 fiscal outturn: - Overall fiscal surplus (GFSM definition) in FY2017/18 (ending March 2018): 4.7 percent of GDP (budgeted 1.7 percent of GDP). - Drivers: higher stamp duty revenues, one-off increase in statutory board contributions, cashflow delays in infrastructure projects. - FY2018/19 budget: - Provides fiscal stimulus; planned boost to capital expenditure and a lower overall surplus. - Projects increases in infrastructure and other capital outlays by 1¼ percent of GDP. - Overall surplus projected to decline to about 2.3 percent of GDP. - Staff supports planned fiscal impulse ~1 percent of potential output; calls for more ambitious fiscal stimulus if downside risks materialize. - Aging-related healthcare projections (authorities’ projection): - Healthcare spending to rise to 3 percent of GDP in 2030, up from 2.2 percent in 2018. - Options to finance long-term needs: - Higher taxes; borrowing; bringing on budget a greater proportion of government’s investment income. - Budget 2018 proposal: 2 percentage point hike in GST rates during 2021-25 to meet rising recurrent spending needs; enhanced offsets and transfers to preserve progressivity; timing to depend on economic conditions and expenditure needs. - Fiscal policy considerations: - Staff: relying on higher consumption taxes alone may be counterproductive if economic conditions weak at time of increase; using available fiscal space (lowering surplus and/or bringing more investment income on budget) is an alternative. - NIRC framework: contribution of reserves to budget has more than doubled since FY2009/10; up to 50 percent of expected long-term real returns from financial reserves available for budget spending; following inclusion of Temasek in NIRC in 2016, NIRC is largest revenue source. ### Debt dynamics and baseline projections (selected numeric values) - Debt-to-GDP (nominal gross public debt): 99.3 (2016); 108.2 (2017); 112.2 (2018); 113.9 (2019); 115.2 (2020); 116.2 (2021); 117.0 (2022); 117.5 (2023); 117.9 (2023?). - Gross financing needs (GFN, percent of GDP): expected to average close to 8½ percent per annum in medium term. - Baseline primary (noninterest) revenue and grants (selected): 16.1 (2017), 16.8 (2018), 15.8 (2019), 16.0 (2020), 16.1 (2021), 16.2 (2022), 16.4 (2023). - Baseline primary (noninterest) expenditure (selected): 18.0 (2017), 17.9 (2018), 18.6 (2019), 19.6 (2020), 19.8 (2021), 20.0 (2022), 20.1 (2023). - Primary Balance (staff GFSM 2014 estimates, excluding capital receipts and NIRC): −2.8 (2018), −3.6 (2019), −3.7 (2020), −3.8 (2021), −3.8 (2022), −3.8 (2023) in Baseline Scenario. - Public gross financing needs (selected values): 13.6 (2016), 5.2 (2017), 3.6 (2018), 7.2 (2019), 7.9 (2020), 9.2 (2021), 10.1 (2022), 8.0 (2023). ### Alternative fiscal scenarios (selected) - Baseline Scenario key assumptions: - Real GDP growth: 2.9 (2018), 2.7 (2019), 2.7 (2020), 2.6 (2021), 2.6 (2022), 2.6 (2023). - Inflation: 0.9 (2018), 1.2 (2019), 1.3 (2020–2023). - Primary Balance: −2.8 (2018), −3.6 (2019), −3.7 (2020), −3.8 (2021–2023). - Effective interest rate: 3.5 (2018), rising to 4.2 (2023). - Historical Scenario (selected): - Real GDP growth: 2.9 (2018), 4.4 (2019–2023). - Primary Balance: −2.8 (2018), −1.3 (2019–2023). --- ### Structural reform, digital transformation, and labor market/social insurance - Industry Transformation Maps (ITMs): - ITMs: sector-specific plans for 23 sectors that cover 80 percent of the economy. - Roadmaps help firms, especially SMEs, digitalize and enhance growth/productivity. - ITMs cover four areas: productivity, jobs and skills, innovation, trade and internationalization. - Next phase: group 23 industries into six clusters to exploit synergies; clusters include manufacturing, built environment, trade and connectivity, essential domestic services, modern services. - Staff appraisal and recommendations: - Staff supports transition to innovation-based growth; recommends supporting new/dynamic firms and cooperation with trade associations and private sector. - Staff encourages independent evaluations of existing approaches for firms and workers. - Social insurance and labor policy: - Staff encourages broader social insurance arrangements, including unemployment insurance. - Rationale: universal, transparent, time-bound unemployment insurance could help workers cope with unemployment spells, complement active labor market programs, and address inequality. - Authorities’ counterpoint: unemployment insurance could discourage job search; prefer targeted active labor market programs (SkillsFuture, Adapt and Grow) and tripartite collaboration. - Authorities’ estimates and targets: - Authorities estimate collective efforts should enable growth of 2 to 3 percent per year on average over next decade. - Monetary policy normalization likely in order during 2018-19 (MAS expected to continue gradual normalization). ### Staff policy guidance (selected) - Monetary policy: - Continue monetary policy normalization; timing and size data dependent and well communicated. - If inflation continues to undershoot, fiscal policy should be first line of defense; monetary easing could impede private domestic demand recovery and increase external surplus. - A Taylor-type rule suggests gradual appreciation of NEER parity, rising to about 1½ percent by end-2019 under baseline. - Fiscal policy: - Use multi-year fiscal expansion to support domestic demand, improve infrastructure, and broaden social insurance systems. - Deploy available fiscal space to support domestic demand and address inflation undershooting. - Monitor elevated household and corporate sector leverage as property market picks up; upcoming 2019 FSAP to follow up on financial sector risks. - Macroprudential and housing policy: - Maintain property demand cooling measures, including structural macroprudential policies and cyclical measures such as ABSD. - Residency-based differentiation in ABSD should be eliminated by unifying rates and the measure phased out once systemic risks dissipate. - Continue monitoring supply side through Government Land Sales program. --- ### Selected macroeconomic and statistical indicators (preserved values) - Nominal GDP (2017): US$324 billion. - GDP per capita (2017): US$57,737. - Population (June 2017): 5.61 million. - Real GDP growth (percent): 2013 5.1; 2014 3.9; 2015 2.2; 2016 2.4; 2017 3.6; 2018 2.9; 2019 2.7. - Current account as percent of GDP (selected projections): 2017 18.8; 2018 18.2; 2019 18.0; Medium-term: 2020 17.7; 2021 17.4; 2022 16.7; 2023 16.0. - Change in inventories (contribution to GDP growth): 2013 −0.2; 2014 −1.0; 2015 −2.7; 2016 1.5; 2017 2.9; 2018 −0.6; 2019 −0.9. - Unemployment rate (period average): 2013 1.9; 2014 2.0; 2015 1.9; 2016 2.1; 2017 2.2; 2018 2.0; 2019 1.9. - CPI inflation (period average): 2013 2.4; 2014 1.0; 2015 −0.5; 2016 −0.5; 2017 0.6; 2018 1.0; 2019 1.3. - Private residential real price changes (end of period, y/y): 2013 1.1; 2014 −4.0; 2015 −3.7; 2016 −3.1; 2017 1.1; 2018 5.4. - Net international investment position (percent of GDP): 2013 199; 2014 188; 2015 205; 2016 215; 2017 248. - Gross official reserves (US$ billions): 2013 273.1; 2014 256.9; 2015 247.7; 2016 246.6; 2017 279.9; 2018 294.0; 2019 301.9. --- *Source: IMF staff report chapter "1. Rising Investment in Intangible Assets" and accompanying chapters/appendices (cr18245).* ### 1. Rising Investment in Intangible Assets _________________________________________________________7 ### 1. Rising Investment in Intangible Assets ### Context and policy recalibration - Singapore was one of the fastest growing advanced economies in the region in 2017, following a synchronized global expansion that turned around externally oriented sectors and supported a broader recovery. - Inflation remained low despite picking up since early 2017. - Structural transformation underway to harness emerging digital technologies amid population aging and tighter limits on foreign labor. - Incentives provided to firms to automate, innovate, and integrate regionally and globally; incentives to workers to retrain, raise skills and pursue lifelong learning. - Political transition: preparing for a transition to a new generation of leaders ahead of the next general election that must be held by January 2021. - Policy adjustments in response to strengthening economy: - MAS adjusted its forward guidance in October 2017 and commenced monetary policy normalization in April 2018. - FY2018/19 Budget provides for a fiscal stimulus after a higher-than-expected budget surplus in FY2017/18. - Authorities continued to ensure financial sector stability and responded to property market developments with both demand- and supply-side measures. ### Economic developments, outlook, and risks - Near-term outlook: - After the fastest growth in three years in 2017, moderation of growth momentum expected in 2018. - Private domestic demand is on the mend as labor market strength grows; inflation expected to creep up but remain manageable. - Risks to the near-term outlook are broadly balanced. - Medium-term challenges: - Demographic headwinds and adaptation to rapid technological changes remain medium-term challenges. - Key growth and demand figures: - Real GDP grew by 3.6 percent y/y in 2017 (2016: 2.4 percent), and strengthened to 4.4 percent y/y in 2018Q1. - Private consumption grew by 3.1 percent in 2017 (2016: 1.7 percent), but slowed to 2 percent y/y in 2018Q1. - Contribution dynamics (2017 and 2018Q1): - Recovery in private domestic demand supported services sectors. - Faster growth in imports in late 2017 more than offset initial positive contribution from net exports; in 2018Q1 net exports’ contribution turned positive on slower import growth. - Private fixed investment contribution grew on firming global outlook; inventories increased due to higher wholesale trade and a rise in intangible capital, partly offsetting lower private investment in buildings. - Public consumption contributed positively in 2018Q1; public investment fell on completion of some infrastructure projects and lower public housing investment. - Construction sector experienced seven consecutive quarters of negative annual growth due to lower private and public investment in buildings. - Labor market and productivity: - Labor force declined in 2017 for the first time since 2003, reflecting slowing working-age population growth and restrictions on foreign workforce. - Employment of residents grew in 2017, supported mainly by services; total employment fell due to decline in foreign work permit holders in construction and shipyards. - Overall unemployment rate declined over 2017 and stood at 2 percent in 2018Q1. - Overall labor productivity (value added per actual hours worked) improved to 4.5 percent y/y in 2017, concentrated in externally-oriented sectors; some domestically-oriented sectors also saw higher productivity growth. - Real income from work has risen; income inequality among resident employed households, as measured by the Gini coefficient, is below its peak but remains elevated. ### Role and rise of intangible capital (Box 1 findings) - Long-term trend: - Singapore’s stock of Intellectual Property Products (IPP) grew rapidly as a share of GDP to about 25 percent as of 2016. - Revisions in historical national accounts data from 2011 were largely supported by upward adjustments in private IPP investment. - Growth rates and contributions: - Singapore’s capital stock related to IPP grew by 11¾ percent annually over the past decade. - Average contribution of IPP capital to real GDP growth was 0.6 percentage points per annum in the past five years, double that of the preceding one and a half decades. - Private sector accounted for about 92 percent of total IPPs in 2017. - Firm-level evidence: - Orbis firm-level dataset covering about 900 companies (about 20 percent of Singapore’s corporate sector in terms of assets) shows corporate sector investment shifted toward intangible capital since 2013. - Intangible capital stock in the corporate sector accelerated at a 30 percent compound annual rate between 2013 and 2016, while physical capital investment remained sluggish. - Industry concentration: - Intangible assets concentrated in a few industries, especially computer and electronic product manufacturing. - In 2016, computer and electronic product manufacturing accounted for about one-half of total intangible capital stock in the corporate sector. - Information and communication (InfoComm) and wholesale trade sectors also have high intangible shares; intangible share in wholesale trade increased fast between 2014 and 2016, while InfoComm remained stable. - Impacts of intangible investment: - At the macro level, intangible capital investment contributes to productivity and growth. - At the micro level, firms benefit through commercialization of intellectual properties, innovation in business processes or organization, better branding and distribution, and enhanced ability to absorb and leverage technologies. - Empirical studies cited indicate that intangibles can enhance firm productivity and financial performance, and may be more productive in ICT-intensive industries. ### Inflation, external sector, and valuation - Inflation developments: - Headline inflation turned positive in 2017 after two years of deflation: average headline inflation was 0.6 percent in 2017 (2016: –0.5 percent), mainly due to pass-through from higher global oil prices and administrative price changes. - Official core inflation averaged 1.5 percent in 2017 (2016: 0.9 percent), partly due to increases in electricity and services prices. - In the first five months of 2018, headline inflation averaged 0.2 percent; MAS core inflation averaged 1.5 percent. - Current account and external position: - Current account surplus close to 19 percent of GDP in 2017; remained largely stable since 2014. - Despite export recovery, goods and services surplus declined in 2017 as imports rose; primary income balance improved. - CA surplus close to 18 percent of GDP in 2018Q1. - Staff assessment: 2017 CA balance was substantially higher, by 2.5–8.5 percent of GDP, than warranted by fundamentals and desired policies (Appendix II). - Domestic policy gaps contributed 3.4 percentage points to this CA gap, mostly from the fiscal surplus. - Real exchange rate assessed as undervalued by 4–16 percent in 2017. - Real effective exchange rate depreciated by 1 percent in 2017 and weakened further in the first four months of 2018. ### Financial conditions, housing, and sectoral vulnerabilities - Financial Conditions Index (FCI): - Staff estimates show overall easing in 2017, led by compressed corporate spreads and buoyant asset valuations. - Bank lending to businesses turned around, supporting private investment. - Financial conditions tightened somewhat in early 2018 with rising global interest rates and heightened market volatility. - Housing market: - Prices of private residential properties recovered in 2017 for the first time since 2013; up by 5.4 percent y/y in 2018Q1. - Share of foreign transactions stable at close to 7 percent over past six years, well below 2011 peak of 19.5 percent. - Vacancy rates declined slightly but remain elevated. - Supply in the pipeline (new and redevelopment projects with planning approvals expected on market within a few years) increased after prior decline. - Leverage and balance sheets: - Private sector leverage stabilized but remains elevated. - Credit growth to domestic private sector peaked at 20 percent y/y in late 2011 and trended down to 3 percent y/y in 2018Q1. - Nonfinancial corporate sector debt at 150 percent of GDP by end-2017 (recent peak 160 percent of GDP). - Household debt declined from peak of 75 percent of GDP in 2014 and remained about 72 percent of GDP. - Household net wealth close to 400 percent of GDP; total holdings of cash and deposits exceed total debt. - Average loan-to-value ratio of mortgages at 54 percent. - Pockets of vulnerabilities remain in corporate and household sectors. - Banking sector health: - Capital and liquidity buffers remained strong; profitability improved due to higher net interest margins and loan growth (notably to nonresidents). - Growth in loans to nonresidents driven by trade credits to the Greater China region. - Asset quality improved: gross NPL ratios in local banks declined slightly in 2018Q1 after modest increases over prior two years. - Sectoral stress: gross NPL ratios peaked in transportation, storage and communication subsector in 2017; banks recognized vulnerable exposures in marine and offshore engineering. - Banks’ exposure to property-market related sectors about 30 percent of total nonbank lending; gross NPL ratios low for building and construction loans (0.8 percent) and housing loans (0.4 percent). - Banks maintain loss provisioning above 100 percent of unsecured NPLs, and capital adequacy and leverage ratios well above regulatory requirements. *Source: IMF staff report chapter "1. Rising Investment in Intangible Assets" (cr18245).* ### Box 2. Financial Conditions and Growth-at-Risk in Singapore ### Box 2. Financial Conditions and Growth-at-Risk in Singapore ### Growth-at-Risk (GaR) methodology and key GaR findings - GaR links current financial conditions to the distribution of future growth outcomes, analogous to Value-at-Risk in finance. - For Singapore, the one-year ahead growth distribution is well predicted by: - the financial conditions index (FCI), - house prices, - China’s output growth. - Asset prices (stock market prices, corporate bond spreads) embed much forward-looking information about growth; FCIs predict conditional moments of the GDP growth distribution. - Benchmark model (quantile regressions tailored to Singapore’s risks and vulnerabilities): - Interquartile interval of forecasted real growth at end-2018: 2.1 to 6.5 percent. - Median forecast at end-2018: 3.5 percent. - GaR results signal potential upside risks to the average estimate. - Tail-risk changes from 2017 to 2018: - Probability of recession declined from about 15 percent in 2017 to 8 percent in 2018, below its historical average. - 5 percent GaR (value of fitted growth distribution forecasted to be breached once in 20 cases) improved from -2 percent at end-2017 to -0.7 at end-2018. - Right tail indicates higher growth potential in 2018. - Caveat: Buildup of financial vulnerabilities over time can worsen outcomes; prolonged accommodative global financial conditions may raise the probability of recession three years ahead. Note: In the GaR figures, recession is defined as negative year-on-year real GDP growth rate; the forecast horizon is four quarters ahead (h=4). *Prepared by Adrian Alter (MCM).* ### Near-term growth and inflation projections (staff projections and drivers) - Staff projects growth to moderate to 2.9 percent in 2018 but remain above potential. - Drivers and dynamics: - Final domestic demand expected to be the main driver of growth. - Momentum in electronics exports expected to remain healthy but at a more sustainable pace, leading to lower inventory accumulation later in the year. - Strength in the global economy, higher oil prices, and momentum in the property market expected to help private investment and construction. - Services sector expected to pick up as growth becomes more entrenched; labor market slack to decline further, supporting private consumption. - Higher contribution from public investment would also help. - Inflation forecasts: - Headline inflation forecast to average 1 percent in 2018. - MAS core inflation projected to average at 1.6 percent. - Over the medium term, headline inflation will stabilize at about 1¼ percent as higher non-food, non-energy prices offset waning global cost factors. ### Risks to the near-term outlook - Near-term risks broadly balanced; mainly from external sources. - Upside risks: - Slower-than-expected normalization in global electronics trade (i.e., continuation of healthy electronics trade) and/or higher-than-expected spillover from U.S. fiscal stimulus. - GDP forecasts based on staff’s FCI point to some upside surprise to the 2018 baseline. - Downside risks: - Growing U.S.–China trade frictions; impact through trade exposures to China (Singapore’s single largest destination for goods exports). - Short-run uncertainties about regional economic policies causing financial volatility. - Tighter global financial conditions amid continued monetary policy normalization and/or deterioration in global risk appetite could lead to higher financing costs, higher debt servicing and refinancing costs, and potential disruption to ongoing property price adjustments—impacting private domestic demand. ### Medium-term outlook and structural drivers - Staff revised potential growth up to about 2¾ percent from about 2½ percent, reflecting upward revisions in the capital stock. - In 2017, total factor productivity contribution to growth turned positive after six years. - Over the medium term: - Capital intensity of production expected to rise and productivity to improve, driven by higher skills complementing automation and digitalization, and labor-lean but inclusive policies boosting the wage-rental ratio. - Final domestic demand expected to remain main driver of growth. - Headline inflation expected to stabilize at about 1¼ percent. - Current account (CA) gap: - CA gap expected to narrow moderately over the medium term due to recovery in private fixed investment and lower public sector net saving (partly owing to higher investment in aging-related and other infrastructure). - Productivity growth expected to support a trend appreciation in the real exchange rate. - Persistently high CA surplus attributed to structural factors: limited social insurance and safety nets, mandatory defined-contribution pension system, Singapore’s status as a financial center and hub for multinational companies. - Staff recommends more ambitious policy action to strengthen social insurance and safety nets (including introduction of unemployment insurance) to lower private precautionary saving and ease credit constraints. - Household net saving—the largest contributor to the CA balance—is expected to decline over the longer term as population aging accelerates. - Corporate saving noted as another channel boosting private saving; high levels of corporate retained earnings relative to the OECD may reflect presence of multinational companies. ### Authorities’ views (near-term and external assessment) - Authorities broadly agreed with staff assessments of near-term growth and risks. - Noted sterling performance due to openness to trade, recovery in global growth, upswing in IT product demand, and robust regional domestic demand. - GDP growth described as firm but uneven: trade-related and modern services outperformed domestically-oriented sectors. - Labor market slack has declined; authorities expect growth sustained at close to 3 percent near term. - Inflation supported by increases in prices for retail and essential services; inflation for discretionary services weak. - Authorities expect headline inflation toward 1 percent and MAS core inflation toward 2 percent by year end. - Authorities consider escalation of trade frictions among key trading partners and geopolitical risks as main external sector risks, and reiterated commitment to free trade. - External sector assessment: - Authorities reiterated demographic transition would help lower the CA surplus over time. - Household saving identified as biggest contributor to saving-investment gap; existing mechanisms (mandatory pension contributions, limits on banks’ exposures) aim to ensure sound household balance sheets. - Large CA surplus also reflects Singapore’s city-state characteristics and role as a global hub; large foreign workforce and remittances mean consumption should be assessed relative to gross national disposable income rather than GDP. - Over time, higher public spending, recovery in private investment, and dissaving by an aging population should help lower the CA balance. ### Policy discussions — Overall stance and recommendations - Given large and persistent external and fiscal surpluses, staff recommends recalibration of medium-term macroeconomic policies: - Continue monetary policy normalization. - Use multi-year fiscal expansion to support domestic demand, improve infrastructure, and broaden social insurance systems. - Continue monitoring elevated household and corporate sector leverage as property market picks up; upcoming 2019 FSAP to follow up on financial sector risks. - Continue structural reforms to raise skills and productivity, boost business innovation, and pursue more inclusive policies for the digital age. ### Monetary policy (MAS actions and guidance) - In its April meeting, the MAS announced a slight appreciation in the slope of its exchange rate band after two years of targeting a zero slope for the central parity of its basket, band, crawl NEER framework. - At the current level, monetary policy remains accommodative. - MAS expects steady economic expansion and improving labor market conditions in 2018–19 will put upward pressure on core inflation and reverse undershooting. - Under the baseline, further normalization of monetary policy is likely: - Given the economy’s strength, labor market recovery, and positive fiscal impulse, MAS is expected to continue gradual normalization during 2018-19. - A Taylor-type rule suggests a gradual appreciation of the NEER parity, rising to about 1½ percent by end-2019. - Timing and size of moves should be data dependent and well communicated; premature or overly ambitious tightening could impede healthy ascent of inflation and de-anchor expectations. - If inflation continues to undershoot, fiscal policy should be the first line of defense: - Inflation has underperformed authorities’ expectations partly due to a weaker New Keynesian Phillips Curve relationship between inflation and unemployment, though inflation expectations appear well anchored. - Monetary policy easing (e.g., lowering NEER slope) in response to undershooting could adversely impact recovery in private domestic demand, lead to faster domestic interest rate rises than international rates, affect adjustable-rate mortgages, and further increase external surplus. - Available fiscal space should be deployed to support domestic demand and address inflation undershooting. - Authorities’ stance: - Monetary policy decisions are calibrated to deliver medium-term price stability. - April move reflected careful consideration of domestic strength and evolving near-term risks. - Authorities remain cognizant of uncertainties in the inflation path and will evolve policy with economic responses to existing policies and shocks. ### Fiscal policy — recent developments and near-term plans - FY2017/18 fiscal position strengthened significantly, due mostly to cyclical and one-off factors: - Overall fiscal surplus (GFSM definition) in FY2017/18 (ending March 2018) was at 4.7 percent of GDP, substantially higher than the budgeted 1.7 percent of GDP. - Higher revenues from stamp duties, a one-off increase in statutory board contributions, and cashflow delays in infrastructure projects contributed to fiscal overperformance. - FY2018/19 budget: - Provides fiscal stimulus with a boost to capital expenditure and a lower overall surplus than last year. - Projects increases in infrastructure and other capital outlays by 1¼ percent of GDP. - Overall surplus projected to decline to about 2.3 percent of GDP. - Staff supports planned fiscal impulse of about 1 percent of potential output, noting it would help ease medium-term supply-side constraints and support external rebalancing. - Deviations of fiscal outturns from budget targets in recent years were due to revenue over-performance, project savings, and cashflow delays; potential over-performance again would have implications for external adjustment and pace of monetary policy normalization. - Staff calls for more ambitious fiscal stimulus if downside risks to growth or inflation materialize. *International Monetary Fund.* ### 21. The authorities are proactively addressing future aging-related healthcare and ### cr18245 - 21. The authorities are proactively addressing future aging-related healthcare and ### Aging-related healthcare needs and projections - Singapore’s health care system provides quality outcomes at a fraction of the cost seen in other advanced economies. - The population will age at a very fast pace (faster than Japan). - Authorities’ projection: healthcare spending to rise to 3 percent of GDP in 2030, up from 2.2 percent in 2018. - Uncertainties and upside pressures on government healthcare spending: - Recent enhancements of government subsidies for healthcare insurance. - Higher spending on additional infrastructure needs for the very aged in the future. - Downside mitigants: - Innovative digital medical technologies and supply management could help contain the pace of cost increases. ### Options to finance long-term healthcare and infrastructure needs - Available financing options: - Higher taxes. - Borrowing. - Bringing on budget a greater proportion of the government’s investment income. - Considerations for choosing the financing mix: - Efficiency and equity considerations, both within and across generations. - Long-term infrastructure investment that benefits future generations calls for borrowing to spread costs across current and future generations. ### Fiscal stance, policy signals, and macroeconomic considerations - Budget 2018 reaffirmations and signals: - Sufficient fiscal resources are available to meet spending plans until the end of the current term of government in 2020. - Fiscal sustainability beyond 2020 called for higher taxes and signaled an increase in Goods and Services Tax (GST) to cover recurrent healthcare costs going forward, with appropriate offsets to reduce its regressive nature. - Major infrastructure needs can be financed by borrowing. - Macro considerations on relying on consumption taxes: - Singapore runs a large fiscal surplus, possesses substantial net sovereign assets whose income is only partially on budget, and has a low consumption-to GDP ratio. - Relying on higher consumption taxes alone may be counterproductive, especially if the economic conditions at the time of the increase are weak. - A GST hike alone could reduce private income and consumption, especially of low-income households, and could lead to a lower path for GDP and private consumption, with limited external adjustment, relative to using more of the available fiscal space (lowering the surplus and/or bringing more income from reserves on budget) to finance health care increases. - A more supportive fiscal policy in the medium-term is affordable given the projected fiscal surpluses will continue to improve the public-sector balance sheet. ### Authorities’ views and planned measures - Commitment to medium-term fiscal sustainability against demographic headwinds; fiscal policy must be forward-looking beyond this decade to cope with rising aging-related spending pressures, infrastructure upgrading and national security. - Budget 2018 proposal: - A 2 percentage point hike in GST rates during 2021-25 to meet rising recurrent spending needs, including healthcare costs. - Enhanced offsets and transfers to ensure the overall system of taxes and transfers remain fair and progressive. - The timing of the GST hike will depend on the state of the economy and expenditure needs. - Infrastructure financing considerations: - Considering borrowing by the Statutory Boards and government-owned companies with the provision of government guarantees. - Fiscal reserves and NIRC framework: - Contribution of reserves to the budget, as per the Net Investment Returns Contributions (NIRC) framework, has more than doubled since FY2009/10. - Up to 50 percent of the expected long-term real returns from the government’s financial reserves are available for budget spending. - Following the inclusion of Temasek in the Net Investment Return framework in 2016, the NIRC has become the largest source of revenue. - Authorities will continue to spend reserves prudently but without overly relying on them and consider past reserves as an important resource against an uncertain future. *Source: IMF staff report (cr18245), section 21–26.* ### 36. The longer-term challenge is to make a successful transition to new business ### 36. The longer-term challenge is to make a successful transition to new business ### Digital transformation and the future economy: findings - The basic research that drives technical change and the Schumpeterian creative destruction of product, firms and jobs are inherently unpredictable. - As the new digital GPT diffuses throughout the economy in the coming years and decades, marketing and monetizing new ideas will increasingly require firms to adopt new business models. - New/young firms may find it easier to adopt these new business models, while expectations for support for incumbents could lead to a longer process of structural adjustment. - Singapore’s successful transition to a new innovation-based growth model could have a positive spillover in the rest of the region; as chair in 2018, Singapore aims to strengthen ASEAN’s connectivity, resilience, and innovativeness. - Singapore can play an active role in the diffusion of innovation and knowledge in ASEAN, helping the region adapt to rapid technological changes. ### Industry Transformation Maps (ITMs): role and design - ITMs are sector specific plans for 23 sectors that cover 80 percent of the economy. - ITMs are roadmaps meant to help companies – especially small and medium enterprises – to digitalize and growth and productivity. - ITMs guide the government’s facilitation of industry upgrading by: - creating a regulatory environment conducive to innovative business models; - setting national standards to promote technology adoption. - Government support (2018 budget) includes grants to adopt technologies and enhanced tax deduction on licensing payments as well as on IP registration fees and qualifying expenses incurred on R&D. - The Council for Skills, Innovation, and Productivity (CSIP) takes overall responsibility for the implementation of the ITMs. - Each ITM consists of a growth and competitiveness plan, covering four areas: productivity, jobs and skills, innovation, and trade and internationalization. - Government agencies are assigned to each ITM and tasked to coordinate among agencies and with tripartite partners. - The next phase is to group the twenty-three industries into six clusters to maximize opportunities for collaboration, exploit synergies, and strengthen linkages across industries. - The sectors/clusters include: manufacturing, built environment, trade and connectivity, essential domestic services, modern services. Each cluster will be overseen by a CSIP sub-committee. ### Social insurance and labor market policy: findings and recommendations - Digital technological change is likely to disrupt incumbent firms, industries, and workforces and accelerate worker churn in Singapore, ASEAN and beyond. - Staff encourages the authorities to adopt broader social insurance arrangements, including unemployment insurance. - Rationale for unemployment insurance: - With technological unemployment likely to rise, universal, transparent, and time-bound unemployment insurance could help workers cope with unemployment spells, complementing active labor market programs and enabling workers to quickly adapt to technological change. - Such arrangements could also address inequality. - Authorities’ counterpoints: - Unemployment insurance could discourage workers from searching for new jobs and increase both frictional and structural unemployment. - Singapore’s current approach relies on active labor market programs with training subsidies, temporary employer wage support, and grants, facilitating fast reemployment without affecting incentives to work. - Programs cited include SkillsFuture, Adapt and Grow, and means-tested social support programs. - Singapore emphasizes tripartite collaboration where employers and unions take responsibility for workers’ development. ### Authorities’ views on structural reform and ITMs - The structural reform agenda seeks to address challenges and opportunities presented by a rising Asia, shifts in global supply and value chains, rapid technological change and an aging population. - The Committee on the Future Economy envisions an economy that is: - more globally and regionally integrated; - with deeper enterprise and human capabilities; - at the forefront of innovation; - with strong partnerships with Trade Associations and Chambers, and unions. - Support is provided to both incumbents and new firms in each industry; this support does not preclude healthy competition and creative destruction. - Industry Transformation Maps are designed to support and accelerate transformation, accumulate human capital, and will move to a cluster-based approach across the 23 industries. ### Staff appraisal: macroeconomic outlook and policy guidance - 41. Singapore’s growth firmed up and became more broad-based in 2017. Growth acceleration was led by the upswing in global growth, trade and capital expenditure, including on information technology. An easing of financial conditions supported a recovery in private domestic demand, and labor market slack was reduced. While the economy is in a cyclically strong position, inflation remains positive but subdued after being negative for two years. - 42. Growth momentum is expected to be sustained but moderate somewhat in 2018, while inflation is set to increase moderately. Final domestic demand will be the main driver of growth. Momentum in electronics exports is expected to remain healthy but at a more sustained pace relative to last year. Headline inflation is forecast to rise modestly but remain contained owing to a healthier labor market, a rise in housing rentals, and pass through of higher global oil prices. Risks to the near-term growth outlook stem mainly from external sources and are broadly balanced. - 43. Over the medium term, rising capital intensity and higher productivity will support growth. As the economy transitions toward more automation and digitalization, and inclusive policies and lower immigration raise the wage-rental ratio, the capital intensity of production and productivity will rise. Final domestic demand will remain the main driver of growth. Risks to the medium-term outlook are broadly balanced and represent a mix of domestic and external factors. - 44. The current account surplus is expected to narrow gradually over the medium term. Singapore’s external position is assessed to be substantially stronger than warranted by medium-term fundamentals and desired policies. A further recovery in private investment and higher aging-related public spending and infrastructure will help boost productivity and future growth, which will also support external rebalancing. Productivity growth would support a trend appreciation in the real exchange rate. More ambitious policy action than currently envisaged will be required to lower private precautionary saving and ease credit constraints, including through unemployment insurance and strengthening of social insurance and safety net arrangements. The CA gap is expected to decline further over the longer term as population aging accelerates. - 45. Macroeconomic policies should strike a balance between the ongoing recovery in domestic demand and risks to the outlook. Currently, monetary policy remains accommodative despite the April 2018 announcement of a slight normalization. Given the economy’s cyclical strength, continued recovery in the labor market, and a positive fiscal impulse, further normalization in monetary policy is likely in order during 2018-19. The timing and size of the moves should be data dependent and taken in response to clear signs of inflationary pressure that could impact medium-term price stability. They should be well communicated. Staff supports the planned fiscal impulse under the FY2018/19 budget. Such fiscal support would also help ease medium-term supply-side constraints and facilitate external rebalancing. Staff calls for more ambitious fiscal stimulus if downside risks to growth and/or inflation materialize. - 46. Options to finance long-term healthcare and infrastructure needs include higher taxes, running a lower budget surplus, borrowing, or bringing on budget a greater proportion of the government’s investment income. The government is appropriately considering borrowing to finance long-term infrastructure. From a macroeconomic point of view, relying on higher consumption taxes alone to fund higher health care costs may be counterproductive, especially if economic conditions at the time of the increase are weak. - 47. The property market should be closely watched and policies adjusted as needed to maintain stability. Staff analysis suggests that prices are now moderately above levels consistent with long-term fundamentals. Property demand cooling measures should be maintained, including structural macroprudential policies and cyclical measures, such as the ABSD. Residency-based differentiation in the ABSD should be eliminated by unifying rates and the measure should be phased out once systemic risks from the housing market dissipate. Staff encourages continued monitoring of the supply side through the government land sales program. - 48. The financial sector remains healthy with adequate buffers at the banks, but risks require continued monitoring. Banks’ risks from exposures to the real estate and the oil and gas sectors are contained. Overall balance sheets of the household and the corporate sectors are strong, with pockets of vulnerabilities. Staff welcomes efforts to strengthen the regulatory framework in line with Basel III principles, encourages continuation of efforts to enhance the AML/CFT framework, and supports development of a FinTech ecosystem while adapting regulations to emerging risks. The upcoming 2019 FSAP will follow up on emerging risks, including from FinTech, and its implications for the banking sector. - 49. Staff supports Singapore’s aspiration to transition to a new growth model that addresses challenges posed by technological change and rapid population aging. Incentives are being provided to firms to automate, innovate, and integrate; and to workers to retrain, raise skills, and pursue lifelong learning. Efforts to increase research and development and intellectual property have intensified. Staff encourages support of new, dynamic firms and cooperation with trade associations and the private sector. Authorities could consider commissioning independent evaluations of existing approaches to providing support for firms and workers. - 50. Staff encourages the authorities to adopt broader social insurance arrangements, including unemployment insurance. With technological unemployment likely to rise, universal, transparent, and time-bound unemployment insurance could help workers quickly adapt to technological change and address income inequality. ### Key statistics and explicit numeric values preserved from the source - ITMs cover 23 sectors that account for 80 percent of the economy. - Authorities estimate that their collective efforts should enable them to grow by 2 to 3 percent per year on average over the next decade. - Monetary policy normalization likely in order during 2018-19. - Reference to the 2018 budget measures and FY2018/19 budget. *IMF Staff report excerpt (chapter/section provided).* ### 51. It is recommended that the next Article IV consultation with Singapore be held on ### cr18245 - 51. It is recommended that the next Article IV consultation with Singapore be held on ### Recommendation - It is recommended that the next Article IV consultation with Singapore be held on the standard 12-month cycle. ### Real sector developments and growth - Growth accelerated in 2017 to its three-year high level. - Private domestic demand recovered, including a positive contribution from inventories. - Key sectoral contributors in 2017: - Manufacturing (strong electronics production supported manufacturing output in 2017 but has softened since end-2017). - Wholesale & retail trade, information & communication, and finance & insurance sub-sectors. - Partly offset by soft construction and business services. - Change in inventories (contribution to GDP growth): 2013 −0.2; 2014 −1.0; 2015 −2.7; 2016 1.5; 2017 2.9; 2018 −0.6; 2019 −0.9 (Table 1). ### Labor market developments - Labor market conditions improved slightly in late-2017, with net employment generation helping lower the unemployment rate slightly. - Employment and unemployment indicators: - Resident unemployment rate and overall unemployment rate tracked; unemployment rate (period average) by year: 2013 1.9; 2014 2.0; 2015 1.9; 2016 2.1; 2017 2.2; 2018 2.0; 2019 1.9 (Table 1). - Total employment grew slightly 2018Q1. - Net change in employment remained weaker than during 2010-2014, impacting both resident and foreign workers. - Job Vacancy to Unemployed Persons Ratio returned to around unity for the first time in two years. - Number of retrenched workers declined further. - Real income from work continued to rise. - Change in employment by residency (selected): shows Local and Foreign changes (chart referenced; source: Singapore, Ministry of Manpower). ### Inflation and prices - Headline inflation turned positive in 2017 on rising energy prices; there is no widespread price pressure yet. - MAS core inflation has stayed mostly between 1 and 1.5 percent since mid-2016. - CPI inflation (period average): 2013 2.4; 2014 1.0; 2015 −0.5; 2016 −0.5; 2017 0.6; 2018 1.0; 2019 1.3 (Table 1). - CPI inflation, excluding food and energy (period average): 2013 2.7; 2014 0.6; 2015 −0.7; 2016 −0.9; 2017 −0.1; 2018 0.4; 2019 1.3 (Table 1). - Declining prices of car ownership certificates contributed to downward pressure on headline inflation. ### Monetary and financial sector developments - Treasury yield curve shifted upward, with rates at the shorter end rising faster than the long end. - Money market rates in Singapore moved up with a rise in global rates. - Short-term real rates inched up; long-term real rates largely stable. - Broad money growth slowed on account of a slower expansion of credit to domestic nonbanking sector. - Stock market has remained on an upward trend since early 2016 with low volatility. - Growth in foreign exchange market turnover was low in 2017. - Government bond yields (end of period) shown for 3M, 1Y, 5Y, 10Y (chart referenced; source: Bloomberg L.P.). ### Financial services and cross-border banking - Financial services sector contributed about 1 percentage point to total growth on average over the past decade. - Financial services exports reached 9 percent of GDP in 2017. - Financial services activity started to recover in 2017 as global risk sentiment stabilizes and is usually correlated with economic activity in ASEAN-5 countries. - Cross-border banking activity dominated by East Asian and European regions. - Net lending to nonbank customers in East Asia increased. - Bank funding from both East Asia and Europe increased in recent quarters. ### Banking sector developments - Banking sector assets grew at a slower pace in 2017. - Non-bank deposits and interbank funding from outside Singapore are important funding sources for banks. - Property-market related loans account for about 30 percent of total domestic non-bank loans: - Building and Construction 13% - Housing Loans 16% - Other Business Loans 62% - Other Consumer Loans 9% (Nonbank Loans by Sector, Apr2018) - Domestic non-bank loan growth in 2017 supported by credit to general commerce and financial institutions. - Cross-border loans to nonbanks in US and East Asia rose sharply; demand from EU remained strong. - Banking sector foreign currency loan to deposit ratio has increased. - Financial soundness indicators (local banking groups, various years): - Regulatory capital to risk-weighted assets: 2015 16.4; 2016 15.9; 2017 Q3 15.9. - Regulatory tier I capital to risk-weighted assets: 2015 13.8; 2016 13.6; 2017 Q3 13.7. - Shareholders’ equity to assets: 2015 8.4; 2016 8.6; 2017 Q3 9.1. - NPLs to nonbank loans: 2015 1.0; 2016 0.9; 2017 1.1; Q3 1.4; 2017 1.6 (Table 7). - After tax return on assets: around 1.0–0.9 in recent years. - Loans to deposits ratio: 2017 84.9 (Table 7). - NPL ratio (local banks, percent, latest available): 2013 1.0; 2014 0.9; 2015 1.1; 2016 1.4; 2017 1.6 (Table 4). ### Housing market developments - House price-to-income ratio is trending downwards. - House price-to-rent ratio moved up in the last few quarters (House Price to Rent Ratio Index; 2009Q1=100). - Transactions in the private market accelerated in 2017 to the highest since the previous peak in 2012; public housing resale transactions continue gradual increase. - Private vacancy ratio is still elevated, although it declined slightly in 2017. - Supply bottlenecks owing to rapid population growth with limited new housing supply look set to ease as a pipeline of housing supply is expected to come on the market in the coming years. - Household debt and balance sheets: - Household debts, including housing loans, have flattened in recent years. - Household debt-to-GDP ratio is elevated. - Households’ total net worth reached close to 400 percent of GDP. - Financial assets, or currency and deposits alone, are enough to cover current debt outstanding in aggregate. - Banks’ exposure to private housing loans has been stable; asset quality of housing loans remains relatively strong. - Real estate price changes (end of period, percent change, y/y): Private residential (end of period): 2013 1.1; 2014 −4.0; 2015 −3.7; 2016 −3.1; 2017 1.1; 2018 5.4 (Table 4). ### External sector - Current account surplus averaged close to 19 percent of GDP over 2014-17, lower than its post-GFC peak. - NIIP reached 248 percent of GDP in 2017 due to positive valuation effects and continued significant current account surplus (Table 2: Net international investment position in percent of GDP: 2013 199; 2014 188; 2015 205; 2016 215; 2017 248). - Singapore has: - Net asset position in portfolio assets and net liability position in FDI holdings. - Both gross official reserves and MAS’ net long FX position in forwards and futures increased steadily in 2017. - Balance of payments (selected, US$ billions; Table 2): - Current account balance: 2013 50.3; 2014 58.2; 2015 56.5; 2016 58.8; 2017 61.0; 2018 63.6; 2019 65.7 (Table 2 and Table 1). - Goods balance: 2013 76.1; 2014 85.0; 2015 89.8; 2016 85.5; 2017 84.7; 2018 87.3; 2019 91.9. - Services balance and primary income balance details shown in Table 2. - Gross official reserves (US$ billions): 2013 273.1; 2014 256.9; 2015 247.7; 2016 246.6; 2017 279.9; 2018 294.0; 2019 301.9 (Table 1). ### Spillovers and external linkages - Singapore depends mainly on foreign final demand from the EU and the US; China, Japan, Indonesia and India are important regional partners. - FDI stocks dominated by the EU and the US, mainly concentrated in the finance and insurance sector. - Large portfolio assets make external balance sheet vulnerable to shocks in the US and regional economies such as China and India. - Major sources of funding for Singapore’s financial center: East Asian and European banks; deposits from East Asian nonbanks. - East Asia is the largest user of funds and likely to experience outward spillovers from Singapore in the event of banking sector stress. - Cross-border exposures of domestic banks in Greater China and other Asian economies remain near post-GFC highs. ### Social and inequality indicators - Industry-wide average monthly earnings increased by 3 percent in 2017. - Median wages for low-skilled workers grew at a compound annual rate of 4.9 percent since 2013. - Median household income rose at a 2.6 percent compound annual real rate since the GFC. - Real incomes of lower income groups have increased at a faster pace in the last decade. - Lower rate of inflation helped everybody; the bottom 20 percent has gained the most in recent years. - Government policies (taxes and benefit payments) have contributed to a reduction in inequality. - Average monthly real household income by decile (cumulative change, in percent): Total 2000→2017: 1,735 → 2,907 = 67.6; 1st-10th 315 → 400 = 26.9; 11th-20th 537 → 788 = 46.8; 91st-100th 5,801 → 10,536 = 81.6. Memo: Top dec/bottom dec 18.4 → 26.4 (Table in Figure 9). ### Demographic transition - Old-age dependency is projected to increase significantly in the medium to long term. - Singapore’s aging speed is among the highest in the region and advanced economies. - Total fertility (children per woman) is among the lowest in the world. - Labor force participation rates have risen, particularly for the elderly and women in prime working age; scope remains to further increase participation for prime working age women. - Labor force growth declined further in 2017 after strong growth during 2005−2009. - Capital to labor ratio has increased, reflecting lower labor force growth and investment patterns. ### Key macroeconomic indicators and projections (selected, from Table 1 and Table 5) - Nominal GDP (2017): US$324 billion. - GDP per capita (2017): US$57,737. - Population (June 2017): 5.61 million. - Main goods exports (2017, percent of total exports): Electronic products 33 percent; mineral fuels 18 percent; chemical products 14 percent. - Top three destinations for goods exports (2017, percent of gross goods exports): China 14 percent; Hong Kong SAR 12 percent; Malaysia 11 percent. - Real GDP growth (percentage change): 2013 5.1; 2014 3.9; 2015 2.2; 2016 2.4; 2017 3.6; 2018 2.9; 2019 2.7 (Table 1 and Table 5). - Current account as percent of GDP (selected projections): 2017 18.8; 2018 18.2; 2019 18.0; Medium-term: 2020 17.7; 2021 17.4; 2022 16.7; 2023 16.0 (Table 5). *Source: IMF staff report content provided in the supplied PDF excerpt.* ### Appendix I. Recent Labor Market Developments ### Appendix I. Recent Labor Market Developments ### Labor force trends - The labor force declined in 2017 for the first time since 2003. - Growth in labor force had been slowing down since the Global Financial Crisis (GFC), reflecting a combined effect of slowing working-age population growth and stricter limits on use of immigrant labor in the last 5–6 years. - The decline in labor force in 2017 was concentrated in the non-resident population, while growth in residents seeking employment decelerated. - Resident labor force participation has not changed much in the last two years after growing steadily for several years on improved female labor force participation. Key statistics: - “first time since 2003” - “last 5–6 years” ### Employment developments - Net changes in employment have slowed down considerably in the last three years. - In 2017, total employment fell despite some increase in the fourth quarter on year-end seasonal demand in the services sector. - Employment of residents grew, but remained below the levels seen prior to 2015. - Total employment for foreign workers declined in 2017 and in 2018Q1, particularly for work permit holders in construction. - Singapore uses a system of levies and dependency ceilings (maximum ratio of foreign workers to total workers) to manage inflows of certain categories of foreign workers; these mechanisms have been tightened in the last few years, with some exceptions (e.g., previously scheduled levy increases in the marine sector has not yet been implemented). - Employment in manufacturing declined at a slower pace reflecting higher demand, while changes in services sector employment were similar to 2016. - Both manufacturing and constructions sectors continued to shed employment in 2018Q1. ### Unemployment and labor market slack - The unemployment rate has remained largely stable. - The overall unemployment rate was largely unchanged in 2017. - By 2018Q1, unemployment rates for Singapore residents and citizens had fallen from their early-2017 peaks as they saw a faster increase in employment. - The ratio of job vacancies to unemployed persons ratio has steadily improved since early 2017, reaching slightly above unity in 2018Q1, which indicates that the labor market slack has reduced. Key statistics: - “2017” - “2018Q1” - job vacancies to unemployed persons ratio: “slightly above unity in 2018Q1” ### Productivity and unit labor costs - Labor productivity improved in 2017. - Value-added per actual hours worked grew by 4.5 percent in 2017 for the entire economy, highest since 2010. - Labor productivity increased at a double-digit rate in the manufacturing sector. - Productivity also noticeably improved in wholesale and retail trade; transportation and storage services; and business services sub-sectors. - Productivity growth slowed down in the construction sector and declined in information and communication, and accommodation and food services sub-sectors. - Workers’ earnings increased, but productivity gains helped keep unit labor cost under control, particularly in the manufacturing sector. Key statistics: - “4.5 percent in 2017” - “highest since 2010” - “double-digit rate in the manufacturing sector” - unit labor cost: year-on-year percent change in 4-quarter moving average noted in sectoral comparisons for 2016, 2017, and 2018Q1 *Source: Appendix I. Recent Labor Market Developments (cr18245).* ### 5. Relying on different moments, the predicted growth distribution for one year ### 5. Relying on different moments, the predicted growth distribution for one year ahead ### Forecasting approach and model specification - Benchmark one-year-ahead model (forecast horizon h=4): function of Singapore’s past growth rate, changes in financial conditions (FCI Overall (change)), and changes in real house prices (Residential HP (yoy growth)). The model is augmented by Real GDP CHN (yoy growth). - Regressors are lagged 4 quarters. - Quantile regressions estimated at quantiles .1, .25, .4, .5, .6, .75, .9. - Three alternative model specifications considered: - Model 1: FCI Overall (change), Real GDP CHN (yoy growth), Residential HP (yoy growth), and autoregressive term (Real GDP SGP (yoy growth)). - Model 2: FCI Overall (change), Residential HP (yoy growth), and autoregressive term. - Model 3: FCI Prices, FCI Leverage, and FCI External, and autoregressive term. - Parametric fit for full conditional distribution: t-skew distribution (location/mode, degree of freedom, scale/variance, kurtosis, skewness) following Adrian et al. (2016) to capture fatter tails and skewness. Degrees of freedom computed directly; conditional mean retrieved from OLS with same specification as quantile regressions. Sigma, kurtosis, and skewness estimated by a constrained minimization (algorithm based on Singer and Nelder (2009)). ### Main forecast results and distributional statistics (one-year ahead, end-2018) - Interquartile interval (forecasted real growth): 2.1 to 6.5 percent. - Median (50th percentile) forecasted real growth: 3.5 percent. ### Growth-at-Risk and recession probability - Recession definition: negative year-on-year real GDP growth rate. - Recession probability: - 2017: 14.9 - 2018 (about): 8 percent - The probability of recession in 2018 is projected below the 12 percent historical average. - Different model specifications yield similar patterns in recession probability forecasts. ### Key quantile regression coefficient patterns (selected results from Table 3) - FCI Overall (change): negative and statistically significant across many quantiles (examples): - 0.1 quantile: -0.1202 (Std. Error 0.0425, t.value -2.83, P‐value 0.010) - 0.25 quantile: -0.0741 (Std. Error 0.0206, t.value -3.60, P‐value 0.00) - 0.5 quantile: -0.0697 (Std. Error 0.0196, t.value -3.55, P‐value 0.000) - 0.9 quantile: -0.5185 (Std. Error 0.2129, t.value -2.43, P‐value 0.02) - Real GDP CHN (yoy growth): positive and often highly significant across quantiles (examples): - 0.25 quantile: 1.3482 (Std. Error 0.2775, t.value 4.86, P‐value 0.00) - 0.4 quantile: 1.4601 (Std. Error 0.2243, t.value 6.51, P‐value 0.000) - 0.5 quantile: 1.4205 (Std. Error 0.2016, t.value 7.05, P‐value 0.000) - Real GDP SGP (yoy growth) (autoregressive term): negative coefficients in many quantiles (examples): - 0.25 quantile: -0.7047 (Std. Error 0.2366, t.value -2.98, P‐value 0.00) - 0.5 quantile: -0.3324 (Std. Error 0.1173, t.value -2.83, P‐value 0.010) - 0.9 quantile: -0.0669 (Std. Error 0.0138, t.value -4.84, P‐value 0.00) - Residential HP (yoy growth): mixed significance, positive at higher quantiles (examples): - 0.25 quantile: 0.1045 (Std. Error 0.0558, t.value 1.87, P‐value 0.06) - 0.75 quantile: 0.1109 (Std. Error 0.0449, t.value 2.47, P‐value 0.02) - 0.9 quantile: 0.1016 (Std. Error 0.0395, t.value 2.57, P‐value 0.01) - Goodness-of-fit / pseudo R-squared examples (from quantile results): - For 0.1 quantile: GoF test (P‑value) 0.21; Pseudo R squared 0.21. - For 0.5 quantile: GoF test (P‑value) 0.30; Pseudo R squared 0.30. - For 0.9 quantile: GoF test (P‑value) 0.45; Pseudo R squared 0.32. ### Robustness and alternative specifications - Table 4 compares coefficients across multiple versions (Main, Version 2, Version 3, Version 4, Version 5) showing: - FCI subcomponents (FCI External, FCI Leverage, FCI Prices) enter with varying signs and magnitudes across versions and quantiles. - Main qualitative conclusions on FCI overall (change), Real GDP CHN, and Real GDP SGP persist across versions. ### Methodological advantages and notes - Quantile regressions: - Provide best unbiased linear estimator for conditional quantiles under standard assumptions. - Are robust to outliers. - Have well-known asymptotic properties. - Conditional quantiles used as sufficient statistics to fit a full conditional cdf via a parametric t-skew distribution to handle fatter tails and skewness and avoid quantile crossing issues. - Optimization of t-skew parameters enforces positivity for sigma, skewness, and kurtosis. *Source: IMF staff calculations, cr18245 - 5. Relying on different moments, the predicted growth distribution for one year ahead* ### Appendix IV. Risk Assessment Matrix 1/ ### Appendix IV. Risk Assessment Matrix ### Risk Assessment Matrix — overview - The Risk Assessment Matrix (RAM) shows events that could materially alter IMF staff’s baseline path (the scenario most likely to materialize in the view of the mission). - The relative likelihood is staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). - The RAM reflects staff’s views on the source of risks and overall level of concern as of the time of discussions with the authorities. Nonmutually exclusive risks may interact and materialize jointly. ### External risks, likelihoods, transmission channels, expected impact, and recommended policy responses - Policy uncertainty - Likelihood: Medium - Transmission and expected impact: Two-sided risks to U.S. growth with uncertainties about the positive short-term impact of the tax bill on growth and the extent of potential medium-term adjustment to offset its fiscal costs; uncertainty associated with negotiating post-Brexit arrangements and NAFTA and associated market fragmentation risks; and evolving political processes, including elections in several large economies, weigh on the whole on global growth. - Expected impact on Singapore: High - Recommended policy response: - Continue to implement structural reforms to transform Singapore into a knowledge-based innovation-driven economy. - Should domestic demand weaken substantially, use temporary and targeted fiscal stimulus, loosen monetary policy, including recentering the NEER band if the shock is large, and recalibrate macro-prudential policy as necessary, while maintaining financial stability. - Retreat from cross-border integration - Likelihood: Medium - Transmission and expected impact: Fraying consensus about the benefits of globalization leads to protectionism and economic isolationism, resulting in reduced global and regional policy and regulatory collaboration with negative consequences for trade, capital and labor flows, and growth. - Expected impact on Singapore: High - Recommended policy response: - Continue to advocate for multilateralism, trade openness, and free flow of capital. - As ASEAN Chair in 2018, redouble efforts to accelerate ASEAN economic and financial integration. - Weaker-than-expected global growth (including significant China slowdown and its spillovers; significant U.S. slowdown; structurally weak growth in key advanced economies) - Likelihood: Low (short term)/Medium (medium term) for China slowdown; Medium (medium term) for U.S. slowdown; High (medium term) for structurally weak growth in key advanced economies - Transmission and expected impact: - Trade linkages: A significant slowdown in China would have both direct and indirect effects on Singapore’s exports; China is the second largest source of tourists for Singapore; domestic demand would be hit through worsening investment sentiment. Singapore’s high degree of openness and position as a financial center and a trading hub would imply large spillovers from global lower growth. High household leverage and potential asset price corrections could exacerbate a slowdown, with potential spillovers to banks. - Financial linkages: Although most domestic banks’ lending to China is assessed to be of high quality, total exposures remain high. Widespread corporate defaults could lead to rising NPLs. Financial stress in China could lead to a decline in investor sentiment, pullback of funding and market volatility. Inward spillovers from banks in advanced markets with significant presence in Singapore are also possible. - Expected impact on Singapore: Medium to High - Recommended policy response: - Provide temporary and targeted fiscal support and loosen monetary policy to offset headwinds from a potential slowdown. - Continue to monitor banks’ exposures to China and the rest of the region. Use prudential policies and bank supervision to ensure risks are managed well. - Continue to ensure that stress tests are up to date in an evolving environment with changing risks. - Should growth weaken substantially, use temporary and targeted fiscal stimulus, loosen monetary policy, including recentering of the NEER band, and recalibrate macro-prudential policy as necessary while maintaining financial stability. - Tighter global financial conditions - Likelihood: High - Transmission and expected impact: Higher debt service and refinancing costs, and corrections in asset prices could affect growth prospects through wealth effects and deteriorate banks’ capital, especially in light of the elevated levels of household and corporate debt and prevalence of variable interest rates. A decline in financial sector activity—an important driver of the economy and very sensitive to the global risk sentiment—could slow growth. - Expected impact on Singapore: Medium - Recommended policy response: - Ensure financial institutions maintain prudent risk management practices and have adequate liquidity and capital buffers. - Continue to ensure that stress tests are up to date in an evolving environment with changing risks. - Maintain close links with home country supervisors. - Recalibrate macro-prudential policies to mitigate financial sector stress. - In an extreme event, the strong official reserve position could provide an additional cushion. Swap lines with other central banks could complement this. - Cyber-attacks - Likelihood: Medium - Transmission and expected impact: Given Singapore’s role as a financial sector, cyber-attacks on interconnected financial systems and broader private and public institutions that trigger systemic financial instability or widely disrupt socio-economic activities could significantly impact the financial sector – an important driver of growth. - Expected impact on Singapore: Medium to High - Recommended policy response: - Continue to assess the adequacy of the information technology risk management practices in the financial system and prepare a contingency plan. - Coordinate with global financial regulators. - Should significant disruptions take place, provide temporary and targeted emergency liquidity support and/or fiscal support to ensure a functional banking system. ### Domestic risks, likelihoods, transmission channels, expected impact, and recommended policy responses - Disorderly correction in property prices - Likelihood: Low - Transmission and expected impact: Decline in collateral values and wealth effects could trigger a fall in economic activity and bank lending with further adverse feedback effects on household indebtedness and property prices. - Expected impact on Singapore: Medium - Recommended policy response: - Adjust macro-prudential policies while safeguarding financial stability. - Use targeted assistance measures to households whose debt servicing capacity is adversely affected. - Low growth in productivity and investment - Likelihood: Medium - Transmission and expected impact: Sharp increase in unit labor costs and loss of competitiveness. Tighter immigration policy may reduce competitiveness and profitability and provide disincentives to invest in some sectors. Higher than expected transitional costs such as high frictional unemployment or higher than expected hollowing out in some sectors can have long-term effects on growth. - Expected impact on Singapore: Medium - Recommended policy response: - Adjust foreign worker policies to relax tightness in labor markets. - Provide targeted and temporary fiscal stimulus in areas of education and skills training to help reduce frictional unemployment. - Delays in implementing AML standards and associated reputational risks - Likelihood: Medium - Transmission and expected impact: Reputational risks. If risks related to opaque ownership structures, including in the wealth management sector, are not adequately addressed, changes in perceptions about Singapore’s good reputation could adversely affect the viability of the industry. - Expected impact on Singapore: Medium - Recommended policy response: - Continue to strengthen the AML/CFT regime in line with international standards, including with regard to entity transparency and international exchange of information. *Source: Appendix IV. Risk Assessment Matrix, IMF staff.* ### 1.7 percent of GDP in 2023. The fiscal position strengthened significantly in 2017 due mostly to ### cr18245 - 1.7 percent of GDP in 2023. The fiscal position strengthened significantly in 2017 due mostly to ### Fiscal outlook and baseline projections - Staff’s baseline does not include the proposal of raising the Goods and Services Tax rate after 2020. - The projected fiscal path reflects a normalization in revenues and further increases in outlays for aging-related healthcare and physical infrastructure needs. - Debt-to-GDP ratio under the baseline is projected to increase gradually to about 118 percent by 2023, an increase of about 6 percentage points of GDP since end-2017 (increase over 2011–17: 10.2 percentage points of GDP). - Gross financing needs (GFN) are expected to average at close to 8½ percent of GDP per annum in the medium term. - Lower fiscal surpluses going forward would contribute to a higher GFN to GDP ratio. - Primary (noninterest) revenue and grants: 16.1 (2017), 16.8 (2018), 15.8 (2019), 16.0 (2020), 16.1 (2021), 16.2 (2022), 16.4 (2023) — cumulative 97.0. - Primary (noninterest) expenditure: 18.0 (2017), 17.9 (2018), 18.6 (2019), 19.6 (2020), 19.8 (2021), 20.0 (2022), 20.1 (2023), 20.3 (2023?) — cumulative 118.5. - Primary Balance (staff estimates per GFSM 2014, excluding capital receipts and Net Investment Returns Contributions): -2.8 (2018), -3.6 (2019), -3.7 (2020), -3.8 (2021), -3.8 (2022), -3.8 (2023) in Baseline Scenario. ### Data coverage and choice of framework - Fiscal assumptions in the DSA are based on the central government debt, consistent with authorities’ reported government debt data. - Singapore’s high level of government assets calls for using the basic framework with some country-specific adjustments. - The current framework delinks the evolution of gross debt from the government’s fiscal accounts. - Public sector is defined as central government. ### Debt dynamics, interest-growth interactions, and identified flows - Nominal gross public debt: 99.3 (2016), 108.2 (2017), 112.2 (2018), 113.9 (2019), 115.2 (2020), 116.2 (2021), 117.0 (2022), 117.5 (2023), 117.9 (2023? table lists through 2023). - Public gross financing needs: 13.6 (2016), 5.2 (2017), 3.6 (2018), 7.2 (2019), 7.9 (2020), 9.2 (2021), 10.1 (2022), 8.0 (2023), 8.0 (2023). - Real GDP growth (in percent): 5.2 (2016), 2.4 (2017), 3.6 (2018), 2.9 (2019), 2.7 (2020), 2.7 (2021), 2.6 (2022), 2.6 (2023), 2.6 (2023). - Inflation (GDP deflator, in percent): 1.4 (2016), 0.0 (2017), 0.9 (2018), 0.9 (2019), 1.2 (2020), 1.3 (2021), 1.3 (2022), 1.3 (2023), 1.3 (2023). - Nominal GDP growth (in percent): 6.7 (2016), 2.4 (2017), 4.5 (2018), 3.9 (2019), 4.0 (2020), 4.0 (2021), 4.0 (2022), 4.0 (2023), 4.0 (2023). - Effective interest rate (in percent, defined as interest payments divided by debt stock at end of previous year): … 3.5 (2019), 3.6 (2020), 3.7 (2021), 3.8 (2022), 4.0 (2023), 4.2 (2023). - Change in gross public sector debt: 1.4 (2016), 7.5 (2017), 4.0 (2018), 1.7 (2019), 1.3 (2020), 1.0 (2021), 0.7 (2022), 0.6 (2023), 0.4 (2023) — cumulative 5.7. - Identified debt-creating flows: ... -2.1 (2016), -1.1 (2017), 1.0 (2018), 0.8 (2019), 0.7 (2020), 0.7 (2021), 0.9 (2022), 0.9 (2023) — cumulative 5.1. - Automatic debt dynamics (interest rate/growth differential contribution): ... -2.3 (2016), -4.7 (2017), -0.5 (2018), -0.5 (2019), -0.4 (2020), -0.2 (2021), 0.1 (2022), 0.3 (2023) — cumulative -1.2. - Of which: real interest rate: ... 0.0 (2016), -0.9 (2017), 2.7 (2018), 2.5 (2019), 2.6 (2020), 2.7 (2021), 3.0 (2022), 3.2 (2023) — cumulative 16.9. - Of which: real GDP growth: ... -2.4 (2016), -3.7 (2017), -3.2 (2018), -3.0 (2019), -3.0 (2020), -3.0 (2021), -3.0 (2022), -3.0 (2023) — cumulative -18.1. - Other identified debt-creating flows: ... 0.2 (2016), 3.5 (2017), 1.5 (2018), 1.3 (2019), 1.1 (2020), 1.0 (2021), 0.8 (2022), 0.7 (2023) — cumulative 6.4. - Residual: ... 9.6 (2016), 5.2 (2017), 0.7 (2018), 0.5 (2019), 0.2 (2020), 0.0 (2021), -0.3 (2022), -0.6 (2023) — cumulative 0.5. - The Government of Singapore does not have foreign currency-denominated debt. ### Alternative scenarios presented - Baseline Scenario (selected underlying assumptions): - Real GDP growth: 2.9 (2018), 2.7 (2019), 2.7 (2020), 2.6 (2021), 2.6 (2022), 2.6 (2023). - Inflation: 0.9 (2018), 1.2 (2019), 1.3 (2020), 1.3 (2021), 1.3 (2022), 1.3 (2023). - Primary Balance: -2.8 (2018), -3.6 (2019), -3.7 (2020), -3.8 (2021), -3.8 (2022), -3.8 (2023). - Effective interest rate: 3.5 (2018), 3.6 (2019), 3.7 (2020), 3.8 (2021), 4.0 (2022), 4.2 (2023). - Historical Scenario (selected): - Real GDP growth: 2.9 (2018), 4.4 (2019), 4.4 (2020), 4.4 (2021), 4.4 (2022), 4.4 (2023). - Inflation: same as baseline. - Primary Balance: -2.8 (2018), -1.3 (2019), -1.3 (2020), -1.3 (2021), -1.3 (2022), -1.3 (2023). - Effective interest rate: 3.5 (2018), 3.6 (2019), 3.3 (2020), 3.1 (2021), 2.9 (2022), 2.7 (2023). - Constant Primary Balance Scenario: - Primary Balance held at -2.8 (2018–2023). - Other assumptions same as baseline. ### Housing market developments, policies (2009–17) and recent trends - Housing and systemic importance: - Property accounts for 44 percent of total household assets. - Mortgage loans form three-quarter of household liabilities. - Property-related loans are about 30 percent of banks’ loan books. - About 80 percent of residents live in Housing and Development Board (HDB) housing; 20 percent live in private housing. - More than three-quarter of total land in Singapore is state-owned. - Supply- and demand-side policy tools used: - Supply: land reclamation, control of land supply through lease of state-owned land, Government Land Sales (GLS) program, decentralization of jobs and offices. - Demand: Loan-to-Value (LTV) ratio limits, Seller’s Stamp Duty (SSD, introduced 2010Q1), Additional Buyer’s Stamp Duty (ABSD, end-2011), limits on Total Debt Servicing Ratio (TDSR, introduced 2013), fiscal measures and macroprudential tools. - Policy chronology and effectiveness: - SSD introduced 2010Q1; tightened 2010Q3 and 2011Q1. - ABSD introduced end-2011 with a 7 percentage point higher rate for foreign buyers initially; ABSD rates were raised further in 2013 (by 5-7 percentage points across the board). - TDSR limit introduced in 2013. - Seller’s Stamp Duty was relaxed in March 2017. - Empirical findings: Fu and others (2014) find the increase in stamp duty transaction taxes reduced speculative activity in Singapore by 75 percent; Agarwal and others (2018) show LTV-targeting measures dampened household leverage only after a shift in household expectations induced by tighter TDSR limits. - Market developments: - Property prices surged during the recovery in 2009–10; foreign demand returned to pre-crisis levels until 2013. - Prices continued to rise during 2011–13 despite subdued fundamentals; real GDP growth slowed from 15.2 percent in 2010 to 4.1 percent in 2012; resident population growth fell from 2.5 percent in 2009 to 0.8 percent in 2012. - After comprehensive cooling measures, prices declined: by 2017Q3 prices had declined by over 10 percent from their peak in 2013Q3. - Housing loan growth stabilized to 3-5 percent, y/y, from a peak level of 23 percent y/y in 2010Q3. - Private residential property prices started to pick up end-2017 and recorded an increase of 4.6 percent, y/y in 2018Q1. ### Long-run equilibrium housing prices and model findings - Long-run equilibrium estimated using quarterly real prices 1995–2017; models test cointegration and estimate relationships between real house prices and supply-demand fundamentals. - Key empirical relationships: - Positive association: residential prices with rental index, GDP per capita, household credit, construction costs. - Negative association: private residential supply and real interest rates. - Supply factors explain about half of long-run house price variations. - Heterogeneity across areas and property types: - Landed house prices: private residential supply and construction costs are important. - Non-landed house prices: supply factors less relevant. - Central area prices: largely driven by rental income; indicates higher propensity to rent and attractiveness to foreign investors. - Outside-central area: more affected by construction costs and private residential supply, and to a lesser degree by availability of credit. *Source: IMF staff estimates and analysis as presented in the provided content unit.* ### 11. Estimated long-run relationship suggests that current residential property prices ### 11. Estimated long-run relationship suggests that current residential property prices ### Long-run house price equilibrium: key findings - Estimated long-run relationship suggests that current residential property prices are above the level explained by fundamentals (Figure 2.1). - The positive deviations appear larger for the outside central area than for core areas (Figure 2.2). - These deviations are relatively small compared to the levels experienced before and after the Asian Financial Crisis, suggesting that policies used might have mitigated strong deviations. - Robustness and model notes: - Residuals from equations 1-3 in Table 2 are depicted in Figure 2.1. - Demographic factors such as dependency ratios were considered and not found significant. - The analysis uses seasonally-adjusted, logarithmic-transformed, constant-price series; private residential supply refers to total available units by type and location. ### Empirical determinants (highlights from Table 2) - Private residential supply coefficients: - Negative and significant in many specifications (examples include coefficients: -0.289***, -0.661***, -0.336*, -4.396***, -0.460***, -0.898***, -1.828***). - Construction cost: - Positive and significant in multiple specifications (examples include coefficients: 0.519***, 0.449***, 0.159***, 0.349***, 0.232***, 0.390***). - Real interest rate: - Negative and significant across specifications (examples include coefficients: -0.083***, -0.042***, -0.055***, -0.040***, -0.027**, -0.052***, -0.046***, -0.016*, -0.024**, -0.021**). - Rental index: - Positive and significant in several specifications (examples include coefficients: 0.528***, 0.317**, 0.680***, 0.786***, 0.311**, 0.411***). - Goodness-of-fit and sample: - Observations: 92 (many regressions); some regressions use 89 or 56 observations. - Adjusted R-squared reported values include: 0.451, 0.712, 0.890, 0.880, 0.854, 0.863, 0.820, 0.870, 0.940, 0.846, 0.965. - Period coverage for price index residential: 1995Q1-2017Q4 (varies by regression and price series). ### House price interconnectedness and spillovers - House prices of major Asian cities are highly synchronized, similar to patterns elsewhere (Figure 3). - Singapore house prices are highly connected to Melbourne, Sydney, Mumbai, and Hong Kong SAR. - ASEAN cities such as Kuala Lumpur, Jakarta, and Manila seem more influenced by house prices in Tokyo and Beijing. - Methodology and data: - Analysis based on Diebold and Yilmaz (2014) approach, controlling for global factors. - Uses quarterly real growth rates spanning from 2004Q1 to 2017Q2. - Network map: node size, location, and proximity reflect influence; arrow thickness reflects link distribution. - Interpretation: - High cross-country correlations imply house prices are driven not only by domestic factors; financial and trade linkages, historical shock transmission, demand for safe assets, and global search for yield may all matter. - The choice of macroprudential tools should depend on which segment of the market financial vulnerabilities are emerging. ### Policy measures and housing market tools (selected policy parameters and dates) - Loan-to-Value ratio (Jan. 2013): - 80% for individuals applying housing loans for their first home - 50% for second housing loans, or 30% if loan tenure is longer than 30 yrs. - 40% for third or subsequent housing loans, or 20% if loan tenure is longer than 30 yrs. - 20% for non-individual borrowers - Total Debt Servicing Ratio (Jun. 2013): - Total monthly debt obligation not to exceed 60% of gross monthly income.2/ - Seller's Stamp Duty (Mar. 2017): - Tax rate of 12% applies for properties sold within 1 year of purchase; 8% if sold within 2 years; 4% if sold within 3 years - Buyer's Stamp Duty (Feb. 2018 and Jan. 2013 provisions): - Tax structure (Feb. 2018): Tax rate of 1% applies to first $ 180,000 of the market value of the property; 2% for next $180,000; 3% for next $640,000; and 4% for remaining amount (i.e., over $ 1million). - Jan. 2013 status: Not applicable for Singaporean Citizens buying first residential property; Tax rates of 7% applies for citizens buying second residential property, or 10% if buying third or subsequent; 5% for Permanent Residents buying first residential property; or 10% if buying second or subsequent; 15% for foreigners and non-individuals buying any residential property - Minimum cash down payment (Jan. 2013): - 25% for individuals buying second or subsequent housing loans - Notes: - 2/ Monthly repayments of all loans, new and all other outstanding property and non-property loans, are considered. Gross income is assessed by applying haircut on all variable and rental income, and also when calculating income streams from eligible financial assets. - 1/ Months in which the latest change in each policy measure is made. - 3/ Buyer's Stamp Duty is also considered as a measure to make the tax system more progressive in a broader context. ### FinTech opportunities, risks, and regulatory implications (Appendix VIII highlights) - FinTech funding and activity (Asia and Singapore): - Cumulative fintech equity funding in Asia reached about US$28 billion in 2017, with two-thirds of that growth captured by China. - Asian FinTech startups received about US$9 billion in funding over 2013-2017 period. - Yearly funding peaked at US$12 billion in 2016. - Singapore-based FinTech companies received more than US$800 million; almost one-third of that funding went to trading and investments activities. - Singapore Life received about US$50 million in 2017 (insurance field). - Banks and investors: - Banks are among the main FinTech investors with more than US$13 billion channeled to firms headquartered in Asia. - More than two-thirds of the FinTech funding from banks came through equity financing. - Venture capital firms (e.g., Sequoia Capital, 500 Startups, IDG Capital Partners, Accel Partners) were among the most active investors by number of deals during 2000-2017. - Productivity and cost implications: - MAS estimated adoption of FinTech could result in a decline in banks’ cost-to-income ratios averaging about 15 percent across selected Asian economies, with a projected decline of 13.9 percent for Singapore-based banks. - Example: DBS Digibank operates with a cost-to-income ratio of about 34 percent, compared to 55 percent for traditional banking. - UBS estimate: AI could potentially increase bank revenue by 3.4 percent and reduce costs by about 4 percent over the next three years. - MAS launched a S$27 million grant to support adoption of new data analytics technologies such as AI and machine learning by financial institutions. - Risks and regulatory responses: - FinTech–financial system nexus poses challenges for financial stability (IMF 2017): credit risks from unsecured lending to FinTech firms; potential correlated losses in banks’ investment portfolios from FinTech-related shocks (e.g., cryptocurrencies). - Recommended regulatory emphases: - Increase monitoring of activities in addition to entity-focused oversight, given intertwined cross-country ownership of FinTech ecosystem. - Apply clear rules and standards for governance and integrity of data, algorithms, and platforms. - Shape regulation to promote lower barriers to entry while maintaining a level playing field and minimizing regulatory arbitrage. - Encourage low leverage among new market participants to allow sustainable growth and improve discipline, while addressing AML/CFT and cybersecurity threats. - Strengthen cross-border regulatory cooperation: FinTech Memoranda of Understanding (MoUs) and global or regional industry sandboxes can improve monitoring and cooperation (more than 30 Fintech MoUs signed since 2016 by major regulators). *Source: cr18245 — IMF staff estimates.* ### References ### cr18245 - References ### References - Bromberg, L., Godwin, A. and Ramsay, I., 2017, “Cross-border Cooperation in Financial Regulation: Crossing the Fintech Bridge.” Capital Markets Law Journal, 13(1), pp.59-84. - International Monetary Fund, 2017, “Fintech and Financial Services: Initial Considerations”, IMF Staff Discussion Note, SDN/17/05. - International Organization of Securities Commissions, 2017, “Research Report on Financial Technologies (Fintech)”, IOSCO, February. - Monetary Authority of Singapore, 2017, “Financial Stability Review”, November, Macroprudential Surveillance Department. - Philippon, T., 2015. “Has the US finance industry become less efficient? On the theory and measurement of financial intermediation.” American Economic Review, 105(4), pp.1408-38. - Philippon, T., 2016. “The Fintech Opportunity”, National Bureau of Economic Research No. w22476. - Rysman, M. and Schuh, S., 2017, “New Innovations in Payments.” Innovation Policy and the Economy, 17(1), pp.27-48. ### FUND RELATIONS — Key facts and arrangements - Membership Status: Joined August 3, 1966; Article VIII. - Quota: SDR Millions 3,891.90 (Percent of Quota 100.00). - Fund holdings of currency (exchange rate): SDR Millions 3,394.94 (Percent of Quota 87.23). - Reserve tranche position: SDR Millions 498.37 (Percent of Quota 12.81). - New Arrangements to Borrow: 68.74 (SDR Millions). - Net cumulative allocation (SDR Department): 744.21 (SDR Millions) (Percent of Allocation 100.00). - Holdings (SDR Department): 749.63 (SDR Millions) (Percent of Allocation 100.73). - Outstanding Purchases and Loans: None. - Financial Arrangements: None. - Projected Payments to the Fund: None. - Resident Representative: Mr. Jochen Schmittmann has been posted in Singapore since August 2017. - FSAP: FSAP Update missions on May 15−22, 2013 and July 25–August 7, 2013; findings presented in Financial System Sustainability Assessment (IMF Country Report No. 13/325). An FSAP is planned for 2019. - Technical Assistance: None. ### Exchange arrangement and capital restrictions — highlights - De facto exchange rate arrangement: “stabilized arrangement.” - De jure exchange rate arrangement: “other managed.” - MAS monitors S$ against an undisclosed basket and intervenes to maintain value within an undisclosed target band; the U.S. dollar is the intervention currency. - Singapore has accepted obligations of Article VIII, Sections 2, 3, and 4. - Restrictions: Singapore maintains restrictions on Singapore dollar credit facilities to, and bond and equity issuance by, nonresident financial institutions: - Singapore dollar proceeds obtained by nonresident financial entities from loans exceeding S$5 million, or any amount for equity listings or bond issuance to finance activities outside Singapore, must be swapped or converted into foreign currency upon draw down. - Financial institutions are prohibited from extending Singapore dollar credit facilities in excess of S$5 million to nonresident financial entities if there is reason to believe proceeds may be used for Singapore dollar currency speculation. - Property market measures: Additional stamp duties on purchases by foreigners and corporate entities of residential properties in Singapore (measures maintained to contain a real estate price bubble). ### STATISTICAL ISSUES — Assessment and data practices - General assessment: Data provision is broadly adequate for surveillance; more disaggregated data would enhance macroeconomic policy analysis, particularly external, monetary, and fiscal areas. - National accounts: - Reconciliation of various national accounts estimates conducted in 2014, resulting in lower statistical discrepancies. - Rebasing of national accounts to reference year 2010 completed. - Price statistics: - Consumer Price Index (CPI) rebased to base year 2014; CPI is rebased once every five years. - Government finance statistics: - Information on government assets held abroad is neither published nor provided to the Fund; partial annual information on interest and dividends on these assets is published. - Debt service payments on domestic debt from the Government Securities Fund are published annually. - Data on the financial position of the consolidated public sector are not published. - Monetary statistics: - MAS has not submitted the standardized report forms (SRFs) for monetary statistics introduced in October 2004 (SRFs provide accounting breakdown by instrument, sector, and currency). - Balance of payments: - Migration to BPM6 completed in February 2012. - Main BPM6 changes relative to BPM5 include: reclassification of repairs on goods and processing fees to services (from goods); reclassification of merchanting to goods (from services); treating banks’ Asian Currency Units (ACUs) as residents. - International investment position (IIP) data are not provided on a disaggregated sectoral basis as suggested by BPM6. - Authorities completed revising IIP data to include all foreign assets held by Singapore’s Government Investment Corporation; associated flows were already included in balance of payments. - Data Standards and Quality: - Singapore provides data on a timely basis and meets all the SDDS specifications (coverage, periodicity, timeliness, advance release calendars, quarterly certification of metadata on the Fund’s DSBB, and provision of information to assess data quality). - No data ROSC is available. ### Singapore — Table of Common Indicators Required for Surveillance (As of June 20, 2018) — selected latest observations and reporting frequencies - Exchange rates: Date of Latest Observation 6/20/18; Date Received 6/20/18; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International reserve assets and reserve liabilities of the Monetary Authorities: Date of Latest Observation 5/2018; Date Received 6/2018; Frequency M M M. - Reserve/base money: Date of Latest Observation 4/2018; Date Received 5/2018; Frequency M M M. - Broad money: Date of Latest Observation 4/2018; Date Received 5/2018; Frequency M M M. - Central bank balance sheet: Date of Latest Observation 4/2018; Date Received 5/2018; Frequency M M M. - Consolidated balance sheet of the banking system: 4/2018; 5/2018; M M M. - Interest rates: Date of Latest Observation 6/20/18; Date Received 6/20/18; Frequency D D D. - Consumer price index: 4/2018; 5/2018; M M M. - Revenue, expenditure, balance and composition of financing — general government: Latest observation 3/2017; Date Received 9/2017; Frequency A A A. - Revenue, expenditure, balance and composition of financing — central government: 4/2018; 5/2018; M M M. - Stocks of central government and central government-guaranteed debt: 2018:Q1; 5/2018; Q Q Q. - External current account balance: 2018:Q1; 5/2018; Q Q Q. - Exports and imports of goods and services: 2018:Q1; 5/2018; Q Q Q. - GDP/GNP: 2018:Q1; 5/2018; Q Q Q. - Gross external debt: 2017:Q4; 3/2018; Q Q Q. - Net international investment position: 2017:Q4; 3/2018; Q Q Q. - Notes and definitions: - 1 Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA). - 2 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. - 3 Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds. - 4 Foreign and domestic banks, and domestic nonbank financing. - 5 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. - 6 Including currency and maturity composition. - 7 Official external debt is zero. ### Statement by Juda Agung, Executive Director for Singapore and Chengyi Ong, Advisor — Key messages (July 20, 2018) - 1 Introduction - The Singapore authorities thank the IMF mission team for a constructive and engaging 2018 Article IV consultation and welcome the analytical studies prepared. - 2 Recent Economic Developments and Outlook - Global and Singapore growth: - Global GDP growth in 2017 was at its strongest since 2011. - Singapore economy expanded by a firm 4.1% in the first half of 2018. - H2 2017 growth was 4.5% y-o-y; H1 2018 growth profile more evenly distributed across industry clusters. - 2018 outlook and risks: - Barring materialisation of tail risks, Singapore’s GDP growth is expected to come in at 2.5–3.5% in 2018, in line with potential. - Manufacturing growth likely to moderate further. - Support from resilient regional demand, digital transformation, and stronger labour market outcomes expected to support services clusters. - Inflation: - MAS Core Inflation averaged 1.5% in 2017 and in Jan–May 2018, compared to 0.5% in 2015. - CPI-All Items averaged 0.5% over 2017 to May 2018. - Authorities expect core and headline inflation to average in the upper half of the 1–2% and 0–1% ranges, respectively for 2018. - External inflationary pressures (global oil price rally) are feeding through to domestic oil-related components; upside risks to food inflation exist. - 3 Macroeconomic and Financial Stability - Policy stance: - MAS undertook gradual normalisation of monetary policy in April 2018 after two years at a neutral stance; slope of the S$NEER policy band was increased slightly to a modest and gradual appreciation path. - Policy response based on baseline projections of rising core inflation and steady growth; approach is incremental and not aimed at pre-empting tail risks. - MAS will monitor developments and adjust policy depending on assessments of inflation and growth prospects. - Property market measures: - On 5 Jul 2018, authorities adjusted the Additional Buyer’s Stamp Duty (ABSD) rates and Loan-to-Value (LTV) limits on private residential property purchases to cool the market and align price increases with fundamentals. - Measures calibrated to dampen the upswing since late-2017; comprehensive package of tax and credit-based measures implemented. - Financial system resilience: - Authorities note high financial regulatory and supervisory standards. - MAS stress tests indicate resilience under severe stresses due to strong capital and liquidity buffers. - Authorities appreciate acknowledgement of Singapore’s FinTech development and regulatory adaptation. - 4 Medium-term Issues - Structural challenges and policy responses: - Challenges: rising Asia, changing global value chains, technological advancements, and population ageing. - Committee on the Future Economy (CFE) aims for a globally and regionally integrated economy with strong digital capabilities and skilled labour force. - Industry Transformation Maps (ITM) and programmes (e.g., National Research Foundation’s Early Stage Venture Fund; Partnerships for Capability Transformation (PACT)) support capability development and technology adoption. - Workforce support: - SkillsFuture initiative provides broad support for skills upgrading. - Adapt and Grow (A&G) initiative assists displaced workers; services include career matching centres and MyCareersFuture portal. - Direct wage support, training subsidies, allowances provided conditionally. - Means-tested social support such as GST Vouchers and ComCare, and MediShield Life medical insurance schemes, provide additional income and health security. - Authorities prefer targeted measures over universal schemes like unemployment insurance. - Fiscal and savings implications: - Pro-growth agenda and structural challenges will increase broad-based recurrent expenditure (healthcare, security) and long-lived infrastructure investment. - Government considering other revenue sources, including changes to the GST, to finance ageing-related spending pressures. - Major infrastructure investments will be financed through a mix of government grants, user fees and borrowing. - Public sector net savings has fallen as a share of GDP over the past decade; further acceleration of the fall expected due to demographic transition. - Net savings by households expected to decline given population ageing trends; drawdown of current account surpluses expected as these trends accelerate in the next ten years. - 5 Final Remarks - Global expansion likely to be sustained in 2018 but tail risks on the external front have grown significantly over the past six months. - Authorities will carefully monitor developments and stand ready to provide timely and appropriate support to ensure macroeconomic and financial stability in the event of a negative shock. *International Monetary Fund — cr18245 (References and accompanying informational annex content)* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18245.pdf_