## 1. Credit Growth and the Credit Intensity of Output ## Source details **Canonical URL:** [1. Credit Growth and the Credit Intensity of Output](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13328.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13328.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13328.pdf.json) --- ### Background — Challenges and Opportunities - Singapore faces: a rapidly‑aging population, limited room for productivity catch‑up in frontier sectors, and widening income inequality. - Constraints: growing land scarcity, the social choice to slow the intake of foreign workers, and a likely more moderate growth trajectory for large advanced and emerging market economies. - Strengths: flexible markets, strong finances, and forward‑looking policymaking that position Singapore to manage challenges and benefit from the pivot of global growth toward Asia. ### Recent Macroeconomic and Financial Developments - External and demand dynamics: - G3 (United States, euro area, and Japan) demand remains Singapore’s main external growth engine. - Growth weakened from 5¼ percent in 2011 to 1¼ percent in 2012, before rebounding strongly in H1:2013. - Domestic demand—especially consumption—has been considerably less volatile, though generally subdued. - Prices, labor, and inflation: - CPI‑based REER has risen by a cumulative 8¾ percent since end 2010; unit labor cost–based REER has jumped 17 percent. - Headline inflation reached 4−5 percent during 2010−12; headline inflation fell to 1.6 percent in September (2013). - Resident unemployment rate at 2.9 percent; unit labor costs rising at an annual rate of 6¼ percent in 2013. - Credit, leverage, and property: - Loans to nonfinancial resident borrowers increased by a cumulative 60 percent since end 2009. - Real estate‑related loans grew 75 percent and account for 46 percent of DBU loans to nonbank customers. - Leverage increased from 151 percent of GDP in 2008 to 182 percent of GDP in mid 2013. - Private house prices increased by 62 percent since their GFC trough; public resale housing has risen 46 percent since mid‑2009; private and public resale house prices rose some 54 percent on average from their mid‑2009 trough and have recently stabilized. - Nearly half of household wealth is held as real estate. - Mortgage conditions: very low mortgage rates (around one percent); TDSR caps payments at 60 percent of household income using an interest rate of 3½ percent (or the prevailing market interest rate, if higher); maximum allowable mortgage loan tenor now 35 years, with shorter limits for older borrowers. - Financial markets and funding: - From late April to late October (2013 implied), stock price index fell 7 percent; Singapore dollar eased by less than 1 percent against the U.S. dollar; NEER returned to the upper half of the policy band. - Longer‑dated government bond yields rose by ¾−1¼ percentage points; short‑term rates unchanged. - Real estate loans account for 28 percent of total (DBU plus ACU) loan portfolios. - DBU and ACU distinctions no longer clearly delineate resident versus nonresident borrowing. ### Structural Challenges and Demographics - Workforce and aging: - Very low fertility rates for several decades; workforce to plateau later this decade and decline thereafter. - Citizen old‑age dependency ratio projected to rise from less than one‑in‑five in 2012 to one‑in‑two in 2030. - Risks of prior growth model: - Absent structural changes, per capita income could decline and prices of labor‑intensive goods could rise sharply. - Policy strategy summary: - Government strategy focuses on enhancing labor productivity; raising fertility rates and resident labor participation; calibrated immigration and FW inflows; offshoring some labor‑ and land‑intensive activities; expanding infrastructure. ### Outlook and Risks - Short‑term forecast (2013−14): - GDP growth forecast to reach 3½ percent in 2013 and 3½ percent in 2014 (with carryover accounting for 1½ percentage points of growth in 2014), keeping output just above potential. - Core inflation expected to rise from temporary lows in 2013; headline inflation likely to stabilize at about 2½ percent. - Current account surplus forecast to narrow modestly to around 17½ percent of GDP by 2014. - Medium‑term expectations: - Potential GDP growth expected to dip significantly in the next few years on slower labor force expansion, then recover gradually to just under 4 percent in the medium term. - Aging‑related social spending to increase by 2½ percentage points of GDP, supporting demand rebalancing. - Main downside risks: - Disorderly UMP exit, euro area stress flare‑up, emerging market capital flow reversals. - High household and firm leverage increases vulnerability to sharp interest‑rate rises. - Prolonged slow euro area growth, weaker emerging market growth, or sharp slowdown in China would depress Singapore through trade, financial, and tourism channels. - Domestic restructuring could underdeliver productivity gains, undermining competitiveness. - Reputational risk from opaque beneficial ownership in offshore wealth management with potential negative implications for financial and external stability. ### Monetary Policy and Macroprudential (MaP) Measures - Monetary stance and framework: - MAS’s moderately restrictive monetary policy and modest gradual appreciation of the NEER policy band appropriate to contain demand pressures and prevent second‑round inflation effects. - Staff estimates: NEER band width of about ±2 percent; appreciating at an annual rate of around 2½ percent. - Exchange rate–centered framework preferred because unilaterally raising interest rates would attract capital inflows and exchange rate–sensitive components dominate real activity. - MaP findings and actions: - Targeted MaP measures effective in slowing house and car prices and promoting prudent lending (capping tenors, reducing multiple mortgages). - MaP toolkit can be implemented countercyclically; a roadmap for relaxing measures should be readied. - Growing reliance on MaPs may lead to circumvention, demand spillovers to substitute assets, administrative complexity, and internationalization spillovers. - Examples of operational tightenings include TDSR implementation, borrower‑title alignment requirement (June 2013), and extensions of housing measures to other real estate and cars. - Specific MaP timeline highlights (selected exact measures): - September 2009: LtV ceilings lowered to 80 percent and then to 70 percent for buyers with existing mortgaged property; SSD introduced and later extended; minimum cash payment raised. - December 2011: Additional buyer's stamp duty (10 percent for foreigners and corporate entities, 3 percent for PRs buying second property, etc.); maximum tenor capped at 35 years; extensive LtV and payment tightening; MSR cap for HDB loans set at 30 percent; SSD on industrial property introduced. - February 2013: TDSR not to exceed 60 percent; debt‑service computations use stress rates of 3.5 percent for housing and 4.5% for non‑residential. - August 2013: HDB loan tenor reduced to 25 years; MSR for HDB loans reduced to 30 percent; PRs must wait 3 years before buying resale HDB flat; refinements to CPF Housing Grants. ### Fiscal Policy and Structural Spending - Fiscal stance and Budget: - Fiscal stance restrictive in 2012‑13 due to large one‑off revenues; FY 2013 Budget (April 2013‑March 2014) focuses on restructuring and raising inclusiveness. - Staff expects fiscal policy to inject a stimulus of about 1¾ percent of GDP in 2013 and 2014 (though leakage abroad likely significant). - Government to allocate an additional 1−2 percentage points of GDP over the medium term for social and economic priorities (healthcare, income support, education, housing grants, transport). - Authorities’ fiscal approach: - Medium‑term objectives: strengthen productivity and foster inclusiveness. - A three‑year budget‑financed transition support package to promote restructuring (wage credits, corporate income tax rebates, investment subsidies). - Social measures to improve education access, expand wage supplements, and increase assistance to the elderly. - Budget implies a fiscal impulse of 1¾ percent of potential GDP, with macro impact dampened as stepped‑up social transfers may be saved and monetary policy internalizes fiscal stance. ### Financial Sector Resilience and Recommendations - System strengths and vulnerabilities: - Healthy bank and sovereign balance sheets; FSAP stress tests confirm resilience. - Household and corporate positions robust in aggregate but with wide dispersion concealing pockets of risk. - Property‑specific concerns: - About 70 percent of mortgages have variable rates tied to the 3‑month SIBOR. - Mortgage tenors have risen sharply; net housing wealth is large while liabilities are fixed. - Real estate‑related activities account for a non‑negligible share of GDP and employment. - Key metrics: - Total and Tier 1 capital ratios of 17 percent and 14 percent respectively at end‑March 2013. - Liquidity cover consolidated across all currencies in excess of 100 percent (but lower for U.S. dollars). - Nonperforming loans about 1 percent; mortgage NPL ratio was 0.3% as at Q3 2013. - Household debt is 77 percent of GDP in 2012 (about 210 percent of household income); household assets are more than 6 times liabilities; half of household assets are residential property. - Bank loans expanded to more than 170 percent of GDP in mid 2013; housing and construction account for 46 percent of bank loans. - Average LtV of all outstanding mortgages is 47.5%; average risk weights of locally‑incorporated banks around 45% as at Q2 2013. - Policy recommendations: - Implement a countercyclical capital buffer. - Step up onsite inspections of banks’ credit risk and enforcement of underwriting standards. - Further strengthen foreign currency liquidity management practices and monitor fx swap exposures. - Broaden banks’ real estate exposure limits to include owner‑occupied mortgages. - Encourage highly leveraged households to reduce housing debt; consider raising mortgage risk weights where appropriate. - Prepare operational frameworks for resolution: authorize SDIC to provide least‑cost support for deposit transfers; ensure banking industry contributes adequately to failure costs; facilitate cross‑border cooperation in bank resolution; formalize bilateral crisis management agreements for FMIs. ### Financial Center and AML/CFT Considerations - Cross‑border and center risks: - Foreign banks mainly operate as branches; MAS participates in Supervisory College and Crisis Management groups. - Rapid expansion of cross‑border trade finance and heavy reliance on fx swap market could be vulnerable during global stress. - Large and growing assets under management (over US$1.3 trillion) and past AML/CFT weaknesses expose Singapore to being used as a harbor or conduit for illicit assets. - Policy actions: - Criminalized laundering of proceeds of tax evasion and tax fraud (since July 2013). - Measures to make tax evasion a predicate crime for money laundering, bolster international tax cooperation and information sharing, and commit to AML/CFT assessment under revised FATF methodology in 2015. - Urged addressing deficiencies on transparency of beneficial ownership of companies and trusts. ### External Sector Assessment and Current Account - Current account and reserves: - Current account surplus shrank by 6 percentage points in 2012 to 18½ percent of GDP. - Current account expected to narrow modestly to around 17½ percent of GDP by 2014. - Current reserves at 95 percent of GDP. - External position evaluation: - Standard CGER indicators suggest the current account remains 4½−8 percent of GDP above its norm in the medium term. - Additional factors (MNC presence, corporate saving, income distribution) may further elevate the current account and increase uncertainty; data limitations preclude precise quantification. - MNC and measurement issues: - Singapore’s stock of FDI liabilities is 262 percent of GDP. - Presence of foreign MNCs and retained earnings reporting may cause measured current account to overstate underlying wealth accumulation. ### Policy Guidance and Executive Board Assessment - Directors’ guidance: - Cyclical conditions call for a moderately restrictive policy mix. - Continue tight monetary stance (nominal exchange rate appreciation) to anchor inflation expectations. - Deploy macroprudential policies as needed to contain asset prices and promote prudent lending. - Modest fiscal stimulus warranted to enhance productivity and relieve future supply constraints. - Financial sector priorities reiterated: - Countercyclical capital buffer, stepped‑up onsite inspections, strengthened foreign currency liquidity practices, and vigorous AML/CFT enforcement. - External rebalancing: - Support authorities’ plans to raise public infrastructure and targeted social spending; policies to boost labor productivity will help address aging and workforce decline. - A subset of Directors considered a faster pace of nominal exchange rate appreciation might aid external rebalancing. ### Key Quantitative Highlights (select figures preserved exactly) - Growth: 5¼ percent (2011), 1¼ percent (2012), forecast 3½ percent (2013), 3½ percent (2014). - Inflation: headline 4−5 percent (2010−12); CPI‑All Items 1.6 percent (September 2013); headline projected to stabilize at about 2½ percent. - Exchange rates and REER: CPI‑based REER up 8¾ percent since end 2010; unit labor cost–based REER up 17 percent. - Credit and leverage: loans to nonfinancial resident borrowers up 60 percent since end 2009; real estate‑related loans up 75 percent; leverage 182 percent of GDP (mid 2013). - Households: household debt 77 percent of GDP in 2012 (about 210 percent of household income); assets more than 6 times liabilities; one third of outstanding loans are for non‑owner occupied properties. - Banking sector: total and Tier 1 capital ratios 17 percent and 14 percent at end‑March 2013; nonperforming loans about 1 percent. - External balances: current account 18½ percent of GDP (2012); reserves 95 percent of GDP. - Assets under management: over US$1.3 trillion. *Source: _cr13328.* ### 1. Credit Growth and the Credit Intensity of Output ___________________________________________ 20 ### 1. Credit Growth and the Credit Intensity of Output ### Background — Challenges and Opportunities - Singapore faces challenges common to advanced peers and those unique to a mature city state: a rapidly-aging population, limited room for productivity catch-up in frontier sectors, and widening income inequality. - Constraints amplifying these challenges: growing land scarcity, the social choice to slow the intake of foreign workers, and a likely more moderate growth trajectory for large advanced and emerging market economies. - Strengths: flexible markets, strong finances, and forward-looking policymaking that position Singapore to manage challenges and benefit from the pivot of global growth toward Asia. ### Recent Developments — Macroeconomic and Financial Trends - Executive Directors’ concerns (2012 Article IV): weak external demand, price pressures from labor market tightening, large property exposures, and growing cross-border financial linkages. - Progress noted: moderating consumer price inflation, downward revision in outlook for main trade partners, credit and household indebtedness rising at a more moderate pace, and property prices recently stabilized. - External influences: - G3 (United States, euro area, and Japan) demand remains Singapore’s main external growth engine. - Unconventional monetary policies (UMPs) and shifts in global risk sentiment boosted financial market activity and demand for real estate. - Labor policy: measures to slow the increase in foreign workers (FWs) introduced in 2010 and tightened subsequently to encourage faster wage and productivity growth in labor-intensive sectors and ease congestion. - Real economy outcomes: - Growth weakened from 5¼ percent in 2011 to 1¼ percent in 2012, before rebounding strongly in H1:2013. - Domestic demand—especially consumption—has been considerably less volatile, though generally subdued. - External sector: - Current account surplus shrank by 6 percentage points in 2012, falling to 18½ percent of GDP as exports declined while imports continued to expand. - CPI-based real effective exchange rate (REER) has risen by a cumulative 8¾ percent since end 2010. - Unit labor cost-based REER has jumped 17 percent. - Inflation and labor market: - Headline inflation pushed to 4−5 percent during 2010−12 by rising housing prices and rationed vehicle ownership permits. - Core inflation increased more modestly; restrictive macroprudential (MaP) measures on housing and cars pushed down headline inflation to 1.6 percent in September (2013). - Resident unemployment rate at 2.9 percent, close to historical lows; unit labor costs rising at an annual rate of 6¼ percent in 2013. - Credit and property: - Loans to nonfinancial resident borrowers increased by a cumulative 60 percent since end 2009. - Real estate-related loans (housing loans, loans to the building and construction sector) grew 75 percent and account for 46 percent of DBU loans to nonbank customers. - Leverage increased from 151 percent of GDP in 2008 to 182 percent of GDP in mid 2013. - Private and public resale house prices rose some 54 percent on average from their mid-2009 trough and have recently stabilized with intensive application of MaPs. - Private house prices increased by 62 percent since their GFC trough; public resale housing has risen 46 percent since mid‐2009. - Nearly half of household wealth is held as real estate. - Mortgage conditions: very low mortgage rates (around one percent); TDSR caps payments at 60 percent of household income, calculated using an interest rate of 3½ percent (or the prevailing market interest rate, if higher) for the marginal mortgage loan; maximum allowable mortgage loan tenor now 35 years, with shorter limits for older borrowers. - Financial markets: - Markets absorbed expectations of future QE tapering with limited volatility. - From late April to late October (year implied 2013), stock price index fell 7 percent, Singapore dollar eased by less than 1 percent against the U.S. dollar, NEER returned to the upper half of the policy band. - Longer-dated government bond yields rose by ¾−1¼ percentage points; short-term rates unchanged. - Data/accounting notes: - Real estate loans account for 28 percent of total (DBU plus ACU) loan portfolios. - DBU and ACU distinctions no longer provide a useful delineation between resident versus nonresident borrowing because domestic banks extend loans to nonresidents through their DBU books (about a third of the total). ### Structural Challenges - Demographic headwind: - Very low fertility rates for several decades, already-high labor force participation, and constraints on absorbing a further large influx of foreign workers suggest the workforce will plateau later this decade and decline thereafter. - Citizen old-age dependency ratio (aged 65 and above relative to working age) projected to rise from less than one-in-five in 2012 to one-in-two in 2030. - Risks of sustaining the prior labor-intensive growth model: absent structural changes, per capita income could decline and prices of labor-intensive goods could rise sharply. ### Outlook and Risks - Short-term forecast (2013−14): - GDP growth forecast to reach 3½ percent in 2013 and 3½ percent in 2014 (with carryover accounting for 1½ percentage points of growth in 2014), keeping output just above potential. - External sector expected to return to expansion as strengthening G3 activity offsets slower regional growth. - Consumption likely to increase modestly; public investment forecast to remain robust. - Core inflation expected to rise from temporary lows in 2013; headline inflation likely to stabilize at about 2½ percent. - Current account surplus forecast to narrow modestly to around 17½ percent of GDP by 2014. - Medium-term expectations: - Potential GDP growth expected to dip significantly in the next few years on slower labor force expansion, then recover gradually to just under 4 percent in the medium term—well below the pace during 2000−08. - A 2½ percentage points of GDP increase in primarily aging-related social spending is expected to support demand rebalancing; more appreciated REER expected to narrow the current account surplus. - Risk factors (balance tilted to the downside): - Disorderly UMP exit, flare-up in euro area financial stress, and/or emerging market capital flow reversals could transmit strains via asset repricing and liquidity pressures. - High leverage among households and firms increases vulnerability to an unexpectedly sharp rise in interest rates. - Prolonged slow euro area growth, weaker emerging market growth, or a sharp medium-term slowdown in China would depress Singapore through trade, financial, and tourism channels. - Domestic policies to reduce labor intensity carry the risk of insufficient productivity gains, undermining competitiveness and causing business closures and structural unemployment. - Reports that Singapore’s foreign banks, companies and trusts may have permitted nonresidents to conceal beneficial ownership of assets for tax evasion purposes could expose Singapore to reputational risk with negative implications for financial and external stability. ### Authorities’ Views - Authorities expected growth to pick up in 2013 on somewhat better global prospects: - Economy expected to expand by 2½−3½ percent in 2013, with improved conditions in advanced economies and recovery in the global IT sector outweighing headwinds from slowdown in China and softer regional trade. - Headline inflation expected to ease to 2.5−3 percent in 2013 due to measures already taken, with core inflation rising mildly from the middle of 2013 as wage and rental cost pressures are passed on amid firmer demand. *International Monetary Fund — Singapore: Selected Chapter "1. Credit Growth and the Credit Intensity of Output"* ### 13. While the probability of extreme events has receded, several risks remain. Conditioned ### _cr13328 - 13. While the probability of extreme events has receded, several risks remain. Conditioned ### Risks and downside scenarios - Mis­timed exit from UMPs, a hard landing in China, or a renewed flare up in euro area stress would adversely affect the Singapore economy through trade, credit, and financial channels. - Domestic restructuring poses risks if inflation expectations become unhinged or productivity significantly lags wage growth. - Ongoing global normalization risks include a disruptive unwinding of UMPs and potential seizures in the fx swap market. ### Monetary and macroprudential policies — complementary pair - MAS’s moderately restrictive monetary policy is appropriate to contain demand pressures and prevent possible second round inflation effects. - Modest gradual appreciation of the NEER band since early 2012 continues to be appropriate to keep aggregate demand in line with output and prevent restructuring-related transitory price effects from becoming entrenched. - Staff estimates: NEER band width of about ±2 percent; appreciating at an annual rate of around 2½ percent. - Sustained deviations from the baseline growth forecast or evidence of significant second round inflation effects would warrant a compensating adjustment to the policy rate of crawl. Findings on macroprudential (MaP) measures - Using the NEER to affect aggregate demand is consistent with Singapore’s very large external sector (trade is nearly four times GDP). - Tightening policy through faster appreciation could increase financial stability risks by depressing nominal interest rates, which are determined by interest parity in the very open financial account. - Authorities’ targeted and well-coordinated MaP measures have been effective in slowing house and car prices and have helped make lending more prudent by capping tenors on new loans and reducing multiple mortgages. - The MaP toolkit can be implemented countercyclically; a roadmap for relaxing measures should be readied. - Growing reliance on MaPs may lead to circumvention, demand spillovers to near substitute assets, increased administrative complexity, and spillovers from internationalization of segments of the housing market. - Example operational tightening: in June 2013, MAS stipulated the mortgage borrower must be the same as the holder of the legal title to the property; measures originally for housing loans were extended to other real estate and cars. Authorities’ view (monetary & MaP) - Modest, gradual appreciation of the NEER policy band is appropriate amid restructuring and low global interest rates; real appreciation facilitates productivity gains and demand rebalancing while guarding against a buildup of inflation expectations. - Exchange rate–centered framework preferred because unilaterally raising interest rates would attract additional capital inflows and because exchange rate–sensitive components dominate real activity. - MaPs target demand at source, are adopted incrementally to minimize unintended consequences, and measures like the total debt servicing ratio should be considered permanent features to be dialed up or down with cyclical conditions. ### Fiscal policy - Fiscal stance: restrictive in 2012-13 owing to large one-off revenue from property transaction taxes and proceeds from auction of car ownership certificates. - FY 2013 Budget (in effect during April 2013-March 2014) focuses on restructuring and raising inclusiveness via: calibrated tightening of FW policy, cost defrayments for businesses to enhance productivity, more progressive taxes, stronger social safety nets, and increased public transport spending. - Staff expects fiscal policy to inject a stimulus of about 1¾ percent of GDP in 2013 and 2014, though leakage abroad likely significant given the very open economy. - With substantial budgeted spending aimed at boosting productivity and relieving future supply constraints, some stimulus is appropriate provided monetary policy maintains a tightening bias. Authorities’ view (fiscal) - Fiscal policy focuses on medium-term objectives of strengthening productivity and fostering greater inclusiveness. - A three­year budget­financed transition support package is intended to promote restructuring by absorbing part of the cost to firms of wage increases and new investments; support mechanisms include wage credits, corporate income tax rebates, and investment subsidies targeted at impacted firms, particularly SMEs. - Social measures include improving access to education, expanding wage supplements for low­income workers, and increasing direct assistance to the elderly. - The Budget implies a fiscal impulse of 1¾ percent of potential GDP, but macro impact will be dampened as some stepped­up social transfers will be saved and monetary policy decisions will internalize the fiscal stance. ### Shoring up financial sector resilience Findings and vulnerabilities - Healthy bank and sovereign balance sheets provide buffers; FSAP joint MAS­IMF stress tests confirm resilience. - Household and corporate positions are robust in the aggregate, but wide dispersion of household income/wealth and firm heterogeneity may conceal pockets of risk. - Buildup of leverage increases exposure to economic cycle turns and shocks; ongoing restructuring may reduce future debt­carrying capacity. - Property-specific concerns: - About 70 percent of mortgages have variable rates tied to the 3­month SIBOR, implying most rates would reprice in unison when short­term market rates increase. - Mortgage tenors have risen sharply, limiting scope to cushion higher interest rates by refinancing to longer tenors. - Net housing wealth is large but assets are subject to valuation changes while liabilities are fixed. - Real estate-related activities account for a non­negligible share of GDP and employment, with feedback risk to loan quality in a slowdown. - Recent policy steps: TDSR guidelines and credit card issuance rules to ensure prudent underwriting and slow credit growth. - Further suggested measures in FSSA (Box 6): broaden banks’ real estate exposure limits to include owner­occupied housing loans, encourage highly leveraged households to reduce housing debt, and increase on­site inspection of banks’ credit risks. Capital and risk-weight considerations - Capital risk weights applied to mortgages by local banks average about 10 percent and are very low by international standards. - MAS lacks explicit authority over risk weights of foreign branches; all institutions in Singapore are subject to MaP measures but not to uniform risk-weight setting by MAS. - Scope may exist to raise mortgage risk weights if home supervisors revise weights accordingly; recent conversion of a major foreign bank branch into a Singapore subsidiary strengthens the case for a minimum mortgage risk weight floor above prevailing weights. Authorities’ view (financial resilience) - Locally incorporated banks hold capital in excess of MAS minimum requirements, which exceed Basel III standards, have buffers against large property price declines, and face rigorous stress testing. - High proportion of variable rate loans seen as helping cushion banks against higher rates. - Estimated 5−10 percent of households are over­leveraged on property purchases (defined as total debt service payments in excess of 60 percent of income); this could rise to 10−15 percent if mortgage rates rise by 3 percentage points. - Lower­income households with smaller savings and those with multiple mortgages or longer tenors are most at risk. - Large government assets provide scope for systemic support, including in prolonged elevated unemployment. ### Financial center considerations - Foreign banks mainly operate as branches and are closely interconnected with larger parent banks; MAS participates in Supervisory College and Crisis Management groups and advocates for enhanced sharing of supervisory information. - Rapid expansion of cross-border trade finance by the Big 3 local banking groups increased presence in under­banked neighbors, raising liquidity and credit risks; trade­related lending mainly to China and ASEAN has been funded by swapping SGD liquidity into U.S. dollars. - Reliance on fx swap market remains high and could be vulnerable during global stress, though Singapore’s fx swap market has been resilient in earlier stress episodes. - Large and growing assets under management and past AML/CFT weaknesses expose Singapore to risk of being used as a harbor or conduit for illicit assets. - Measures in place or in progress: making tax evasion a predicate crime for money laundering, bolstering framework for international tax cooperation and information sharing, committing to undergo in 2015 an AML/CFT assessment under the revised FATF methodology, and urged addressing deficiencies on transparency of beneficial ownership of companies and trusts. Authorities’ view (financial center) - Preemptive steps to contain risks inherent in being a regional hub have been adopted; banks broadened U.S. dollar funding profiles by issuing commercial paper and stepping up deposit taking. - Singapore has implemented stringent measures to combat money laundering, terrorism financing, and tax evasion; since July 2013, Singapore criminalized laundering of proceeds of tax evasion and tax fraud. ### Adjusting to demographic decline - A large education dividend, supplemented by inflows of foreign workers with key skills, would cushion the impact of demographic decline; higher educational attainment of younger cohorts allows a smaller labor force to be used more effectively. - Greater reliance on labor­saving technologies will help manage a shrinking labor force but may hollow out labor­intensive tradables and cause redundancies if re­training is unsuccessful. - Continuing to tap foreign manpower needed to alleviate local shortages of critical skills. - Aging population effects: - CPF is a mandatory defined-contribution savings scheme; fiscal obligations for old­age income support are limited to providing a guaranteed minimum rate of return on accumulated savings. - Only citizens and permanent residents may participate in the CPF; uneven income distribution and CPF incentives to save in real estate imply some elderly may retire with insufficient liquid assets. - More health care spending will be required; health care is currently largely privately financed. - Government has increased spending for social safety nets and infrastructure for the elderly and commits to further increases while drawing on income from public sector reserves and, to a lesser extent, raising taxes. - The narrowing of the fiscal surplus and stepped up spending by retirees of CPF and other savings are expected to further narrow the current account surplus over the medium term. *Source: _cr13328.* ### 28. A comprehensive approach has been adopted to address Singapore’s demographic ### _cr13328 - 28. A comprehensive approach has been adopted to address Singapore’s demographic ### Demographic strategy and labor market implications - Government strategy focuses on: - (i) enhancing labor productivity; - (ii) raising fertility rates and further increasing resident labor force participation; - (iii) continuing immigration and FW inflows in a calibrated manner, and offshoring some labor­- and land­-intensive activities; - (iv) expanding infrastructure to accommodate a growing population. - As the economy restructures and businesses adopt laborsaving technologies: - Some increase in unemployment is to be expected, but with retraining, no permanent uptick is likely. ### Social safety nets and fiscal implications - Shift to strengthen social safety nets while preserving self reliance. - CPF (Central Provident Fund) limits contingent fiscal liabilities related to population aging and social security. - Government will allocate an additional 1−2 percentage points of GDP over the medium term for social and economic priorities, including: - healthcare, income support, education, housing grants, and transport infrastructure. - Policy design principles: - Benefits will be well targeted; - Work incentives will be retained. - Authorities have sufficient space to fund policy shifts for now, but must ensure revenues continue to meet expenditure increases. ### External sector assessment and current account - Standard indicators suggest the external sector remains stronger than warranted by medium­-term fundamentals and desired policies (Appendix 2). - Contributors to large current account surplus since 2000 include: - heavy reliance on low­-wage foreign workers that discouraged fixed capital investment; - policies that boost public and private saving; - as a major financial center, a large stock of net international assets to safeguard against financial shocks (Figure 7). - Current reserve levels are at 95 percent of GDP and appear adequate; no clear case for further accumulation for precautionary purposes. - Income generated by existing large net foreign assets keeps the current account elevated. - Recent sharp narrowing of the current account during 2011−12 appears driven by structural factors (including lower labor intensity and REER appreciation) rather than multilateral output and terms of trade gaps. - Various standard indicators—including CGER methods—suggest the current account remains 4½−8 percent of GDP above its norm in the medium term. - Additional considerations likely raise the current account and increase uncertainty: - Singapore is an outlier on extent of population aging, role as a major financial center but not a reserve-currency issuer, large lagged current account and NFA stock—estimated contributions may be understated. - Low labor share of GDP implies a large corporate share; corporate saving may be higher due to presence of foreign multinationals retaining earnings. - Greater income inequality (Gini coefficient) and higher saving propensity of wealthier households could have raised aggregate saving. - Authorities’ view: external sector expected to continue moving toward equilibrium over the medium term; current account surplus likely to continue narrowing and the real exchange rate to appreciate. ### Macroeconomic stance and staff appraisal (growth, inflation, labor market) - 2013 appraisal: - Growth expected to recover to a moderate pace in 2013 after weak 2012. - Inflation has fallen sharply from elevated levels. - Unemployment remains low with robust job creation. - Credit growth moderated to low double­-digit rates and house prices have stabilized. - Risks tilt to the downside due to external and domestic factors. - MAS policy of modest gradual appreciation is consistent with keeping the output gap contained and anchoring inflation expectations. - Targeted macroprudential measures (MaPs) have been effective but could face operational limits if overused. - FY 2013 Budget is expansionary; appropriate given expected leakage abroad, tightening monetary bias, and goal of enhancing productivity. ### Financial sector resilience and policy recommendations - Financial system characteristics and risks: - Highly developed, well regulated and supervised. - Domestic banks performed well; risks stem from high leverage in the economy, elevated real estate prices, and potential tightening of advanced economy monetary policies. - Recommendations: - Implement a countercyclical capital buffer. - Step up onsite inspections of banks’ credit risk. - Further strengthen foreign currency liquidity management practices. - Expand banks’ real estate exposure ceilings to include owner-occupied mortgages. - Encourage excessively leveraged households to divest some real estate holdings. - Cross-border risks: - MAS converting large retail branches into domestic subsidiaries and imposing asset maintenance requirements on remaining foreign branches. - Cross-border interbank liabilities (bulk intragroup) and liquidity coverage ratios for significant foreign currencies should be closely monitored. - Legal changes and international commitments on anti­-money laundering and combating the financing of terrorism should be implemented and enforced. ### Private sector balance sheets and credit dynamics (Boxes) - Box 1: Credit growth and credit intensity of output - Bank and HDB credit growth to the private sector peaked in 2011 at about 18 percent, moderated to 13 percent in 2012. - Relative to GDP, bank and HDB credit to the private sector jumped from 157 percent in 2009 to about 182 percent as of mid­2013. - Flow of new credit remained elevated at around 18−20 percent of nominal GDP per year. - Credit intensity of output has risen sharply to levels observed in the mid­late 1990s and prior to the GFC. - Factors contributing to elevated credit intensity since the GFC: - (i) Purchase of existing assets (larger contribution of housing loans to credit growth); - (ii) Credit leakage abroad due to Singapore’s role as regional financial center and presence of multinationals; - (iii) Changes in corporate funding strategy—shift from equity toward debt financing, consistent with decreased IPOs and increased corporate bond issuance. - Box 2: Balance sheets of the private sector - Households: - Assets are more than 6 times liabilities; half of assets are residential property. - Household debt is 77 percent of GDP in 2012 (about 210 percent of household income). - Mortgage debt has risen more than 40 percent since end 2009; one third of outstanding loans are for non-owner occupied properties. - Nearly all loans are at variable interest rates. - Currency and deposits exceed total household debt. - Households also have large savings in the mandatory defined-contribution Central Provident Fund. - Corporates: - Leverage in the publicly listed corporate sector has edged up. - Median debt-to-equity ratio during 2011−2012 increased in nearly all sectors. - Interest coverage ratio declined since 2010 to about 6 in 2012. - Domestic banks: - Total and Tier 1 capital ratios of 17 percent and 14 percent respectively at end-March 2013. - Liquidity cover consolidated across all currencies in excess of 100 percent (but lower for U.S. dollars). - Nonperforming loans about 1 percent. ### Overall assessment and recommendations - Multi-faceted response required to address shrinking workforce and population aging: - Raise productivity; - Continue calibrated use of foreign workers to fill critical skill gaps; - Increase discretionary social spending in a targeted manner to ensure basic needs are met. - From a multilateral perspective, external position remains stronger than warranted; achieving more balanced external position calls for: - increasing public spending; - more-even distribution of consumption across generations; - maintaining a slower pace of foreign worker inflows. *Source: _cr13328 - 28. A comprehensive approach has been adopted to address Singapore’s demographic* ### Box 3. Singapore—Macroprudential Measures on Housing—A Historical Perspective ### Box 3. Singapore—Macroprudential Measures on Housing—A Historical Perspective ### Overview and objectives - Singapore pioneered macroprudential policies (MaPs) to moderate financial stability risks from the housing market, beginning in 1996 amid sharply rising prices and speculative activity. - Two main tightening episodes: 1996 (with some reversals after the Asian financial crisis) and a new tightening cycle beginning in 2009 to cool renewed housing market pressures. - Measures targeted mainly speculative activity while protecting owner-occupied mortgages. - Policy response also included boosting housing supply.1/ - The range of MaP tools broadened since 2009, with incremental tightenings and greater specificity introducing administrative complexity and trade-offs between minimizing policy errors and closing loopholes. ### Types of measures and intended effects - Fiscal/disincentive measures to discourage flipping and speculation: - Buyer stamp duties on purchases of unfinished properties (introduced in 1996). - Seller’s stamp duties (SSD) on properties sold within specific holding periods (introduced 2011; prior versions included capital gains on properties sold within three years introduced in 1996 and rescinded in 2001). - Higher buyer’s stamp duty for foreigners and corporate entities to deter speculative purchases by these groups. - Access-to-credit restrictions to shield owner-occupiers and limit investor leverage: - Loan-to-value (LtV) limits set lower for holders of multiple mortgages; sequential refinements capped LtV on second and additional mortgages at lower levels. - Caps on loan tenors and debt service–to–income ratios introduced to prevent borrowers becoming over-extended. - Total Debt Servicing Ratio (TDSR) constraints and Mortgage Servicing Ratio (MSR) caps for public housing. - Other measures: - Restrictions on interest-only loans and interest-absorption schemes. - Minimum cash down payment requirements and limits on use of CPF savings. - Measures specific to Executive Condominiums (ECs) and industrial property (SSD). ### Timeline of major housing and related MaP actions (selected entries with exact measures) - September 2009 - Interest absorption scheme and interest-only housing loans for private residential projects were disallowed. - LtV ceilings lowered to 80 percent from 90 percent for all housing loans provided by banks (including for HDB flats). - SSD introduced on residential properties sold within one year at rates: 1 percent for the first S$180,000, 2 percent for the next S$180,000, and 3 percent for the remaining balance. - LtV ceilings reduced from 80 percent to 70 percent for buyers with at least one existing mortgaged property. - SSD extended to sales within three years with time‑tiered rates: full SSD rate if sold within one year, 2/3 of the full SSD rate if sold within the 2nd year, and 1/3 of the full SSD rate if sold within the 3rd year. - For buyers with at least one existing mortgaged property, minimum cash payment not sourced from CPF savings increased from 5 percent to 10 percent of the valuation limit. - SSD later extended to sales within four years with rates raised to 16 percent, 12 percent, 8 percent, and 4 percent correspondingly. - LtV ceilings lowered to 60 percent for individuals with at least one existing mortgaged property and to 50 percent for corporates. - February 2010, August 2010, January 2011 (events noted in timeline context; specifics covered in later entries) - December 2011 - Additional buyer's stamp duty imposed (in addition to existing duty of up to 3 percent): 10 percent for foreigners and corporate entities buying any residential property, 3 percent for permanent residents buying their second or subsequent property or for Singapore citizens buying their third or subsequent property. - Maximum tenor of all new residential property loans capped at 35 years (applies to private properties and HDB flats). Refinancing: sum of tenor of refinancing facility and number of years since the first housing loan disbursed cannot exceed 35 years. - If loans exceed 30 years tenor or extend beyond retirement age of 65 years, LtV limit will be 40 percent for a borrower with one or more outstanding residential property loans and 60 percent for a borrower with no outstanding residential property loan. - LtV for non‑individual borrowers reduced from 50 percent to 40 percent. - Additional buyer's stamp duty rates raised between 5 percent and 7 percent across the board for certain purchaser categories; permanent residents purchasing their first property and Singaporeans purchasing their second residential property subject to additional buyer’s stamp duty rates of 5 percent and 7 percent respectively. Permanent residents purchasing their second and subsequent properties and Singaporeans purchasing their third and subsequent properties subject to additional buyer’s stamp duty of 10 percent. Companies and foreigners subject to additional buyer’s stamp duty of 15% on all purchases of residential property. - LtV limits tightened on loans granted by financial institutions: - Individuals obtaining a second housing loan: from 60 percent to 50 percent for individuals, from 40 percent to 30 percent if loan tenor exceeds 30 years or loan period extends beyond age 65. - Individuals obtaining a third or more housing loan: from 60 percent to 40 percent for individuals, from 40 percent to 20 percent if loan tenor exceeds 30 years or extends beyond age 65. - Non-individuals such as companies: from 40 percent to 20 percent. - Minimum cash down payment for individuals applying for a second or subsequent housing loan raised from 10 percent to 25 percent. - Measures on Public Housing: - Cap on MSR for housing loans to buy HDB flats granted by financial institutions at 30 percent of a borrower’s gross monthly income. - For loans granted by HDB, MSR cap lowered from 40 percent to 35 percent. - Permanent residents who own a HDB flat disallowed from subletting their whole flat. - Permanent residents who own a HDB flat must sell their flat within six months of purchasing a private residential property in Singapore. - Tightening of terms for granting HDB loans and use of CPF funds for purchase of HDB flats with remaining leases of less than 60 years to take effect on 1 July 2013. - Measures on Executive Condominiums (ECs): maximum strata floor area capped at 160 square metres; sales of new dual-key EC units restricted to multi-generational families only; launch timing restrictions for developers; private enclosed spaces and private roof terraces treated as gross floor area (GFA). - Measures on industrial space: Introduction of SSD on industrial property and land bought on or after 12 January 2013 and disposed within three years. SSD rates: 15 percent if sold within one year, 10 percent if within two years, and 5 percent if within three years. - February 2013 - Property taxes: progressivity of property taxes for owner-occupied and non-owner-occupied properties increased, new rates effective January 1, 2014. - Total Debt Servicing Ratio: TDSR should not exceed 60 percent for credit facilities collateralized by property. - Debt service on the housing loan under application computed using a medium-term interest rate of 3.5 percent or the prevailing market interest rate, whichever is higher. - Debt service on non-residential property loans computed using medium-term interest rates of 4.5% or the actual rate, whichever is higher. - Debt service on all other debt obligations based on actual debt service paid. - Income calculation applies haircuts to the variable component of income and rental income. - Refinements: - Borrowers named on a property loan required to be mortgagors of the residential property for which the loan is taken. - Guarantors need to be brought in as co-borrowers if the borrower does not meet the TDSR threshold of 60 percent. - In joint borrower cases, income-weighted average age of borrowers should be used in applying rules on loan tenor. - April 2013, June 2013, October 2012 (timeline context) - August 2013 - Measures on public housing: maximum tenor for HDB housing loans reduced from 30 years to 25 years. - MSR limit for HDB loans reduced from 35 percent to 30 percent of borrower’s gross monthly income. - Maximum tenor of new housing loans and refinancing facilities by financial institutions for purchase of HDB flats reduced from 35 years to 30 years. New loans with tenors exceeding 25 years and up to 30 years subject to tighter LtV limits. - Permanent residents (PRs) required to wait three years from date of obtaining PR status before buying a resale HDB flat. - Conditions for qualifying for CPF Housing Grants for first-time and second-time purchasers were loosened. - 2009–present - Supply of public housing and land sold to private developers increased. ### Other macroprudential and consumer-credit measures (selected) - Unsecured credit and credit-card rules (phased measures, various dates): - Financial institutions required to conduct comprehensive checks with the credit bureau before granting each new credit card, charge card or unsecured credit facility. - Restrictions on unsolicited offers of unsecured credit facilities unless written request provided. - Minimum income requirement: credit card requirement unchanged but minimum income lowered from $30,000 to $20,000 for other unsecured credit facilities. - Aggregate maximum credit limit for all unsecured credit and credit cards across affiliated entities set at four times the borrower’s monthly income for individuals earning at least $30,000. - For individuals with annual income below $30,000 (not eligible for credit cards), maximum credit limit of two times the borrower's monthly income will apply. - Progressive implementation of enhanced disclosure and limits between December 2013 and June 2015: - Lenders to review borrower’s total debt and credit limits before granting or increasing unsecured credit. - Lenders required to disclose costs of rolling over credit card debts and obtain express consent for each credit limit increase. - Lenders not allowed to grant further unsecured credit to individuals whose unsecured debts are more than 60 days past due until past due amounts are paid. - Lenders not allowed to grant further unsecured credit to individuals whose aggregate interest-bearing outstanding unsecured borrowings across all financial institutions exceed 12 months of their income for 90 days or more. - Motor vehicle loans: - LtV ceilings introduced: for cars with open market value not more than $20,000, maximum LtV set at 60 percent of purchase price including taxes and Certificate of Entitlement; for higher open market value cars, maximum LtV set at 50 percent. - Maximum tenor of motor vehicle loan capped at 5 years. - Financing restrictions extended to all entities that finance car purchases, including non‑regulated entities. ### Key trade-offs and implementation notes - Sequential refinement increased specificity and complexity, reflecting a trade-off between minimizing policy errors and closing loopholes versus administrative complexity. - Measures were calibrated to distinguish between owner-occupied mortgages and investment/speculative purchases through differentiated LtV limits, stamp duties, and down-payment rules. - TDSR and MSR frameworks standardized debt-service assessments, with prescribed stress interest rates (3.5 percent for housing loans, 4.5% for non-residential property loans) to assess affordability under medium-term rates. *Source: Box 3. Singapore—Macroprudential Measures on Housing—A Historical Perspective, IMF staff compilation.* ### 11. Formalize bilateral cooperative crisis management agreements for FMIs (paragraph 56). ### 11. Formalize bilateral cooperative crisis management agreements for FMIs (paragraph 56) ### Key recommendations (from paragraphs referenced) - 11. Formalize bilateral cooperative crisis management agreements for FMIs (paragraph 56). - 12. Collect more granular data on household balance sheets, drawing on surveys and strengthened credit bureau practices (paragraph 45). - 13. Authorize the Singapore Deposit Insurance Corporation (SDIC) to provide support, on a least-cost basis, for the transfer of deposit liabilities to a bridge bank or healthy institution (paragraph 65). - 14. Ensure that the banking industry adequately contributes to the costs of bank failures (paragraph 65). - 15. Further facilitate cross-border cooperation in bank resolution (paragraph 64). - 16. Consider changes to the structure of the MAS Board to strengthen operational independence in financial supervision (paragraph 49). - 17. Ensure that MAS’ mandate for prudential supervision is not compromised by its developmental mandate (paragraph 49). - 18. Review and strengthen the resolution framework to enhance MAS' operational independence in bank resolution (paragraph 59). ### Policy rationale and emphasis - Formal bilateral cooperative crisis management agreements for FMIs are prioritized to improve cross-border coordination and crisis readiness (paragraph 56). - Greater data granularity on household balance sheets is recommended to better assess household vulnerability and inform macroprudential policy (paragraph 45). - Empowering SDIC to support least-cost transfers of deposit liabilities aims to facilitate orderly resolution and protect depositor confidence (paragraph 65). - Requiring adequate industry contribution to the costs of bank failures is intended to mitigate fiscal risk and promote market discipline (paragraph 65). - Enhancing cross-border cooperation in bank resolution addresses the challenges posed by foreign branches and global systemically important financial institutions (G-SIFIs) operating in Singapore (paragraph 64). - Governance and mandate adjustments at MAS are advised to safeguard operational independence in supervision and resolution, and to prevent conflicts with developmental objectives (paragraphs 49, 59). ### Operational priorities - Strengthen legal and institutional frameworks for crisis management and resolution to support timely cross-border action (paragraphs 56, 59, 64, 65). - Improve data collection methods and credit bureau practices to obtain more granular household balance-sheet information for risk monitoring (paragraph 45). - Review board structure and mandate clarity for MAS to ensure decisions on prudential supervision and resolution can be made independently of developmental considerations (paragraph 49). ### Key statistics and context from the FSSA (2013) - Banking assets stood at close to 600 percent of GDP in 2012. - Foreign branches, especially G­SIFIs, rely heavily on cross-border interbank funding, which tends to have short maturities and variable cost tied to global market volatility and counterparty risk. - Policy tools referenced that MAS has adopted: - Requiring qualifying full banks (QFBs) with significant domestically-sourced deposits to incorporate local retail business as a subsidiary (subject to MAS capital regulation). - Asset maintenance requirement (AMR) for remaining foreign branches to hold Singapore­-domiciled assets in proportion to their nonbank deposits booked in Singapore. - The AMR may have limited foreign branches’ drawdown of Singapore assets during the Lehman crisis. - Domestic banks’ overseas lending is often denominated in U.S. dollars, funded in part by swapping out of Singapore dollars, exposing banks to fx swap rollover and repricing risk. _Italic: Source — 2013 Financial Sector Stability Assessment (FSSA) update (paragraph references as noted)._ ### Appendix 1: Singapore—Risk Assessment Matrix 1/ ### Appendix 1: Singapore—Risk Assessment Matrix ### Volatility due to prospective exit from unconventional monetary policies / Reemergence of euro area financial stress - Time Horizon: Short Term - Likelihood: High/Medium - Transmission Channels: - Disruptive exit from UMPs or correction of overvalued risk assets, leading to sharply higher interest rates, large capital flow reversals, and sudden unwinding of positions. - Further pullback of funding by European banks. - Expected Impact of Risk: - Medium to high - Financial activity generates 12 percent of GDP. - The banking sector exceeds 6 times GDP, and Singapore hosts large currency and interest rate OTC derivative markets. - Equities and gross capital flows are very sensitive to global risk sentiment. - Real estate prices may have become overstretched by spillovers of lax monetary policies abroad, and private sector indebtedness has risen sharply. - Sudden retrenchment of interbank—including intra­group—funding of offshore banks may create liquidity pressures and valuation losses across a broad range of financial and real assets, with contagion to domestic banks. - Exposure to Europe is limited for domestic banks; but significant for offshore banks (about 21 percent of assets and 28 percent of liabilities). - Recommended Policy Response: - Ensure financial institutions maintain prudent risk management practices and have adequate liquidity buffers (and capital buffers in the case of domestic banks). - Maintain close links with home country supervisors. - In an extreme event, the strong official reserve position provides an additional cushion, possibly complemented by swap lines with other major central banks. ### Protracted period of slow European growth / Sharp China growth decline - Time Horizon: Medium Term - Likelihood: High/Medium - Transmission Channels: - Direct and intraregional trade linkages. - Also, tourism and financial channels (China growth decline). - Expected Impact of Risk: - Medium to high - Very high degree of trade openness, with exports around 200 percent of GDP and trade­related sectors accounting for more than 50 percent of GDP. - While direct exports to the EU (U.S.) comprise only 10 (5) percent of total, indirect exports through regional supply chains are likely considerably larger. - China is a key link in the regional supply chain, but Singapore’s exports are not very sensitive to Chinese domestic demand. - China is the second largest source of tourists. - Domestic banks’ lending to corporates and banks in China and Hong Kong SAR has grown to above 20 percent of Singapore’s GDP. - Recommended Policy Response: - Provide adequate social safety nets while re­orienting the economy to cater to demand from faster-growing regions, including Asia. ### Singapore’s policy-induced tight labor market fails to generate significant productivity gains - Time Horizon: Medium Term - Likelihood: Medium - Transmission Channels: - Rising wages without compensating productivity gains sharply increases unit labor costs. - Expected Impact of Risk: - High - Profit margins of labor­intensive firms are squeezed, leading to erosion of competitiveness, widespread SME closures and worker layoffs. - External and domestic demand contract. - NPLs rise on SME defaults and deterioration in mortgage quality on elevated unemployment. - Achieving productivity improvements is unpredictable in terms of timing and amount. - Recommended Policy Response: - Avoid overtightening the labor market to prevent long­term economic repercussions. ### Reputational risk from opaque ownership structures in the offshore wealth management sector - Time Horizon: Short­Medium Term - Likelihood: Low - Transmission Channels: - Attractiveness as wealth management destination reduced. - Expected Impact of Risk: - Medium - Assets under management have grown rapidly, and are now over US$1.3 trillion. - The financial and business service sectors comprise a combined 25 percent of GDP. - If risks are not adequately addressed, changing perceptions about Singapore’s good reputation could lead to closing of accounts, with adverse effects on the viability of the industry, and knock­on effects to related tax revenue and employment. - Recommended Policy Response: - Effective implementation of international AML standards, particularly relating to transparency of companies and trusts, and pursuing tax evasion as a predicate crime. - Ensure service providers report suspicious transactions and close accounts where supporting evidence of beneficial ownership is incomplete. *1/ The RAM shows events that could materially alter the baseline path—the scenario most likely to materialize in the view of the staff. The relative likelihood of risks reflects staff’s subjective assessment at the time of discussions with the authorities of risks surrounding this baseline.* ### 17.5 percent in the United States but less than 10 percent in Japan (Alvaredo, Facundo, Anthony B. Atkinson, Thomas ### SINGAPORE — STAFF REPORT FOR THE 2013 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX ### MNCs and the Measurement of Current Account Balances - For countries with a large multinational corporation (MNC) presence, the measured current account balance may be a misleading indicator of national wealth accumulation. - One factor: the balance of payments treatment of retained earnings differs depending on whether the domestic firm has at least one single foreign investor with an equity stake of 10 percent or more (FDI) or whether no single foreign owner reaches the 10 percent threshold (portfolio investment). - Switzerland: a case where FDI assets and portfolio investment liabilities coexist, causing current account bias upward because retained profits of foreign subsidiaries of domestic MNCs are reported as income of domestic residents (Swiss MNCs), rather than attributed to largely foreign portfolio investors. - Ireland: presence of “redomiciled publicly-listed companies (plcs)” can push up the current account when MNC profits are paid to Ireland and not paid out as dividends. - Singapore context: - Foreign MNCs have a significant presence; many locate regional or international headquarters in Singapore. - Singapore’s stock of FDI liabilities is 262 percent of GDP. - There is some evidence that MNC presence tends to elevate the current account (compiled according to BPM6 principles) relative to underlying wealth accumulation by Singaporeans. - Singapore has a large positive net portfolio asset position (about half of which is equities). - Cumulating net portfolio investment flows since 2000 indicates a large negative “stock”—consistent with the Swiss case—and suggests the current account surplus could be overstated. - Relevant data are not available to determine whether, as in the Irish case, MNC profits earned abroad and not paid out as dividends are attributed to Singapore from a BoP perspective. - Footnote: The discrepancy between stock and flow portfolio data may reflect large valuation gains on portfolio assets abroad. ### Overall Assessment (regarding external sector) - Additional considerations beyond standard quantitative benchmarks are likely to make a non-trivial contribution to Singapore’s current account surplus. - Data limitations preclude quantifying these contributions. - Their magnitude is unlikely to overturn the assessment that the external sector is overly strong. ### Executive Board Assessment and Policy Guidance - Directors welcomed authorities’ sound policies and skillful macroeconomic management. - Directors counseled vigilance against a reemergence of inflationary pressures and risks in the financial and housing sectors. - Importance of further efforts to promote external rebalancing and address demographic challenges was stressed. - Policy mix guidance: - Cyclical conditions call for a moderately restrictive policy mix. - A tight monetary stance, reflected in the current targeted nominal exchange rate appreciation, will help avoid overheating and anchor inflation expectations. - Macroprudential policies should continue to be deployed as needed to contain asset prices and promote prudent lending. - Modest fiscal stimulus in the budget is warranted to enhance productivity and relieve future supply constraints. - Financial sector recommendations: - A countercyclical capital buffer. - Stepped-up onsite inspections of banks’ credit risk. - Strengthened foreign currency liquidity practices by banks. - Vigorous enforcement of international commitments on anti–money laundering and combating the financing of terrorism. - External rebalancing: - Directors noted staff’s assessment that Singapore’s external position appears stronger than warranted by fundamentals and supported authorities’ plans to raise public expenditure in infrastructure and targeted social spending. - These measures, together with policies to boost labor productivity, will help address population aging and prospective workforce decline. - A few Directors considered that a faster pace of nominal exchange rate appreciation might aid external rebalancing. ### Key Economic Developments, Projections, and Risks - Growth and inflation: - Growth decelerated to 1¼ percent in 2012 before picking up sharply in the first half of 2013. - Near-term outlook: GDP to grow by 3½ percent in 2013−14. - Core inflation and headline inflation projections: headline inflation forecast to stabilize at 2½ percent. - Current account: - Current account surplus narrowed sharply to 18½ percent of GDP in 2012. - Expected to narrow modestly to around 17½ percent of GDP by 2014. - Leverage and financial conditions: - Bank loans expanded briskly, reaching more than 170 percent of GDP in mid 2013. - Housing and construction account for 46 percent of bank loans. - Household indebtedness is more than double household income. - After rising some 55 percent since 2009, house prices recently stabilized on intensive application of macroprudential policies. - Structural and demographic challenges: - Shifting from labor-intensive growth and impending labor force aging motivate policies to enhance labor productivity. - Rising life expectancy will sharply raise the old-age dependency ratio and increase the need for aging-related social spending. - International financial center: - Singapore’s large and highly-developed international financial center has continued to expand despite volatile global conditions. - Long-term interest rates have risen by around 1 percentage point amid global adjustments. ### Selected Economic and Financial Indicators (2008–14; excerpts) - Growth (percentage change): - Real GDP: 2008 1.7-0.8; 2009 14.8 5.2 1.3 3.5 3.5 (table formatting preserved as in source). - Saving and investment (percent of GDP): - Gross national saving: 44.5 42.7 48.2 46.8 45.6 45.3 45.0 - Gross domestic investment: 29.3 25.0 21.4 22.2 27.0 27.1 27.4 - Inflation and unemployment (period average, percent): - CPI inflation: 6.6 0.6 2.8 5.2 4.6 2.5 3.1 - Core CPI inflation: 5.7 0.0 1.5 2.2 2.5 1.9 2.8 - Unemployment rate: 2.2 3.0 2.2 2.0 2.0 2.1 2.3 - Central government budget (percent of GDP): - Revenue: 24.2 19.3 20.6 23.5 22.9 21.9 22.3 - Expenditure: 16.3 18.0 15.2 14.5 14.9 16.1 17.1 - Overall balance: 7.9 1.3 5.4 9.0 8.0 5.8 5.2 - Balance of payments (US$ billions) and percent of GDP: - Current account balance (US$ billions): 28.8 33.5 62.0 65.3 51.4 52.4 53.9 - (In percent of GDP): (15.1) (17.7) (26.8) (24.6) (18.6) (18.3) (17.5) - Trade balance (US$ billions): 42.8 49.3 66.0 72.7 60.9 63.1 67.4 - Financial account balance (US$ billions): -16.2 -24.6 -22.4 -44.2 -28.5 -28.6 -37.7 - Overall balance (US$ billions): 13.1 11.3 42.2 17.1 26.1 23.8 16.2 - Gross official reserves (US$ billions): 174.2 187.8 225.8 237.7 259.3 283.1 299.4 - (Months of imports): (6.5) (5.6) (5.7) (5.8) (6.3) (6.6) (6.6) ### Data and Statistical Issues - General: Data provision is broadly adequate for surveillance; more disaggregated data would enhance macroeconomic policy analysis, particularly external and fiscal areas. - National accounts: DOS completed rebasing to reference year 2005; reconciliation in 2006 lowered statistical discrepancies. - Price statistics: CPI rebased to base year 2009; CPI rebased once every five years. - Government finance statistics: Information on government assets held abroad is neither published nor provided to the Fund; government publishes annually partial information on interest and dividends on these assets; debt service payments on domestic debt made from the extra budgetary Government Securities Fund are published annually; consolidated public sector financial position not published. - Monetary statistics: Monetary Authority of Singapore has not submitted standardized report forms (SRFs) for monetary statistics introduced in October 2004. - Balance of payments: - In February 2012, DOS migrated BoP accounts to BPM6. - Main changes: reclassification of repairs on goods and goods for processing to services (from goods); reclassification of merchanting to goods (from services); treating banks’ Asian Currency Units (ACUs) as residents. - IIP data are not provided on a disaggregated sectoral basis as suggested by the BoP Manual. - IIP does not include all net foreign assets held by Singapore’s Government Investment Corporation, although associated flows are included in BoP data. - Authorities reconfirmed commitment to fully report IIP data to the Fund by mid‐2014. - Data Standards and Quality: Singapore meets all the SDDS specifications; no data ROSC is available. *Source: IMF staff report excerpts from the 2013 Article IV Consultation informational annex and associated materials.* ### 1.1 The Singapore authorities would like to thank the IMF team for the 2013 Article IV ### _cr13328 - 1.1 The Singapore authorities would like to thank the IMF team for the 2013 Article IV ### Recent Economic Developments and Outlook - Growth dynamics: - Singapore economy expanded through H1 2013, supported by strengthening activity in developed countries. - Growth slackened in Q3 2013; preliminary estimates indicate GDP may have contracted by 1.0% in on a quarter-on-quarter, seasonally-adjusted annualised basis. - Q3 weakness reflected a broad-based cyclical pullback after strong Q2 performance and fresh external uncertainties (timing of US Fed tapering; transition challenges in some emerging market economies). - Near-term outlook and risks: - Outlook mainly influenced by divergent momentum in advanced and emerging market economies; on balance external environment should support a pick-up. - Downside risks highlighted: disorderly market response to unwinding of unconventional monetary policies; sharper than expected deceleration in real activity in China; domestic supply-side constraints raising business costs. - Growth projections: - Singapore’s GDP growth projected at 2.5–3.5% for the whole of 2013. - Growth in 2014 is “unlikely to be significantly different” from 2013, but intermittent volatility is possible. - Inflation: - MAS Core Inflation averaged 1.6% in H1 2013 (MAS Core excludes costs of accommodation and private road transport). - CPI-All Items inflation fell to 1.6% in Q2 2013 from 4.0% in the preceding two quarters due to sharp correction in car prices. - In Q3 2013, MAS Core Inflation rose to 1.7% and CPI-All Items inflation rose to 1.8%; CPI-All Items increase driven also by recovery in car prices. - Inflation outlook and projections: - MAS Core Inflation expected to rise into 2014; projected to average 1.5–2% in 2013 and 2–3% in 2014. - CPI-All Items inflation projected at 2.5–3% for the whole of 2013, and 2–3% in 2014; CPI-All Items will be susceptible to swings as car prices adjust to vehicle-related policies. ### Monetary and Fiscal Policies - Monetary framework and stance: - MAS maintained a modest and gradual appreciation of the S$NEER policy band since April 2012, including in October 2013. - Slight tightening bias appropriate to anchor inflation expectations and guard against a wage-price spiral given tight labour market. - Framework allows S$NEER to adjust within its policy band to accommodate short-term financial market volatility and external shocks. - Macroprudential complement: - Targeted macroprudential measures have been used to respond to extended period of low global interest rates and to ensure sustainable credit practices and financial prudence. - Fiscal policy and measures: - FY2013 Budget (announced in February) focused on supporting restructuring and fostering a more inclusive society. - Measures included incentives for business productivity improvement, mitigation of transitional cash-flow strains, enhanced pre-school subsidies for lower- and middle-income households, additional school support for disadvantaged students, and increased coverage and payouts of the Workfare Income Supplement Scheme. - Property and car tax structure made more progressive; one-off transfers to households to alleviate cost of living. - Net effect: slightly expansionary fiscal stance in 2013. - Social policy and fiscal sustainability: - Authorities emphasize equity and financial sustainability in forward planning for increased social spending. - Example: government funds up to 80% of bills of Singaporeans admitted to subsidised wards in public hospitals to keep healthcare affordable on a sustainable basis. ### Financial Sector Policies - FSAP assessment and banking resilience: - FSAP assessed Singapore’s financial system as well regulated and supervised; locally-incorporated banks are in a strong financial position. - Stress tests by MAS and FSAP reaffirm banks remain resilient under adverse macroeconomic scenarios. - Credit growth and balance sheets: - Increase in credit growth over last three years moderated more recently. - Growth of non-bank loans by Singapore banks aligned with economic growth in Asia; domestic credit growth broad-based across household and corporate sectors. - Household debt-to-income ratio was 2.1 times in 2012 (comparable to most advanced economies; lower than peak of 2.6 times about ten years ago). - Aggregate household cash and deposits exceed household debt. - Corporate sector: median interest coverage ratio “close to 6 times”. - Policy actions to mitigate vulnerabilities: - Measures to encourage financial prudence and strengthen underwriting: restrictions on loan tenures and debt servicing ratios for property and motor vehicle loans; restrictions on unsecured credit. - Property-related measures calibrated to address distinct risks and minimise spillovers; apply to all banks including foreign bank branches. - MAS conducts rigorous supervision including onsite credit inspections of major banks; thematic inspections of underwriting standards on residential mortgages in late 2012. - Authorities remain vigilant and will implement additional measures as needed and raise public awareness of imprudent borrowing risks. - Mortgage performance and capital: - Overall NPL ratio on mortgages was 0.3% as at Q3 2013. - Bulk of mortgages are owner-occupied, default experience low. - Banks conduct regular stress tests using severe property downturn scenarios; FSAP stress tests found banks resilient. - Singapore-incorporated banks required to comply with total capital requirements that are 2% points higher than the Basel III minimum. - Liquidity and cross-border cooperation: - Authorities monitoring potential risks from global and domestic financial developments, reflecting Singapore’s role hosting many institutions with cross-border activities. - Authorities looking to enhance risk-based Minimum Liquid Assets framework by adopting Basel III Liquidity Coverage Ratio rules with domestic enhancements. - High cooperation with home regulators of foreign banks in Singapore; active participation in FSB-led initiatives on resolution and recovery planning for global systemically important banks. - Risk-weight and loan-to-value statistics: - Average loan-to-value ratio of all outstanding mortgages is 47.5%. - On an overall basis (retail and wholesale exposures), average risk weights of locally-incorporated banks are around 45% as at Q2 2013 (on the higher end globally). ### Medium-term Economic Restructuring - Strategic objective: - Ongoing restructuring imperative to lay foundations for a productivity-led growth model and move into higher value-added activities. - Policy pillars and measures: - Incentivise businesses to raise productivity via process improvements and technological innovation. - Significant investments in continuous education and training to upgrade worker skills; higher education attainments of younger cohorts expected to yield a human capital dividend to offset slowing labour force growth and lift incomes. - Calibrated tightening of foreign worker policies to reduce excessive reliance on low-skilled foreign manpower, raise relative price of low-skilled foreign labour, and incentivise firms to invest in physical and human capital. - Measures consider sectoral circumstances and categories of workers; implementation is progressive with advance announcements to give firms time to adjust. - A three-year support package, including the Wage Credit Scheme, introduced to ease transition costs for businesses. - Expected effects: - Productivity improvements from more efficient factor use will relieve supply constraints, support potential output and real wages. - Initiatives to promote social mobility and reduce income inequality aim to enable all segments to benefit from growth. ### Final Remarks - Vigilance and capacity to respond: - External environment improved but authorities remain vigilant to continuing external risks and have the wherewithal to respond timely to secure macroeconomic and financial stability. - FSAP follow-up: - Authorities welcome positive assessment of financial system and will review FSAP recommendations and follow-up as appropriate. - Long-term focus: - Progressive restructuring of the economy with policies subject to frequent review and feedback to account for pace of adjustments among firms and workers. - Emphasis on continual upgrading of industries and exports to more capital- and technology-intensive production to secure competitiveness. - Publication consent: - Authorities agree to the publication of the full suite of reports covering the 2013 Singapore Article IV Consultation Report, Selected Issues Papers, Financial System Stability Assessment report, the Report on Observance of Standards and Codes and the Detailed Assessment Reports. *Source: _cr13328 - 1.1 The Singapore authorities would like to thank the IMF team for the 2013 Article IV* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13328.pdf_