## _cr14312

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### Introduction and context
- GDP tripled from less than US$100 billion in 2000 to almost US$300 billion in 2013.
- Population rose by 34 percent since 2000, mostly driven by inflows of foreign workers.
- Key strengths: stable macroeconomic environment; continuous reforms to transport infrastructure and business climate; liberal regime for inflow of foreign workers; diversified economy with manufacturing contributing more than one sixth of GDP.
- Policy focus: medium-term reform agenda announced in 2010 to boost labor and land productivity and reduce reliance on foreign workers; strengthen social safety net; fiscal measures to mitigate wage disparities.
- Macroeconomic stance: moderately tight monetary policy maintained; active use of macroprudential policies contributed to slowdown in mortgage loan growth.

### Recent developments and macro indicators
- Growth and composition:
  - Real GDP growth recovered to 3.9 percent in 2013, from 2.5 percent in 2012.
  - Seasonally-adjusted annualized growth rates in 2014 Q1 and Q2 were 1.8 percent and 0.1 percent, respectively.
  - Net exports accounted for almost half of 2013 growth; private and public consumption contributed the other half.
  - Private investment retreated after two years of strong growth.
- Labor and external accounts:
  - Policy-induced slowing inflow of foreign workers pushed unemployment to a multiyear low (unemployment rate: 1.9 percent in 2013).
  - Current account surplus rose to 18.3 percent of GDP in 2013, from 17.5 percent of GDP in 2012.
- Inflation and interest rates:
  - Headline CPI inflation: 2.4 percent in 2013 (from 4.6 percent in 2012).
  - Core inflation contained at 2.2 percent in July (y/y) but edged up reflecting accumulating wage pressures.
  - Ten-year government bond yield at 2.3 percent, about 70 basis points higher (since May 2013 “tapering announcement”).
- Credit and banking:
  - Private credit growth to residents decelerating after four years of strong growth.
  - Housing loan growth moderated aided by June 2013 launch of the total debt servicing ratio framework (TDSR) and medium-term interest rate expectations.
  - Property prices have leveled off and housing transactions moderated.
  - Nonperforming loan ratio of domestic banks remained stable at about 1 percent.

### Outlook and key risks
- Near-term projections:
  - Growth expected to moderate to around 3 percent during 2014−2015.
  - Core inflation projected to pick up temporarily to around 2.4 percent during 2014−15.
- Medium-term projections and drivers:
  - Potential GDP growth projected to slow in the next few years on slower labor force expansion, then recover gradually, reaching about 3¼ percent in the medium term.
  - Current account surplus projected to narrow gradually by about 3¾ percent of GDP to around 14½ percent of GDP over the medium term.
  - Social and infrastructure spending expected to increase by 1−2 percentage points of GDP.
- Main risks:
  - External: protracted slower growth in advanced and emerging economies; buildup and unwinding of excess capacity in China; abrupt surge in global financial market volatility; geopolitical risks.
  - Domestic: unpredictability of achieving productivity improvements; transition costs from restructuring; possible social costs from vulnerabilities among overextended households if interest rates rise significantly.
  - Operational: delays in implementing AML/CFT standards may adversely affect reputation and wealth management sector.
- Mitigating factors and recommendation:
  - Strong fundamentals: very strong external position, adequate foreign reserves, significant fiscal buffers, strong bank balance sheets.
  - Recommended cautious calibration of labor-market tightening measures to mitigate downside risks from restructuring.

### Monetary and exchange-rate policy
- MAS policy stance and parameters:
  - Moderately tight monetary policy via gradual NEER appreciation maintained since April 2012.
  - Staff estimates: NEER band appreciating at an annual rate of 2½ percent with a width of about ±2 percent; NEER around the midpoint of the band.
- Rationale and challenges:
  - Exchange-rate-based framework appropriate given openness and exposure to external shocks; medium-term orientation to price stability is appropriate.
  - Challenge: U.S. monetary normalization could raise domestic interest rates via uncovered interest parity, increase debt servicing costs, and put downward pressure on the housing market.

### External position assessment and reserves
- Assessment:
  - External position assessed to be substantially stronger than consistent with medium-term fundamentals and desirable policies.
  - At 18.3 percent of GDP in 2013, the current account appears to be 2−8 percent of GDP stronger, and the REER 4−16 percent weaker than consistent with fundamentals.
- Reserves and liquidity:
  - International reserves at 93 percent of GDP assessed as adequate for precautionary purposes.
  - MAS official reserves used in assessment: 270 billion U.S. dollars.
  - Staff notes no clear case for further reserve accumulation given existing adequacy and swap line access.

### Financial sector resilience, MaPs, and macroprudential policies
- Regulatory and supervisory strength:
  - 2013 FSAP update: Singapore’s financial regulation and supervision is among the best globally; overall compliance with supervisory standards is high.
  - Banks meet key Basel III targets for 2015 and are expected to meet MAS’s 2019 target of 10.5 percent (Tier 1 capital ratio plus conservation buffer).
  - Banks close to meeting 2019 LCR target of 100 percent; MAS’s liquidity framework aligned with Basel recommendations.
- Macroprudential measures and effects:
  - Active use of macroprudential policies (MaPs) helped cool housing and car permit markets and slow mortgage loan growth.
  - TDSR (introduced June 2013) aided moderation in housing loan growth; TDSR framework used a higher rate of 3.5 percent rather than the current market rate of 1.8 percent in its calculation.
  - MaPs implemented since 2009 include: stamp duties, lower LTV ceilings, higher minimum cash payment requirements, caps on loan tenors, and TDSR.
  - MAS broadened exemptions in February 2014 for refinancing of owner-occupied housing loans that preexisted before TDSR.
- Staff recommendations:
  - Maintain current MaPs to promote household deleveraging and vigilance on banks’ credit quality, building on hands-on supervision.
  - Further gradual and orderly tightening of credit conditions with the UMP exit to limit further buildup of household and corporate indebtedness.
  - Continue efforts to collect granular data on household balance sheets; strengthen credit bureau practices; continue education of over-indebted households.

### Housing, household sector vulnerabilities, and targeted measures
- Housing market signals:
  - Both private and public house price growth turned negative in late-2013 and declined by 1.3 percent and 1.6 percent (q/q), respectively, in 2014:Q1.
  - Quantity indicators: number of housing transactions decreasing; vacancy rates rising; large supply of new housing set to come on the market.
- Household balance sheet and vulnerabilities:
  - Household housing loans accounted for 28 percent of domestic banks’ assets in 2014:Q1.
  - Houses represent 48 percent of household assets.
  - MAS estimates that about 30‒35 percent of household have a TDSR above 40 percent, and 5‒10 percent of households have a TDSR above 60 percent.
  - About 70 percent of the outstanding stock by value and about a half by numbers of mortgages are linked to variable rates.
- Policy guidance:
  - If excessive house price declines occur, consider relaxation of stamp duties to support demand for real estate without loosening banks’ lending standards.
  - Continue to encourage overextended households to reduce leverage; allow refinancing relief for pre-TDSR loans where appropriate.

### Corporate sector leverage and SME lending
- Corporate leverage indicators (publicly-listed sample, end-2013):
  - About 17 percent of total debt resides with companies with a leverage ratio above 2.
  - About 21 percent of total debt resides with companies with an interest coverage ratio of less than 2.
- SME lending:
  - SMEs account for 21.6 percent of loans to domestic corporates.
  - SME lending subject to strong underwriting standards, highly collateralized, and has a lower NPL ratio than the overall corporate sector.
- Recommendation:
  - Continued vigilance on corporate leverage and in bank supervision given risks from gradual interest rate normalization.

### Singapore as a financial center, cross-border exposures, and spillovers
- Financial center features and size:
  - Financial sector had about S$2.7 trillion (737 percent of GDP) in assets in 2013.
  - Commercial banks make up 78 percent of the financial system; foreign banks make up about 67 percent of banking system assets.
  - Wealth management AUM: about US$1.4 trillion as of end-2013.
- Cross-border exposures and risks:
  - Growing cross-border exposures of domestic banks in the region, including in China, have increased spillover risks.
  - Cross-border loans to China are mainly trade bills (65 percent) and interbank loans (25 percent) and make up about 12 percent and 8 percent of total loans for domestic and foreign banks, respectively.
  - Non-Singapore dollar loan-to-deposit ratio at a multi-year high of 128 percent as of September 2013, with a further rise through the first quarter of 2014.
- MAS proposals and supervisory measures:
  - Proposed stronger regulatory framework for D-SIBs: higher loss absorbency, higher LCR, recovery and resolution planning, risk disclosure, and improved risk data aggregation and reporting.
  - Proposed requirement that foreign bank branches with significant local retail presence incorporate their retail operations.

### Foreign-currency liquidity management and contingency planning
- FX liquidity concerns and indicators:
  - Singaporean banks’ reliance on the foreign currency swap market poses risks during severe stress.
  - Non-Singapore dollar loan-to-deposit ratio at a multi-year high of 128 percent as of September 2013.
  - FSAP U.S. dollar liquidity stress tests showed banking sector’s FX funding gap over a one-year horizon would be about 50 billion U.S. dollars.
- Staff recommendations:
  - Continued monitoring of banks’ foreign currency liquidity management.
  - MAS encouraged banks to increase U.S. dollar deposit taking and issuing U.S. dollar debt to finance U.S. dollar lending.
  - Authorities encouraged to make banks develop contingency plans for low foreign currency swap market liquidity.
  - Authorities decided not to introduce a separate USD LCR.

### AML/CFT framework and reputational risks
- Key developments:
  - Singapore made the evasion of certain foreign taxes a predicate crime for money laundering in July 2013.
  - Singapore’s next AML/CFT assessment by the FATF scheduled for 2015.
  - Legislative changes in 2013 and Global Forum findings mean Singapore’s exchange of information regime is in line with the internationally-agreed standard and ownership and identity information is available for all types of companies, partnerships and trusts.
- Staff recommendations:
  - Continue efforts to implement evolving international AML/CFT standards, enhance transparency of companies and trusts, and strengthen cooperation with other jurisdictions.

### Fiscal policy, buffers, and aging-related spending
- Fiscal framework and buffers:
  - Constitution mandates a balanced budget over the political cycle while allowing use of up to half of projected average long-term investment income from government’s financial assets (equivalent to 2.1 percent of GDP in the FY 2014/15 budget).
  - Fiscal surplus in FY 2013/14 is estimated at 5.7 percent of GDP.
- FY 2014/15 budget and fiscal impulse:
  - Budget initiatives focus on boosting productivity, raising inclusiveness, and coping with projected sharp increase in the old-age dependency ratio.
  - Established Pioneer Generation Fund with seed money transferred to the new fund (2 percent of GDP) to be saved and disbursed over the medium term, along with investment income.
  - Budget implies a fiscal impulse of about ¾ percent of GDP in FY 2014/15 (smaller than estimated fiscal impulse of about 1¼ percent of GDP in FY 2013/14).
- Demographics and retirement policy:
  - Old-age dependency ratio projected to more than double by 2030.
  - Authorities expect government spending to increase by 1−2 percent of GDP over the medium term, mainly due to social and infrastructure spending.
  - CPF: risk-free returns up to 3.5 percent on Ordinary Account and up to 5 percent on medical and special accounts; up to 50 percent of government’s net investment returns are channeled to the budget.

### FSAP recommendations and supervisory priorities (selected)
- Short-term (within 12 months) highlights:
  - Increased attention to onsite inspections of banks’ credit risk; multiyear credit onsite inspection schedule implemented in 2013.
  - Monitor LCR ratios for significant foreign currencies; Basel III LCR data to be submitted monthly once implemented.
  - Consider subjecting owner-occupied housing loans to a limit to be set by MAS (MAS is considering the need).
  - Encourage overextended households to reduce leverage; TDSR implemented June 2013 and enhanced rules on unsecured credit in December 2013.
  - Stand ready to adjust macroprudential measures in the housing market in line with changes in market conditions.
- Medium-term (1–3 years) highlights:
  - Implement countercyclical capital buffer by January 2016.
  - Collect more granular data on household balance sheets; consumer credit bureau enhancements targeted for completion by 2014 H2.
  - Authorize SDIC to provide support for transfer of deposit liabilities on a least-cost basis (under study).
  - Formalize bilateral cooperative crisis management agreements for FMIs; enhance recovery/resolution planning.

### Risk Assessment Matrix (selected entries and recommended responses)
- Protracted slower growth in advanced and emerging economies:
  - Time Horizon: Short-Medium Term; Likelihood: High; Expected Impact: Medium to High.
  - Recommended response: temporary and targeted fiscal stimulus, loosen monetary policy and recalibrate MaPs if domestic demand weakens substantially; diversify economy toward faster-growing regions.
- Abrupt surge in global financial market volatility:
  - Time Horizon: Short Term; Likelihood: High; Expected Impact: Medium.
  - Recommended response: ensure FIs maintain prudent risk management and adequate liquidity/capital; maintain close links with home country supervisors; recalibrate MaPs; use official reserves and swap lines in extreme events.
- Disorderly or excessive correction in property prices:
  - Time Horizon: Short/Medium Term; Likelihood: Medium; Expected Impact: Medium.
  - Recommended response: adjust macroprudential policies while safeguarding financial stability; use targeted fiscal transfers to households whose debt servicing capacity is adversely affected.
- Continued buildup and unwinding of excess capacity in China:
  - Time Horizon: Medium Term; Likelihood: Medium; Expected Impact: Medium to High.
  - Recommended response: temporary and targeted fiscal support and loosen monetary policy; monitor banks’ exposures to China and use prudential policies.

### External sector developments and assessment
- Current account and REER:
  - Current account surplus increased to 18.3 percent of GDP in 2013 (after narrowing by about 6 percentage points during 2010‒2012).
  - Staff MB and ES approaches imply a CA surplus norm of 8‒8½ percent of GDP and a CA gap of 6−6½ percent of GDP relative to staff’s medium-term CA projection of 14.5 percent of GDP.
  - EBA-like estimates imply a CA balance norm of 17½ percent of GDP for 2013, suggesting a CA gap of about 3 percent of GDP in cyclically-adjusted terms.
  - Staff assesses the current account gap range as 2‒8 percent of GDP and the REER as about 4‒16 percent weaker than warranted.
- NIIP, assets, liabilities:
  - NIIP position: 191 percent of GDP in 2013, up by 44 percentage points since 2008.
  - Gross official foreign reserves: 93 percent of GDP (2013).
  - Short-term external debt: 344 percent of GDP (2013).
  - Banking sector FX funding gap (1-year horizon): about 50 billion U.S. dollars; MAS official reserves: 270 billion U.S. dollars.
- Policy implications:
  - Increased public spending, stronger social safety net, more even distribution of consumption across generations, and slower absorption of foreign workers expected to moderate the current account.
  - Staff emphasizes careful consideration of structural reforms and public spending to address external imbalances over time.

### Key macroeconomic and financial statistics (selected)
- Nominal GDP (2013): US$298 billion
- Population (June 2013): 5.4 million
- GDP per capita (2013): US$55,182
- Main exports (percent of total domestic exports): Electronic products (19%); chemical products (17%)
- Current account balance (percent of GDP): 2013: (18.3)
- Gross official reserves (US$ billions): 2013: 273.1
- Net international investment position (percent of GDP): 2013: 190.9
- Financial sector assets (2013): S$2.7 trillion (737 percent of GDP)
- Wealth management AUM (end-2013): about US$1.4 trillion

*Source: IMF staff report excerpt — "SINGAPORE RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK" (content unit: 1. Housing and Household Sector Developments and Macroprudential Policies; appendices and boxes as provided in the supplied PDF excerpt).*

### 1. Housing and Household Sector Developments and Macroprudential Policies _______________ 17

### 1. Housing and Household Sector Developments and Macroprudential Policies

### Introduction and Context
- GDP tripled from less than US$100 billion in 2000 to almost US$300 billion in 2013.
- Population rose by 34 percent since 2000, mostly driven by inflows of foreign workers.
- Key strengths: stable macroeconomic environment, continuous reforms to transport infrastructure and business climate, liberal regime for inflow of foreign workers, diversified economy with manufacturing contributing more than one sixth of GDP.
- Policy focus: medium-term reform agenda announced in 2010 to boost labor and land productivity and reduce reliance on foreign workers; strengthen social safety net; fiscal measures to mitigate wage disparities.
- Macroeconomic stance: moderately tight monetary policy maintained; active use of macroprudential policies contributed to slowdown in mortgage loan growth.

### Recent Developments
- GDP growth and composition:
  - Growth recovered to 3.9 percent in 2013, from 2.5 percent in 2012.
  - Net exports accounted for almost half of 2013 growth; private and public consumption contributed the other half.
  - Private investment retreated after two years of strong growth.
  - Seasonally-adjusted annualized growth rates in 2014 Q1 and Q2 were 1.8 percent and 0.1 percent, respectively.
- Labor market and external accounts:
  - Policy-induced slowing inflow of foreign workers pushed unemployment to a multiyear low.
  - Current account surplus rose to 18.3 percent of GDP in 2013, from 17.5 percent of GDP in 2012.
- Inflation:
  - Headline inflation fell to 2.4 percent in 2013, from 4.6 percent in 2012.
  - Core inflation contained at 2.2 percent in July (y/y), but has edged up reflecting accumulating wage pressures.
- Financial markets and interest rates:
  - Since May 2013 “tapering announcement,” Straits Times index initially fell by 14 percent, with losses down to 3 percent at the time of reporting.
  - Ten-year government bond yield at 2.3 percent, about 70 basis points higher.
- Credit and banking:
  - Private credit growth to residents is decelerating after four years of strong growth.
  - Housing loan growth moderated aided by the June 2013 launch of the total debt servicing ratio framework (TDSR) and medium-term interest rate expectations.
  - Property prices have leveled off and housing transactions moderated.
  - Nonperforming loan ratio of domestic banks remained stable at about 1 percent.

### Outlook and Risks
- Near-term growth and inflation outlook:
  - Growth expected to moderate to around 3 percent during 2014−2015.
  - Core inflation projected to pick up temporarily to around 2.4 percent during 2014−15.
- Medium-term projections and drivers:
  - Potential GDP growth projected to slow in the next few years on slower labor force expansion, then recover gradually, reaching about 3¼ percent in the medium term.
  - REER appreciation and higher wages expected to dampen export growth and rebalance toward domestic demand.
  - Current account surplus projected to narrow gradually by about 3¾ percent of GDP to around 14½ percent of GDP over the medium term.
  - Social and infrastructure spending expected to increase by 1−2 percentage points of GDP.
- Key risks:
  - External: exposure to external demand shocks, China’s capacity dynamics, abrupt surge in global financial market volatility, geopolitical risks.
  - Domestic: unpredictability of achieving productivity improvements; transition costs from restructuring; possible social costs from vulnerabilities among overextended households if interest rates rise significantly.
  - Operational: Delays in implementing AML/CFT standards may adversely affect reputation and wealth management sector.
- Mitigating factors:
  - Strong macroeconomic fundamentals: very strong external position, adequate foreign reserves, significant fiscal buffers, strong bank balance sheets.
  - Recommended cautious calibration of labor-market tightening measures to mitigate downside risks from restructuring.

### Authorities’ Views (Selected)
- Authorities emphasize commitment to medium-term restructuring despite potential transition costs; fiscal incentives provided to adopt labor-saving technologies.
- Concern expressed about the reclassification of Singapore’s external position to “substantially stronger” than consistent with fundamentals, noting variability in current account gap estimates and longer-term correction of external balances.
- Authorities confident in resilience to an orderly UMP exit, citing past episodes where Singapore maintained monetary policy independence aided by a strong balance of payments.

### Monetary and Exchange Rate Policy
- MAS policy stance:
  - Moderately tight monetary policy via gradual NEER appreciation maintained since April 2012.
  - Staff estimates: NEER band appreciating at an annual rate of 2½ percent with a width of about ±2 percent; NEER around the midpoint of the band.
- Rationale and challenges:
  - Exchange-rate-based framework appropriate given openness and exposure to external shocks; medium-term orientation to price stability is appropriate.
  - Challenge: need to maintain tight stance while potential depreciation pressures arise from U.S. monetary normalization, which via uncovered interest parity could raise domestic interest rates and debt servicing costs, and put downward pressure on the housing market.
- External position assessment:
  - Singapore’s external position assessed to be substantially stronger than consistent with medium-term fundamentals and desirable policies.
  - At 18.3 percent of GDP in 2013, the current account appears to be 2−8 percent of GDP stronger, and the REER 4−16 percent weaker than consistent with fundamentals.
  - International reserves at 93 percent of GDP assessed as adequate for precautionary purposes.
  - Projection: current account to moderate further with increased public spending and slower absorption of foreign workers; absent policy measures, higher-than-norm current account balances would persist, leading to further accumulation of net foreign assets.

### Financial Sector and Macroprudential Policies
- Regulatory and supervisory strength:
  - 2013 FSAP update: Singapore’s financial regulation and supervision is among the best globally; overall compliance with supervisory standards is high.
  - Singaporean banks meet key Basel III targets for 2015 and are expected to meet MAS’s 2019 target of 10.5 percent (Tier 1 capital ratio plus conservation buffer).
  - Banks are close to meeting the 2019 liquidity coverage ratio (LCR) target of 100 percent; MAS’s new liquidity framework aligned with Basel recommendations.
- Macroprudential measures and implementation:
  - Active use of macroprudential policies (MaPs) helped cool housing and car permit markets and slow mortgage loan growth.
  - MAS introduced a multiyear onsite credit inspection program for major banks and continues credit and thematic reviews across banks in view of rising household and corporate indebtedness.
- FSAP recommendations:
  - Good progress in implementing key short-term FSAP recommendations; medium-term recommendations under consideration.

*Source: IMF staff report excerpt — "SINGAPORE RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK" (content unit: 1. Housing and Household Sector Developments and Macroprudential Policies).*

### 19.      Singapore is seeing a welcome deceleration of credit growth to residents, amid a

### _cr14312 - 19.      Singapore is seeing a welcome deceleration of credit growth to residents, amid a

### Credit growth, MaPs, and system liquidity
- Singapore is seeing a deceleration of credit growth to residents, amid a tightening of system-wide liquidity and helped by the active use of MaPs.
- During 2011−13, credit growth remained above standard thresholds used to identify build up of risks:
  - Increase in the credit-to-GDP ratio in the range of 8–15 percentage points since 2011.
  - Estimated deviation of the credit-to-GDP ratio from its trend around 13.5 percentage points in 2013.
  - Both exceeded commonly-used thresholds (3 and 10 percentage points, respectively) for excessive credit growth and related risks.
- Staff recommends maintaining current macroprudential policies (MaPs) to promote household deleveraging and vigilance on banks’ credit quality, building on hands-on supervision.
- A further gradual and orderly tightening of credit conditions with the UMP exit should limit further buildup of household and corporate indebtedness.

### Household sector, housing market, and macroprudential measures
- Staff estimates that current MaPs have helped to curb the excessive increase of house prices (Box 1).
- Household balance sheets are strong in the aggregate, but pockets of risks remain.
- Recent policy changes:
  - Broadening of exemptions under the total debt servicing ratio framework (TDSR) and loan tenure rules for refinancing housing loans contracted earlier is deemed appropriate to allow overleveraged households to negotiate restructurings.
- With a large supply of new housing set to come on the market in the near term, a further price easing resulting in an undershooting of historical trends seems likely in the near term.
- In case of signs of excessive house price declines, staff recommends considering a relaxation of stamp duties to support demand for real estate without loosening banks’ lending standards, while maintaining prudentially appropriate levels for more structural measures.
- Additional recommended actions:
  - Continue efforts to collect granular data on household balance sheets.
  - Strengthen credit bureau practices.
  - Continue education of over-indebted households about managing their debt prudently.

### Corporate sector leverage and SME lending
- In aggregate, leverage of publicly–listed corporations has remained relatively low despite rising corporate sector indebtedness, possibly reflecting robust earnings and higher retained earnings.
- Based on a sample of publicly-listed Singaporean nonfinancial corporates:
  - About 17 percent of total debt resides with companies with a leverage ratio above 2 as of end-2013.
  - About 21 percent of total debt resides with companies with an interest coverage ratio of less than 2.
- Lending to SMEs:
  - SMEs account for 21.6 percent of loans to domestic corporates.
  - SME lending is subject to strong underwriting standards, highly collateralized, and has a lower NPL ratio than that for the overall corporate sector.
- Risks from gradual interest rate normalization warrant continued vigilance, including in bank supervision.

### Singapore as a financial center, cross-border exposures, and spillovers
- Singapore’s status as an important financial center and host to large G-SIFIs creates potential for spillovers from global or regional financial shocks.
- Singapore’s financial sector is very large relative to its own economy, increasing potential spillovers into Singapore.
- Growing cross-border exposures of domestic banks in the region, including in China, have increased spillover risks.
  - Cross-border loans to China are mainly trade bills (65 percent) and interbank loans (25 percent) and make up about 12 percent and 8 percent of total loans for domestic and foreign banks, respectively.
- MAS recently proposed a stronger regulatory framework for domestic systemically important banks (D-SIBs), which includes:
  - Higher loss absorbency, LCR, recovery and resolution planning, risk disclosure and effective risk data aggregation and risk reporting requirements.
  - Requirement that foreign bank branches with a significant retail presence locally incorporate their retail operations.

### Foreign currency liquidity and contingency planning
- Singaporean banks’ reliance on the foreign currency swap market poses risks because this market can seize up during periods of severe financial stress.
- Foreign currency liquidity indicators:
  - Non-Singapore dollar loan-to-deposit ratio at a multi-year high of 128 percent as of September 2013, with a further rise through the first quarter of 2014.
- Staff priorities and recommendations:
  - Continued monitoring of banks’ foreign currency liquidity management.
  - MAS’s encouragement for banks to step up efforts to increase U.S. dollar deposit taking and issuing U.S. dollar debt to finance U.S. dollar lending is welcomed.
  - Authorities are encouraged to make banks develop contingency plans for low foreign currency swap market liquidity.
- Authorities decided not to introduce a separate USD LCR due to the inefficiencies this would entail for international banking groups.

### AML/CFT framework and reputational risks
- Efforts to strengthen the AML/CFT framework should continue given reputational risks from opaque ownership structures in the offshore wealth management sector.
- Key points:
  - Singapore made the evasion of certain foreign taxes a predicate crime for money laundering in July 2013.
  - Singapore’s next AML/CFT assessment by the Financial Action Task Force (FATF) is scheduled for 2015.
  - Effective implementation of evolving international AML standards—particularly relating to transparency of companies and trusts—and enhancing cooperation with other jurisdictions is important.
- Authorities’ view:
  - Financial Institutions (FIs) are subject to a comprehensive AML/CFT regulatory regime, including customer due diligence, ongoing account monitoring and suspicious transaction reporting requirements.
  - FIs have undertaken tax-risk reviews of existing accounts to assess tax legitimacy.
  - Legislative changes made in 2013 and Global Forum findings mean Singapore’s exchange of information regime is in line with the internationally-agreed standard and ownership and identity information is available for all types of companies, partnerships and trusts.

### Fiscal policy framework, buffers, and FY 2014/15 budget
- Singapore has maintained a very prudent fiscal policy framework, building up significant financial buffers.
- Fiscal rules and recent outcomes:
  - The Constitution mandates a balanced budget over the political cycle while allowing use of up to half of projected average long-term investment income from government’s financial assets (equivalent to 2.1 percent of GDP in the FY 2014/15 budget).
  - Fiscal surplus in FY 2013/14 is estimated at 5.7 percent of GDP (Table 5).
- FY 2014/15 budget initiatives (April 2014–March 2015) focus on medium-term objectives: boosting productivity, raising inclusiveness, and coping with projected sharp increase in the old-age dependency ratio.
  - Established a new extra-budgetary fund to cover health care costs for the elderly (Pioneer Generation Fund).
  - Seed money transferred to the new fund (2 percent of GDP) will initially be saved and disbursed over the medium term, along with investment income generated by the fund.
- Fiscal stance and impulse:
  - While cyclical conditions warrant a somewhat restrictive fiscal stance in the near term, the budget implies a fiscal impulse of about ¾ percent of GDP in FY 2014/15.
  - This is smaller than the estimated fiscal impulse of about 1¼ percent of GDP in FY 2013/14.
  - The fiscal impulse is expected to turn out smaller still, on spending falling somewhat short of the FY 2014/15 budget as has been the case in the last few years.
- Recommendations on fiscal transparency and consolidation of measures:
  - More work and public dissemination on calculation of the fiscal impulse, including timely disclosure of fiscal data on a consolidated general government basis and publishing general government-based budget estimates at the time of budget announcements.
  - Streamline and consolidate multitudinous initiatives into one or two meaningful and predictable benefits to enhance the predictability of social security and allow the public to adjust precautionary savings.

### Aging, CPF, retirement, and social spending
- Demographic pressures and medium-term fiscal implications:
  - Singapore is among the fastest aging advanced countries with an old-age dependency ratio projected to more than double by 2030.
  - The authorities expect government spending to increase by 1−2 percent of GDP over the medium term, mainly due to social and infrastructure spending.
  - This increase could be financed by a combination of higher revenue from progressive taxes and using a larger share of investment income on accumulated past surpluses.
- Central Provident Fund (CPF) observations and options:
  - The CPF has a bias toward house purchases; home ownership plays a very important role in Singapore.
  - Room to enhance mechanisms to facilitate monetizing real estate assets to supplement retirement savings, including developing well-functioning reverse mortgage schemes.
  - Despite subdued outlook for investment returns, there is scope to let CPF contributors share more in the upside to investment returns.
- CPF returns and government income sharing:
  - Risk-free investment returns of up to 3.5 percent on CPF ordinary savings accounts and up to 5 percent on medical and special accounts.
  - CPF members can choose options with higher risk-return profiles.
  - Up to 50 percent of government’s net investment returns are channeled to the budget, ensuring a more progressive and targeted sharing of earnings compared to raising CPF interest rates.
- Authorities plan to further improve CPF savings and annuities schemes to better prepare Singaporeans financially for retirement.

### Authorities’ views on financial stability and fiscal policy
- Financial sector resilience:
  - Industry-wide stress test by MAS shows banks are resilient to a broad array of adverse macroeconomic shocks (scenario envisages weak global growth, a disruptive UMP exit, a worsening domestic real economy and a large property market correction).
  - Authorities note foreign currency swap market is relatively deep and did not seize up during the global financial crisis.
  - Strong official reserve position would only be used in case of an extreme stress event and not to provide support to individual banks.
- Fiscal policy perspective:
  - Authorities view additional spending underlying the positive fiscal impulse as aimed at boosting productivity and closing the output gap over the medium term.
  - Government takes a medium-term view of the budget; recent revenue over-performance attributed to unexpectedly buoyant demand for real estate and vehicles, which may be at an inflection point.

### Staff appraisal and risks to the outlook
- Growth and inflation:
  - Following a recovery in 2013, growth is expected to moderate somewhat during 2014−2015.
  - Headline inflation has decelerated owing to moderating real estate and car permit prices, but the positive output gap, although narrowing, has been exerting upward pressure on core inflation.
- External and financial risks:
  - Recovering demand in advanced economies likely to be offset by ongoing real appreciation and gradual tightening in global monetary conditions.
  - Key external risks include:
    - A protracted period of slower growth in advanced and emerging economies.
    - Continued buildup and eventual unwinding of excess capacity in China.
    - An abrupt surge in financial market volatility as investors reassess underlying risks.
    - Geopolitical risks.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 38.      Singapore continues to implement a strong set of macroeconomic policies. The

### Singapore continues to implement a strong set of macroeconomic policies.

### Macroeconomic policy stance
- The monetary policy stance is a "moderately tight monetary policy stance of gradual appreciation of the nominal effective exchange rate of the Singapore dollar" that "has been maintained over the past two years" and "remains appropriate."
- The 2014 budget "implies a modest fiscal impulse" despite cyclical conditions warranting "a somewhat restrictive fiscal stance in the near term."
- Additional spending in the 2014 budget is "aimed at boosting productivity and would thereby help close the output gap over the medium term."

### Financial regulation, supervision, and AML/CFT
- Singapore’s financial regulation and supervision "is among the best globally," but continued implementation of evolving international regulatory and AML/CFT standards is "critical."
- The nonperforming loan ratio of domestic banks "remained stable at about 1 percent."
- Progress and priorities:
  - "Good progress has been made in implementing key short-term FSAP recommendations" and authorities are encouraged to implement the remaining recommendations.
  - Given banks’ reliance on foreign currency swap markets to address currency mismatches, "strengthening foreign-currency liquidity management practices remains a priority."
  - Authorities should continue efforts to implement and comply with evolving international AML/CFT standards, including "strengthened measures preventing the laundering of funds that have evaded foreign taxes and the proposed measures to prevent misuse of ownership structures."

### Household deleveraging and macroprudential policies (MaPs)
- Policy stance:
  - "Efforts to promote household deleveraging should continue."
  - The June 2013 launch of the total debt servicing ratio framework (TDSR) aided moderation in housing loan growth.
  - "The current MaPs to promote household deleveraging should be maintained."
- Housing market developments (Box 1):
  - Both private and public house price growth "turned negative in late-2013," and "declined by 1.3 percent and 1.6 percent (q/q), respectively, in the first quarter of 2014."
  - Quantity indicators: "the number of housing transactions has been decreasing"; "vacancy rates are rising"; "a large supply of new housing set to come on the market in the coming years."
- MaPs implemented since 2009 include: "stamp duties, lower loan-to-value (LTV) ceilings, higher minimum cash payment requirements, caps on loan tenors, and the total debt servicing ratio (TDSR) framework."
  - Tighter limits targeted "nonowner­-occupied housing, owners of multiple properties, companies, and foreigners."
  - In February 2014, "MAS broadened exemptions for refinancing of owner-occupied housing loans that preexisted before the implementation of the TDSR rules" and made similar adjustments to mortgage servicing ratio of public housing loans and loan tenure limits.
- Banking sector and household vulnerability:
  - "Household housing loans accounted for 28 percent of domestic banks’ assets in 2014:Q1."
  - Houses represent "48 percent of household assets."
  - "MAS estimates that about 30‒35 percent of household have a TDSR above 40 percent, and 5‒10 percent of households have a TDSR above 60 percent."
  - A high share of mortgages linked to variable rates: "about 70 percent of the outstanding stock by value and about a half by numbers."
  - The TDSR framework used a higher rate "3.5 percent rather than the current market rate of 1.8 percent" in its calculation.

### Medium-term economic restructuring and social safety net
- Restructuring plan:
  - Authorities’ medium-term economic restructuring plan is "ambitious" with measures to "boost the productivity of labor and land" that "could set the stage for a new era of sustainable growth."
  - Productivity improvements "may take some time to materialize."
  - The ongoing slowing inflow of foreign workers, a key part of the reform agenda, "could moderate potential growth and lower competitiveness."
- Social safety net:
  - The 2014 budget focuses on "providing additional social spending on healthcare for the elderly."
  - Authorities intend to strengthen the main pension scheme modalities and plan to raise social and infrastructure spending "by 1−2 percent of GDP over the medium term" to help consolidate support for low-income households.

### External position
- Assessment:
  - Singapore’s external position is "substantially stronger than what is consistent with medium-term fundamentals and desirable policies."
  - The current account surplus is "projected to moderate over the medium term."
- Factors and uncertainties:
  - Singapore is "a very open economy" with a "large positive net international investment position (NIIP), very high per capita income and is aging at a very high speed," making quantitative assessment of the current account and REER difficult.
  - Staff’s current account and REER gap estimations have a "wide range"; "the gaps are assessed to be relatively large."
  - Since 2010, "Singapore’s current account has narrowed considerably and the REER appreciated substantially," consistent with economic rebalancing.
  - Drivers that would further moderate the current account include "increased public spending, including on social safety nets, a more even distribution of consumption across generations, and the planned slower absorption of foreign workers."

### Financial sector overview (Box 2)
- Size and structure:
  - Singapore’s financial sector "had about S$2.7 trillion (737 percent of GDP) in assets in 2013."
  - "Commercial banks make up 78 percent of the financial system" and "foreign banks still make up about 67 percent of the banking system assets."
  - Wealth management AUM: "about US$1.4 trillion as of end-2013."
- Contribution to the economy:
  - Financial sector contribution to GDP grew from "9 percent in 2000 to 11 percent in 2013."
  - During 2000−2013, the economy grew at an average annual rate of "5.5 percent," and the financial sector contributed "about 0.76 percent per annum on average to the headline GDP growth."
  - "Financial sector exports accounted for 14 percent of services exports and 5½ percent of GDP," while "net financial services exports was about 3 percent of GDP on average during 2000−2013."
  - Employment in financial services is "about 5 percent of total employment."
- Activity and linkages:
  - Cross-border banking activity is "dominated by East-Asian and European regions."
  - Singapore is "one of the largest FX trading centers globally" and has an important share of FX turnover in Asian currencies.
  - Singapore’s share in global bond issuance is "still relatively low but is larger than Hong Kong SAR and has shown robust growth since the 2008/2009 Global Financial Crisis."
- Prospects and priorities:
  - Key shaping factors: growth and wealth accumulation in ASEAN and South East Asia; maintenance of a world-class regulatory and supervisory system; development of new financial sector niches, such as the market for renminbi.

*Source: _cr14312 - 38.      Singapore continues to implement a strong set of macroeconomic policies.*

### Box 2. Singapore: Financial Sector (Concluded)

### Box 2. Singapore: Financial Sector (Concluded)

### Financial sector volatility and correlations
- The financial services sector is relatively more volatile than other service sectors.
- Relative volatility of Singapore’s finance and insurance sector is lower compared to other financial centers.
- Financial services activity in Singapore slows down during periods of heightened global risk sentiment.
- Financial services activity in Singapore has been highly correlated with economic activity in ASEAN-5 countries.

### Real sector developments (Figure 1 — summary findings)
- Growth picked up in 2013, driven by net exports and consumption.
- Key sectors leading growth momentum: manufacturing, wholesale and retail trade, and the finance and insurance sectors.
- Since 2007, the construction sector has experienced the highest cumulative growth.
- Unemployment rate: 1.9 percent in 2013; an uptick was observed in 2014:Q1.
- Inflation dynamics: amid a gradual pick up in core inflation, overall inflation decelerated significantly reflecting moderating house prices and COE premiums owing to the implementation of macroprudential measures.

### Monetary and financial sector developments (Figure 2 — summary findings)
- Short-term interest rates remain very low, and real short-term interest rates have been negative.
- Broad money growth has decelerated.
- The stock market has largely recovered from the mid-2013 financial turbulence amid declining volatility.
- The FX market was affected by the mid-2013 turbulence but volumes have increased since then.
- The slope of the yield curve has increased with long-term rates approaching their pre-crisis levels.

### Banking sector developments (Figure 3 — summary findings)
- Asset growth of ACUs is on the rise, while for DBUs it has been gradually trending down.
- DBUs rely primarily on deposit funding; ACUs rely on cross-border bank funding.
- Loan-to-deposit ratios for both ACUs and DBUs have been rising rapidly, exceeding 1 for DBUs since mid-2013.
- 45 percent of total DBU loans consist of housing loans and loans to the building and construction sectors.
- Growth in DBU loans to nonresidents has slowed down.
- The big 3 domestic banks now have about 40 percent of their loan portfolio in other Asia (excluding Singapore).

### Social and equality indicators (Figure 4 — summary findings)
- Wages of low-skilled workers trended up in 2013.
- Average wages increased by 4.3 percent in 2013.
- Median household income increased by 1.6 percent in 2013.
- Real incomes of lower income groups, largely stagnant during 2000−06, have recently increased considerably.
- The relatively high headline inflation during 2011−12 affected lower-income groups.
- Government policies (taxes and benefit payments) are contributing to a reduction in inequality.

### Demographic transition (Figure 5 — summary findings)
- 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 in advanced economies.
- The average number of children per woman is among the lowest in the world.
- Labor force participation rates have been rising for both male and female workers; scope remains to further raise participation rates for women.
- Labor force growth has declined in recent years after a period of very strong growth during 2005−2009, leading to a gradual increase in the capital to labor ratio.

### Spillovers and external exposures (Figure 6 — summary findings)
- Singapore depends mainly on foreign final demand from the E.U. and U.S.; China, Japan, Indonesia and India are important partners in the region.
- FDI inflows are dominated by the E.U. and the U.S. and are mainly concentrated in the finance and insurance sector.
- Singapore has large portfolio assets, making its external balance sheet vulnerable to shocks in the U.S and regional economies such as China and India.
- Major sources of funding for Singapore’s financial center include East Asian and European banks, followed by deposits from East Asian nonbanks.
- East Asia is the largest user of funds and likely to receive outward spillovers from Singapore in the event of banking sector stress.
- Cross-border exposures of domestic banks in Greater China and other Asian economies increased, amplifying regional spillovers.

### Key macroeconomic and financial statistics (from Table 1 and related tables)
- Nominal GDP (2013): US$298 billion
- Main exports (percent of total domestic exports): Electronic products (19%); chemical products (17%)
- Population (June 2013): 5.4 million
- Unemployment rate (2013): 1.9 percent
- GDP per capita (2013): US$55,182

Selected time-series highlights (2009–2015 columns as presented):
- Real GDP growth: 2009: -0.6; 2010: 13.1; 2011: 6.1; 2012: 2.5; 2013: 3.9; 2014: 3.0; 2015: 3.0
- Total domestic demand growth: 2009: -4.3; 2010: 13.1; 2011: 3.5; 2012: 7.6; 2013: 1.5; 2014: 2.3; 2015: 3.4
- CPI inflation (period average): 2009: 0.6; 2010: 2.8; 2011: 5.2; 2012: 4.6; 2013: 2.4; 2014: 1.4; 2015: 2.5
- Core CPI inflation (period average): 2009: 0.0; 2010: 1.5; 2011: 2.2; 2012: 2.5; 2013: 1.7; 2014: 2.3; 2015: 2.4
- Gross national saving (percent of GDP): 2009: 44.5; 2010: 51.5; 2011: 50.1; 2012: 47.9; 2013: 47.4; 2014: 46.8; 2015: 46.4
- Gross domestic investment (percent of GDP): 2009: 27.7; 2010: 27.9; 2011: 27.3; 2012: 30.4; 2013: 29.1; 2014: 29.2; 2015: 29.7
- Current account balance (US$ billions): 2009: 32.4; 2010: 55.9; 2011: 62.6; 2012: 50.2; 2013: 54.6; 2014: 55.4; 2015: 56.0
  - (In percent of GDP): 2009: (16.8); 2010: (23.7); 2011: (22.8); 2012: (17.5); 2013: (18.3); 2014: (17.6); 2015: (16.6)
- Trade balance (US$ billions): 2009: 47.6; 2010: 62.8; 2011: 69.5; 2012: 63.4; 2013: 67.8; 2014: 70.8; 2015: 73.3
- Exports, f.o.b. (US$ billions): 2009: 287.4; 2010: 370.3; 2011: 431.8; 2012: 434.2; 2013: 437.5; 2014: 464.9; 2015: 483.0
- Imports, f.o.b. (US$ billions): 2009: -239.8; 2010: -307.4; 2011: -362.2; 2012: -370.8; 2013: -369.7; 2014: -394.1; 2015: -409.7
- Financial account balance (US$ billions): 2009: -21.2; 2010: -18.3; 2011: -46.2; 2012: -23.1; 2013: -37.4; 2014: -39.0; 2015: -43.4
- Overall balance (US$ billions): 2009: 11.3; 2010: 42.2; 2011: 17.1; 2012: 26.1; 2013: 18.2; 2014: 16.4; 2015: 12.5
- Gross official reserves (US$ billions): 2009: 187.8; 2010: 225.8; 2011: 237.7; 2012: 259.3; 2013: 273.1; 2014: 289.4; 2015: 301.9
  - (Months of imports): (5.5)(5.7)(5.8)(6.2)(6.2)(6.3)(6.2)
- Singapore dollar/U.S. dollar exchange rate (period average): 2009: 1.45; 2010: 1.36; 2011: 1.26; 2012: 1.25; 2013: 1.25

### Balance of payments highlights (Table 2 — select items)
- Current account balance (US$ billions): 2009: 32.4; 2010: 55.9; 2011: 62.6; 2012: 50.2; 2013: 54.6
- Trade balance (US$ billions): 2009: 47.6; 2010: 62.8; 2011: 69.5; 2012: 63.4; 2013: 67.8
- Services balance (US$ billions): 2009: -2.3; 2010: -0.4; 2011: 2.8; 2012: 0.9; 2013: 0.8
- Primary income balance (US$ billions): 2009: -8.9; 2010: -1.3; 2011: -3.9; 2012: -6.8; 2013: -7.2
- Financial account (net) (US$ billions): 2009: -21.2; 2010: -18.3; 2011: -46.2; 2012: -23.1; 2013: -37.4
- Net international investment position (In billions of U.S. dollars): 2009: 368.5; 2010: 438.9; 2011: 502.6; 2012: 549.4; 2013: 562.6
  - In percent of GDP: 2009: 184.8; 2010: 175.3; 2011: 189.7; 2012: 187.3; 2013: 190.9

### Monetary and liquidity indicators (Tables 3–4 — select figures)
- Broad money (M2, percent change, y/y): 2009: 8.7; 2010: 7.6; 2011: 11.8; 2012: 6.8; 2013: 7.9; 2014 (as of June): 5.1
- Credit to private sector (percent change, y/y): 2009: 3.1; 2010: 13.2; 2011: 18.9; 2012: 11.3; 2013: 16.1; 2014 (as of June): 11.3
- Credit to the property sector (percent change, y/y) for DBUs: 2009: 8.3; 2010: 18.2; 2011: 19.5; 2012: 16.3; 2013: 11.8; 2014 (as of June): 8.7
- Share of property sector credit in total nonbank credit (percent, DBU): 2009: 49.9; 2010: 51.4; 2011: 47.2; 2012: 47.0; 2013: 44.9; 2014 (as of June): 44.7
- Three-month S$ SIBOR (percent, end-year): 2009: 0.7; 2010: 0.4; 2011: 0.4; 2012: 0.4; 2013: 0.4; 2014 (as of June): 0.4
- NPL ratio (local banks, percent): 2009: 2.4; 2010: 1.6; 2011: 1.2; 2012: 1.2; 2013: 1.1; 2014: ...

### Financial soundness indicators (Table 7 — local banking sector, select items)
- Regulatory capital to risk-weighted assets: 2009: 17.3; 2010: 18.6; 2011: 16.0; 2012: 18.1; 2013: 16.9; 2013 (Sep): 16.3; 2013 (end): 16.1
- Regulatory tier I capital to risk-weighted assets: 2009: 14.1; 2010: 15.5; 2011: 13.5; 2012: 14.9; 2013: 14.2; 2013 (Sep): 13.6; 2013 (end): 13.5
- Shareholders’ equity to assets: 2009: 9.9; 2010: 9.5; 2011: 8.7; 2012: 9.2; 2013: 8.9; 2013 (Sep): 8.6; 2013 (end): 8.3
- NPLs to nonbank loans: 2009: 2.4; 2010: 1.6; 2011: 1.2; 2012: 1.2; 2013: 1.1; 2013 (Sep): 1.1; 2013 (end): 1.1
- Total provisions to NPLs: 2009: 90.8; 2010: 110.9; 2011: 125.5; 2012: 128.3; 2013: 133.7; 2013 (Sep): 134.3; 2013 (end): 131.2
- After tax return on assets: 2009: 1.1; 2010: 1.2; 2011: 1.0; 2012: 1.1; 2013: 1.1; 2013 (Sep): 1.0; 2013 (end): 1.0
- After tax return on equity: 2009: 10.8; 2010: 12.2; 2011: 11.1; 2012: 12.0; 2013: 11.8; 2013 (Sep): 11.3; 2013 (end): 11.6
- Net interest margin: 2009: 2.2; 2010: 2.0; 2011: 1.9; 2012: 1.8; 2013: 1.7; 2013 (Sep): 1.7; 2013 (end): 1.6

*Source: IMF staff report extract — Box 2. Singapore: Financial Sector (Concluded).*

### Appendix I. Singapore—Risk Assessment Matrix 1/

### Appendix I. Singapore—Risk Assessment Matrix

### Major risks, transmission channels, expected impact, and recommended policy responses
- Protracted period of slower growth in advanced and emerging economies
  - Time Horizon: Short-Medium Term
  - Likelihood: High
  - Transmission Channels:
    - Direct and intra-regional trade linkages given Singapore’s high openness and role as financial center and trading hub.
    - Financial linkages: limited exposure to Europe and the U.S. for domestic banks; significant exposure for offshore banks; potential inward spillovers from banks in advanced markets with presence in Singapore’s domestic market.
    - High household indebtedness and potential asset price corrections could exacerbate slowdown and spillovers to banks.
  - Expected Impact: Medium to High
  - Recommended Policy Response:
    - If domestic demand weakens substantially, use temporary and targeted fiscal stimulus, loosen monetary policy and recalibrate MaPs as necessary while maintaining financial stability.
    - In the longer run, diversify the economy further to tap demand from faster-growing regions, including Asia.

- Continued buildup and eventual unwinding of excess capacity in China resulting in a sharp growth slowdown and large financial and fiscal losses
  - Time Horizon: Medium Term
  - Likelihood: Medium
  - Transmission Channels:
    - Direct and intra-regional trade linkages; China is the second largest source of tourists for Singapore; domestic demand hit via worsening investment sentiment.
    - Financial linkages: domestic banks’ lending to China largely trade finance but total exposures have grown to around 50 percent of GDP; widespread corporate defaults could raise NPLs; financial stress in China could reduce investor sentiment and pullback of funding.
  - Expected Impact: Medium to High
  - Recommended Policy Response:
    - Provide temporary and targeted fiscal support and loosen monetary policy to offset headwinds.
    - Continue to monitor banks’ exposures to China and the region; use prudential policies and bank supervision to ensure risks are managed.

- An abrupt surge in global financial market volatility as investors reassess underlying risk
  - Time Horizon: Short Term
  - Likelihood: High
  - Transmission Channels:
    - Decline in financial sector activity could slow growth; financial sector is an important and sensitive driver.
    - Asset price corrections from capital flow reversals and higher-than-expected interest rates could affect growth via wealth effects and deteriorate banks’ capital given elevated household and corporate debt and prevalence of variable interest rates.
    - Liquidity risks from sudden retrenchment of interbank—including intra-group—funding of offshore banks and funding pressures from foreign currency liabilities of domestic banks.
  - Expected Impact: Medium
  - Recommended Policy Response:
    - Ensure financial institutions maintain prudent risk management and adequate liquidity and capital buffers.
    - Maintain close links with home country supervisors and recalibrate macroprudential policies to mitigate stress.
    - In extreme events, use official reserve position as cushion; swap lines with other central banks complement this.

- Disorderly or excessive correction in property prices
  - Time Horizon: Short/Medium Term
  - Likelihood: Medium
  - Transmission Channels:
    - Decline in collateral values and wealth effects may trigger fall in economic activity and bank lending, with adverse feedback on household indebtedness and property prices.
  - Expected Impact: Medium
  - Recommended Policy Response:
    - Adjust macroprudential policies while safeguarding financial stability.
    - Use targeted fiscal transfers to households whose debt servicing capacity is adversely affected.

- Singapore’s policy-induced tight labor market fails to generate significant productivity gains / generates higher than anticipated productivity gains increasing potential growth relative to the baseline
  - Time Horizon: Medium-Long Term
  - Likelihood: Medium
  - Transmission Channels and Impacts:
    - If productivity gains do not materialize: sharp increase in unit labor costs, loss of competitiveness, business closures, worker layoffs, higher NPLs, decline in mortgage quality on elevated unemployment.
    - If higher potential growth occurs: restructuring toward higher-value-added sectors and closing productivity gaps could raise potential growth.
  - Recommended Policy Response:
    - Calibrate pace of labor market tightening to minimize transitional costs.
    - Provide temporary and targeted fiscal transfers to help SMEs during transition.
    - Increase public spending on health, education and infrastructure to support productivity improvements.

- Risks to financial stability from inconsistent and partial implementation of financial regulatory reforms / Delays in implementation of AML standards and associated reputational risks
  - Time Horizon: Short-Medium Term
  - Likelihood: Medium/Low
  - Transmission Channels:
    - Decline in cross-border banking activity from regulatory uncertainty and possible regulatory arbitrage.
    - Reputational risks in wealth management if opaque ownership structures are not addressed, adversely affecting the industry’s viability.
  - Expected Impact: Medium
  - Recommended Policy Response:
    - Ensure regulatory standards and risk management practices keep up with international norms.
    - Maintain collaboration with financial sector supervisors in other jurisdictions.
    - Fully implement international AML standards; ensure service providers report suspicious transactions and close accounts lacking complete beneficial ownership evidence.

- Inflationary pressures due to higher than expected upswing in external demand
  - Time Horizon: Short/Medium Term
  - Likelihood: Low
  - Transmission Channels:
    - Binding supply constraints amid restructuring and a positive output gap could lead to strong inflationary pressures and rising inflation expectations, straining monetary policy.
  - Expected Impact: Medium
  - Recommended Policy Response:
    - Tighten monetary policy to stabilize inflationary pressures.
    - Accelerate structural reforms to accommodate faster restructuring and increase productivity.

*Recommended policy responses reflect staff views on the expected impact and likelihood of risks as of the time of discussions with the authorities.*

---

### Appendix II. Singapore—External Sector Developments and Assessment

### Current account and REER
- Key figures and dynamics:
  - After narrowing by about 6 percentage points during 2010‒2012, Singapore’s current account surplus increased slightly in 2013 to reach 18.3 percent of GDP.
  - The REER continued to appreciate in 2013, mainly reflecting the nominal effective appreciation of the Singapore dollar as relative inflation differentials declined.
- Drivers of high current account surplus:
  - Historically high savings rate (public and private) underpins the current account.
  - High public sector savings driven by a prudent fiscal policy framework: balanced budget rule over the political cycle and a cap on the transfer to the budget of investment returns earned on government assets.
  - Contributing factors to private savings: relatively limited social safety nets, rapid projected aging, mandatory defined-contribution pension scheme, greater income inequality, high corporate savings, and Singapore’s status as a financial center (precautionary saving motives).
- Medium-term outlook:
  - Narrowing of the current account since 2010 is expected to be structural and continue in the medium term.
  - Drivers of continued narrowing: adjustment in the rest of the world, Singapore’s economic restructuring, rapidly aging population, lower public sector savings and enhanced social safety nets.
  - Consistent with structural trends, the REER is expected to continue to appreciate in the medium term.

### Foreign asset and liability position
- Singapore has a large positive net international investment position (NIIP), reflecting large net portfolio assets and official reserves.
- The size of official foreign assets held by Government Investment Corporation is unknown but likely accounts for a considerable share of portfolio holdings.
- Gross assets and liabilities are significant relative to GDP, making valuation changes an important driver of IIP changes.
- The high NIIP does not seem to contribute significantly to the current account through the income balance because higher income is paid on IIP liabilities (mainly FDI) than on assets (portfolio and official reserves).
- NIIP is expected to increase over time, based on declining but still sizable current account balances projected in the medium term.

### Capital and financial accounts
- Capital account is fully open.
- Financial account deficit is mainly driven by official sector flows reflecting reinvestment abroad of income from large foreign assets; these flows co-move with the global financial cycle.
- Net FDI inflows are significant, historically driven by foreign investment in the financial services sector.
- Net bank-related flows are relatively small but gross banking sector-related flows are significant and highly volatile.
- Financial account is expected to remain in deficit as long as income from net foreign assets is reinvested abroad.

### Reserve adequacy
- No standard quantitative metric for reserve adequacy for advanced economies; staff assessment accounts for Singapore’s role as an international financial center that does not issue a reserve currency.
- Relevant figures:
  - Singapore has a large stock of short-term external debt: 344 percent of GDP in 2013.
  - About 80 percent of banks’ short-term liabilities are covered by their short-term external financial assets.
  - FSAP’s U.S. dollar liquidity stress tests showed the banking sector’s FX funding gap over a one-year horizon would be about 50 billion U.S. dollars.
  - MAS official reserves: 270 billion U.S. dollars (used in assessment).
- Assessment:
  - The 50 billion U.S. dollars FX funding gap is easily covered by official reserves at 270 billion U.S. dollars.
  - Strong supervision and access to swap lines with major central banks reduce the need for very large reserve buffers.
  - Reserve buffers are important for monetary policy implementation under the managed exchange rate system.
  - Conclusion: based on precautionary needs and monetary policy implementation considerations, Singapore’s current levels of reserves appear adequate and there is no clear case for further reserve accumulation.

### Quantitative assessment of the current account and REER
- Singapore is extremely open: export and import shares relative to GDP were 190½ percent and 167½ percent of GDP in 2013.
- Singapore is an outlier in income per capita, pace of aging, and NIIP position, limiting applicability of cross-country econometric models.
- Model-based assessments and staff conclusions:
  - Standard CGER-like models and the EBA model were used.
  - Staff’s MB approach (allowing for a financial center dummy) and the external sustainability approach imply a CA surplus norm of 8‒8½ percent of GDP and a CA gap of 6−6½ percent of GDP relative to staff’s medium-term CA projection of 14.5 percent of GDP.
  - EBA-like estimates imply a CA balance norm of 17½ percent of GDP for 2013 in cyclically-adjusted terms, suggesting a CA gap of about 3 percent of GDP relative to the cyclically-adjusted CA balance in 2013.
  - Staff assesses the current account gap to have a range of 2‒8 percent of GDP reflecting wide uncertainty.
  - With respect to the REER, staff assesses the real exchange rate is around 4‒16 percent weaker than warranted by medium-term fundamentals and desirable policies.
  - The REER estimate uses a semi-elasticity of the CA with respect to the REER of about 0.5, consistent with Singapore’s high openness.
- Caveats:
  - High NIIP level may overstate CA norms in MB and ES approaches if interpreted as byproduct of past excessive surpluses.
  - Singapore is not in the EBA sample; EBA coefficients are applied to Singapore data with caution due to outlier status.
  - Overall, quantitative assessments are uncertain but indicate large external imbalances relative to other countries covered in the External Sector Report.

### Key external sector statistics (selected)
- Current account surplus: 18.3 percent of GDP (2013).
- Exports: 190½ percent of GDP (2013).
- Imports: 167½ percent of GDP (2013).
- Short-term external debt: 344 percent of GDP (2013).
- Banking sector FX funding gap (1-year horizon): about 50 billion U.S. dollars.
- MAS official reserves used in assessment: 270 billion U.S. dollars.
- Gross official foreign reserves: 93 percent of GDP (2013).
- NIIP position: 191 percent of GDP in 2013, up by 44 percentage points since 2008.
- Staff semi-elasticity of CA w.r.t. REER used: about 0.5.
- Assessed CA gap range: 2‒8 percent of GDP.
- Assessed REER gap: 4‒16 percent (real exchange rate weaker than warranted).

### Overall assessment and policy implications
- External position assessment:
  - Based on model ranges, large positive NIIP expected to increase in medium term, continuation of financial account deficit, and adequate reserves, the external position is assessed to be substantially stronger than what is consistent with medium-term fundamentals and desirable policies.
  - This assessment is subject to wide uncertainty given Singapore’s very open economy and global trading and financial center role.
- Policy implications consistent with authorities’ policies:
  - Increased public spending, a stronger social safety net, a more even distribution of income across generations, and slower absorption of foreign workers are expected to moderate the current account going forward.
  - Staff emphasizes careful consideration of structural reforms, public spending, and social policies to address external imbalances over time.

*Source: Appendix I and Appendix II, Singapore—Risk Assessment Matrix and External Sector Developments and Assessment, IMF staff report content.*

### Appendix III. Singapore—Key FSAP Recommendations

### Appendix III. Singapore—Key FSAP Recommendations

### Short-Term Implementation (within 12 months)
- 1. Increased attention to onsite inspections of banks’ credit risk.  
  - MAS has enhanced the CRAFT guidance to require greater attention to sectors where banks have material credit exposure. In addition, MAS has instituted a multiyear credit onsite inspection schedule for major banks in 2013:  
    - i. Where credit risk is key to the risk profile of the bank, there will be periodic onsite reviews of the bank’s credit exposure which will include review of credit files to assess banks’ underwriting and loan grading standards, adequacy of provisions and quality of credit exposures.  
    - ii. Where sector concentration concerns have been noted in the bank’s risk assessment, the review will also focus on credit files belonging to borrowers from the particular sector.  
    - Where necessary, thematic inspections of credit risk will be conducted.

- 2. Monitor LCR ratios for significant foreign currencies.  
  - MAS collects LCR data for Singapore dollar, U.S. dollar and consolidated currency from all banks on an annual basis, as well as on a semi-annual basis for major banks. Once Basel III LCR requirements are implemented in January 2015, such LCR data will be submitted and monitored on a monthly basis.

- 3. Mitigate legal risks to CCPs from conflicts of law across jurisdictions.  
  - MAS continues to actively engage other foreign regulators to mitigate any cross-border regulatory risks to CCPs.

- 4. The CCPs to explore with members the possibility of widening their collateral pool and examine the feasibility of receiving Singapore government securities as collateral to improve access to central bank liquidity in times of stress.  
  - SGS already qualifies as eligible collateral. Nonetheless, SGX will conduct a review, targeted for completion by December 2014, to explore the feasibility of increasing the amount of SGS held as collateral.

- 5. Consider subjecting loans for owner-occupied housing to a limit to be set by MAS.  
  - MAS is in the process of considering the need to subject owner-occupied housing loans to a limit.

- 6. Encourage overextended households to reduce their leverage.  
  - MAS enhanced rules on the prudent use of credit card and other unsecured credit facilities in December 2013. The rules include preventing financial institutions from extending further credit to overextended borrowers. MAS also implemented the Total Debt Servicing Ratio Framework (TDSR) in June 2013 to encourage overextended households to reduce their leverage. The authorities continue to warn households of the risks of overleveraging through outreach and education. The December 2013 Financial Stability Review (FSR) contained a special feature box item warning of the risks of overleveraging. Credit Counselling Singapore helps overleveraged households to restructure and bring down their debt over time. The national financial education programme educates consumers about managing debt prudently, mainly through workplace talks and workshops as well as through newspaper info-ads, TV and radio campaigns.

- 7. Stand ready to adjust macroprudential measures in the housing market in line with changes in market conditions.  
  - MAS monitors various indicators and changes in market conditions, including prices, transactions, and housing affordability indicators, as well as global and domestic macroeconomic conditions. The series of property-related measures taken over the past few years has dampened momentum in the property market, with prices starting to decline and transaction volume moderating. MAS will continue to monitor market conditions and will adjust the measures, if necessary.

### Medium-Term Implementation (1–3 years)
- 8. Further strengthen banks’ capital framework, with implementation of the countercyclical capital buffer in line with the Basel III timelines.  
  - MAS will implement the countercyclical capital buffer by January 2016 in line with the Basel III timelines

- 9. Further develop SGX recovery plans, identifying additional scenarios.  
  - MAS will work with SGX to review CDP’s and SGX­DC’s recovery and resolution plans to incorporate additional scenarios.

- 10. Upgrade the collateral that covers credit exposures related to the link with the Chicago Mercantile Exchange (CME).  
  - SGX will review whether its current letter of credit (LC) regime can be enhanced and if the clearing fund can be used to cover losses from the Mutual Offset System (MOS) link. The review is targeted for completion by June 2015.

- 11. Formalize bilateral cooperative crisis management agreements for FMIs.  
  - While the existing MOU allows MAS to engage CFTC in emergency situations, the authorities will consider including details on crisis coordination with the CFTC at a later stage, when international standards on crisis management are finalized.

- 12. Collect more granular data on household balance sheets, drawing on surveys and strengthened credit bureau practices.  
  - Data collection for the consumer credit bureau will be enhanced, providing information on a borrower’s overall credit limits and aggregate outstanding balances across lenders. This is targeted for completion by 2014 H2. MAS has also conducted new quarterly loan surveys of banks to collect more disaggregated information on the credit profile of borrowers for new housing loans.

- 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.  
  - MAS is studying possible arrangements that are best suited to Singapore’s context, including widening the use of the Deposit Insurance fund, where appropriate. The authorities will draw from international best practices/ standards that are in the process of being formulated and finalized.

- 14. Ensure that the banking industry adequately contributes to the costs of bank failures.  
  - Similar to recommendation 13.

- 15. Further facilitate cross-border cooperation in bank resolution.  
  - MAS is committed to consider the impact of its resolution actions on financial stability in other jurisdictions and to work with foreign resolution authorities wherever possible towards a coordinated resolution.

- 16. Consider changes to the structure of the MAS Board to strengthen operational independence in financial supervision.  
  - No action will be taken. In the authorities’ view, MAS has legal and institutional safeguards that protect against potential conflicts of interest and maintains full operational independence in the supervision of financial institutions. MAS will review the safeguards from time to time.

- 17. Ensure that MAS’ mandate for prudential supervision is not compromised by its developmental mandate.  
  - MAS is in the process of reviewing the MAS Act to clarify that, where there are safety and soundness concerns, the prudential supervision mandate will prevail over the developmental mandate.

*Appendix III. Singapore—Key FSAP Recommendations and Actions Taken*

### 18. Review and strengthen the resolution

### 18. Review and strengthen the resolution

### Recommendation status
- Review and strengthen the resolution framework to enhance MAS' operational independence in bank resolution.
- The recommendation is under review.

### Macroeconomic developments and outlook
- Growth and composition:
  - Real GDP growth: 3.9 percent in 2013 (from 2.5 percent in 2012); growth recovered to 3.9 percent in 2013.
  - Growth decelerated in the first two quarters of 2014 and is expected to moderate to around 3 percent during 2014−2015.
  - Net exports accounted for almost half of 2013 growth; private and public consumption contributed the other half.
- Drivers and risks:
  - A rising trade surplus pushed the current account to 18.3 percent of GDP in 2013 (from 17.5 percent of GDP in 2012).
  - Baseline risks include: protracted slower growth in advanced and emerging economies; buildup and unwinding of excess capacity in China; abrupt surge in global financial market volatility; geopolitical risks.
  - Planned further slowing of foreign-worker inflows as part of economic restructuring could moderate potential growth and lower competitiveness.
- Inflation and labor:
  - Headline CPI inflation: 2.4 percent on average in 2013 (from 4.6 percent in 2012).
  - CPI-All Items inflation eased to 1.6 percent in the first seven months of 2014, from 1.9 percent in the second half of 2013.
  - MAS Core Inflation (excluding accommodation and private road transport) rose to 2.1 percent in Jan-Jul 2014 from 1.8 percent in H2 2013.
  - Unemployment rate: 1.9 percent in 2013.

### Financial sector and housing
- Financial stability measures and outcomes:
  - Targeted macroprudential policies contributed to cooling the housing and car permit markets.
  - Nonperforming loan ratio of domestic banks remained stable at about 1 percent.
  - Housing loan growth moderated after June 2013 launch of the total debt servicing ratio framework (TDSR).
  - Property prices leveled off and housing transactions moderated.
- Supervisory and regulatory priorities:
  - Strengthening foreign-currency liquidity management at banks remains a priority.
  - Ongoing efforts to comply with evolving international regulatory standards and to strengthen the regime against money laundering and the financing of terrorism were encouraged.
  - Directors welcomed progress on key short-term FSAP Update recommendations and encouraged implementation of remaining recommendations.

### Policy assessment and recommendations
- Monetary policy:
  - Given cyclical conditions, the targeted rate of currency appreciation (nominal exchange rate policy) is appropriate to anchor inflation expectations.
- Macroprudential and fiscal policy:
  - Support for complementary use of macroprudential policies to contain asset prices and promote prudent lending and household deleveraging.
  - Merit in a modest fiscal stimulus in the 2014 budget geared toward social and infrastructure spending to support reforms that boost productivity, enhance health care and retirement benefits for the elderly and low-income households, and promote inclusiveness.
- Structural and medium-term priorities:
  - Continue economic restructuring to raise labor productivity; potential GDP growth projected to slow in next few years then recover gradually, reaching about 3¼ percent in the medium term.
  - Address demographic challenges and reduce inequality; strengthen the social safety net to alleviate transition costs from restructuring.
  - Continued efforts to boost domestic demand and narrow the current account surplus over time.

### Selected key statistics (2009–15, as presented)
- Growth (percentage change):
  - Real GDP: -0.6 (2009); 13.1 (2010); 6.1 (2011); 2.5 (2012); 3.9 (2013); 3.0 (2014 proj.); 3.0 (2015 proj.).
  - Total domestic demand: -4.3 (2009); 13.1 (2010); 3.5 (2011); 7.6 (2012); 1.5 (2013); 2.3 (2014 proj.); 3.4 (2015 proj.).
- Saving and investment (percent of GDP):
  - Gross national saving: 44.5 (2009); 51.5 (2010); 50.1 (2011); 47.9 (2012); 47.4 (2013); 46.8 (2014 proj.); 46.4 (2015 proj.).
  - Gross domestic investment: 27.7 (2009); 27.9 (2010); 27.3 (2011); 30.4 (2012); 29.1 (2013); 29.2 (2014 proj.); 29.7 (2015 proj.).
- Inflation and unemployment (period average, percent):
  - CPI inflation: 0.6 (2009); 2.8 (2010); 5.2 (2011); 4.6 (2012); 2.4 (2013); 1.4 (2014 proj.); 2.5 (2015 proj.).
  - Core CPI inflation: 0.0 (2009); 1.5 (2010); 2.2 (2011); 2.5 (2012); 1.7 (2013); 2.3 (2014 proj.); 2.4 (2015 proj.).
  - Unemployment rate: 3.0 (2009); 2.2 (2010); 2.0 (2011); 2.0 (2012); 1.9 (2013); 2.0 (2014 proj.); 2.1 (2015 proj.).
- Central government budget (percent of GDP):
  - Revenue: 19.0 (2010); 20.2 (2011); 22.8 (2012); 22.7 (2013); 22.3 (2013); 22.0 (2014 proj.); 22.0 (2015 proj.).
  - Expenditure: 17.8 (2009); 15.4 (2010); 14.8 (2011); 14.7 (2012); 16.1 (2013); 17.4 (2014 proj.); 17.8 (2015 proj.).
  - Overall balance: 1.2 (2009); 4.8 (2010); 8.0 (2011); 8.1 (2012); 6.2 (2013); 4.7 (2014 proj.); 4.2 (2015 proj.).
- Money and credit:
  - Broad money (M2) growth: 8.7 (2009); 7.6 (2010); 11.8 (2011); 6.8 (2012); 7.9 (2013).
  - Credit to private sector: 3.1 (2009); 13.2 (2010); 18.9 (2011); 11.3 (2012); 16.1 (2013).
- Balance of payments (US$ billions):
  - Current account balance: 32.4 (2009); 55.9 (2010); 62.6 (2011); 50.2 (2012); 54.6 (2013); 55.4 (2014 proj.); 56.0 (2015 proj.).
    - In percent of GDP: (16.8) (2009); (23.7) (2010); (22.8) (2011); (17.5) (2012); (18.3) (2013); (17.6) (2014 proj.); (16.6) (2015 proj.).
  - Trade balance: 47.6 (2009); 62.8 (2010); 69.5 (2011); 63.4 (2012); 67.8 (2013); 70.8 (2014 proj.); 73.3 (2015 proj.).
  - Exports, f.o.b.: 287.4 (2009); 370.3 (2010); 431.8 (2011); 434.2 (2012); 437.5 (2013); 464.9 (2014 proj.); 483.0 (2015 proj.).
  - Imports, f.o.b.: -239.8 (2009); -307.4 (2010); -362.2 (2011); -370.8 (2012); -369.7 (2013); -394.1 (2014 proj.); -409.7 (2015 proj.).
  - Financial account balance: -21.2 (2009); -18.3 (2010); -46.2 (2011); -23.1 (2012); -37.4 (2013); -39.0 (2014 proj.); -43.4 (2015 proj.).
  - Overall balance: 11.3 (2009); 42.2 (2010); 17.1 (2011); 26.1 (2012); 18.2 (2013); 16.4 (2014 proj.); 12.5 (2015 proj.).
- Gross official reserves (US$ billions): 187.8 (2009); 225.8 (2010); 237.7 (2011); 259.3 (2012); 273.1 (2013); 289.4 (2014 proj.); 301.9 (2015 proj.).
  - (Months of imports): (5.5) (2009); (5.7) (2010); (5.8) (2011); (6.2) (2012); (6.2) (2013); (6.3) (2014 proj.); (6.2) (2015 proj.).
- Exchange rates and effective rates:
  - Singapore dollar/U.S. dollar exchange rate (period average): 1.45 (2009); 1.36 (2010); 1.26 (2011); 1.25 (2012); 1.25 (2013).
  - Nominal effective exchange rate (percentage change): -0.1 (2009); 3.1 (2010); 3.7 (2011); 2.4 (2012); 2.6 (2013).
  - Real effective exchange rate (percentage change): -0.1 (2009); 3.4 (2010); 5.5 (2011); 4.7 (2012); 2.7 (2013).

*Source: SINGAPORE STAFF REPORT FOR THE 2014 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (Prepared by Asia and Pacific Department); Press Release No. 14/476 (October 17, 2014).*

### 2.4  Going forward, domestic cost pressures will remain significant. Notably, the labour

### _cr14312 - 2.4  Going forward, domestic cost pressures will remain significant. Notably, the labour

### Domestic cost pressures and inflation projections
- Labour market will remain tight as productivity enhancements take time to materialise; wage cost is likely to rise further and be passed on to some consumption goods and services.
- External price developments expected to be relatively benign due to ample supply buffers in major commodity markets and modest inflation in most of Singapore’s key import source countries.
- MAS Core Inflation is projected to pick up slightly and average 2-3% in 2014.
- Overall inflation (CPI-All Items) for the whole year 2014 is forecast to be in the range of 1.5-2.0%.
- Overall inflation expected to ease for the rest of 2014 due to lower contributions from housing rentals and car prices.

### Monetary policy stance
- MAS kept the S$NEER policy band on a modest and gradual appreciation path in April 2014, with no change to its slope, width or the level at which it was centred; this stance has been in place since April 2012.
- Policy objective: cap domestic and imported sources of inflation and anchor inflation expectations amid economic restructuring.
- Monetary policy focused on restraining, but not totally offsetting, transitional inflationary pressures while allowing relative prices to adjust to reflect the true cost of scarce resources such as land and labour.

### Fiscal measures and medium-term structural policies
- FY2014 Budget reinforced previous directions: sharper incentives for firms to invest in fixed and human capital and engage in business transformation and innovation.
- Key measures: extension of the Productivity and Innovation Credit (PIC) scheme, introduction of PIC+ for small and medium-sized enterprises, and strengthening of R&D tax deductions and allowances.
- Budget enhanced support for lower-income Singaporeans, particularly in healthcare and retirement adequacy.

### Healthcare and targeted subsidies
- Implementation of MediShield Life in 2015 will broaden coverage of the existing medical insurance scheme to all Singapore citizens and permanent residents for life, with targeted subsidies for lower- and middle-income Singaporeans.
- The Pioneer Generation Package (PGP) targets elderly Singaporeans:
  - Around 450,000 elderly Singaporeans, aged 65 and above in 2014, qualify for lifelong healthcare benefits provided by the PGP.
  - Benefits include outpatient care subsidies, annual Medisave top-ups of $200 to $800 for life, and additional support for MediShield Life premiums.
- A Silver Support Scheme will be introduced to provide an annual cash bonus to supplement the earnings of elderly low-income Singaporeans.

### Retirement adequacy and CPF details
- Central Provident Fund (CPF) is a fully-funded defined contribution pension scheme guaranteed by the government.
- More than half of CPF members enjoy a guaranteed floor rate of 3.5% p.a. on their Ordinary Account (OA) savings.
- Around two-thirds earn 5% on their Special, Medical, and Retirement Accounts (SMRA) savings.
- Various schemes to help retirees monetise flat equity have been introduced and expanded (e.g., Lease Buyback Scheme (LBS) extension in April 2015 to four-room HDB flats covering 75% of elderly HDB households; maximum lease retention up to 35 years).

### Labour market, incomes and inequality
- Overall wages in the Singapore economy have continued to increase; labour market has remained tight since the recovery from the Global Financial Crisis.
- Shift towards capital-intensive sectors has raised the average wage level of workers.
- Over the last decade, real incomes have grown across all groups of workers:
  - Median worker saw an increase of 24%.
  - Worker at the 20th percentile saw an increase of 12%.
- Government transfers and taxes reduced the Gini coefficient in 2013 from 0.463 to 0.412.

### Financial sector resilience and macroprudential measures
- Authorities endorse strong financial sector regulation and supervision.
- Macro-prudential measures used to moderate credit growth and household leverage during a sustained period of low global interest rates.
- Growth of household debt slowed from nearly 13% year-on-year in Q3 2011 to 5.5% in Q1 2014.
- Risk profile of new housing loan borrowers improved; almost all new housing loans granted since the introduction of the Total Debt Servicing Ratio were within the 60% threshold.
- Authorities will continue vigilant monitoring of credit and asset markets and retain flexibility to adjust macro-prudential tools while maintaining structural safeguards against excessive leverage.

### Liquidity risk management and stress testing
- As a regional financial centre with significant cross-border activities, Singapore monitors banks’ liquidity risk profiles using indicators such as the Basel III Liquidity Coverage Ratio.
- Ongoing monitoring is complemented by rigorous supervision to understand banks’ risk management and liquidity risk profiles.
- Industry-wide stress tests indicate the banking system will remain resilient under various liquidity stress scenarios, including a disorderly unwinding of quantitative easing in the US and a consequent squeeze in USD funding.

### Final remarks and authorities' position
- External economic environment is generally supportive of sustained if modest growth of the Singapore economy for the rest of the year, but authorities remain vigilant to risks.
- Economic restructuring is proceeding at a deliberately measured pace to allow workers and businesses time to adjust towards a sustainable productivity-led growth model.
- The Singapore authorities are agreeable to the publication of the 2014 Article IV Staff Report and the Buff Statement.

*Source: _cr14312 - 2.4 Going forward, domestic cost pressures will remain significant. Notably, the labour (IMF staff report excerpt).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14312.pdf_