## _cr15199 - 4.4 percent in 2013, on the back of the slow global recovery, domestic restructuring, and the ## Source details **Canonical URL:** [_cr15199 - 4.4 percent in 2013, on the back of the slow global recovery, domestic restructuring, and the](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15199.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15199.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15199.pdf.json) --- ### Recent performance and near-term outlook - Real GDP growth: - 2013: 4.4 percent - 2014: 2.9 percent - 2015 (projected): about 2.9 percent - 2016 (projected): 3.1 percent - Inflation: - CPI inflation: 2013: 2.4 percent; 2014: 1 percent - Headline and core inflation expected to average 0 and 1 percent in 2015, respectively - Headline and core inflation expected to rise to 1.8 percent in 2016 - Monetary policy: - In January 2015 MAS reduced the pace of appreciation of the nominal effective exchange rate. - Staff estimates post-change: NEER band appreciating at an annual rate of 1 percent (down from about 2 percent before January); NEER band width about ±2 percent. - Financial conditions: - Private sector credit growth slowed to 4.6 percent in April 2015 (y/y) — the slowest pace in five years. - House prices: public resale segment down 9 percent as of Q1 2015; private market down 6 percent as of Q1 2015. - Total debt service ratio (TDSR) framework supported easing in credit and house prices. - External sector: - Current account surplus rose by 1.2 percentage points to 19.1 percent of GDP in 2014. - Current account projected to increase by about 1.3 percent of GDP in 2015 on lower oil import prices. - Risks: - Exposure to external shocks (slower growth in advanced and emerging economies; volatility in global financial markets) and elevated private indebtedness. ### Key macroeconomic projections and statistics (selected) - Nominal GDP (2014): US$308 billion - GDP per capita (2014): US$56,287 - Population (June 2014): 5.47 million - Unemployment rate (2014): 2.0 percent - Selected growth and demand components (percentage change): - Real GDP (2011–2016): 2011: 6.2; 2012: 3.4; 2013: 4.4; 2014: 2.9; 2015: 2.9; 2016: 3.1 - Total domestic demand (2011–2016): 2011: 3.6; 2012: 6.9; 2013: 2.8; 2014: 0.3; 2015: 3.8; 2016: 4.0 - Private consumption (2011–2016): 2011: 4.0; 2012: 3.4; 2013: 3.6; 2014: 2.5; 2015: 3.5; 2016: 3.5 - Gross capital formation (2011–2016): 2011: 5.0; 2012: 14.0; 2013: -0.7; 2014: -2.4; 2015: 3.8; 2016: 4.1 - Saving and investment (percent of GDP): - Gross national saving (2011–2016): 2011: 49.2; 2012: 47.2; 2013: 46.9; 2014: 46.7; 2015: 47.5; 2016: 46.5 - Gross domestic investment (2011–2016): 2011: 27.3; 2012: 30.0; 2013: 29.0; 2014: 27.6; 2015: 27.1; 2016: 27.8 - Fiscal indicators (central government, percent of GDP): - Revenue (2011–2016): 2011: 22.7; 2012: 22.5; 2013: 21.7; 2014: 21.5; 2015: 21.4; 2016: 21.6 - Expenditure (2011–2016): 2011: 14.7; 2012: 14.5; 2013: 15.6; 2014: 17.6; 2015: 19.7; 2016: 19.7 - Overall balance (2011–2016): 2011: 8.0; 2012: 8.0; 2013: 6.1; 2014: 3.9; 2015: 1.7; 2016: 1.9 - Primary balance (2011–2016): 2011: 0.4; 2012: 1.4; 2013: 0.3; 2014: -1.1; 2015: -2.8; 2016: -2.7 - Money and credit: - Broad money (M2, 2011–2015): 2011: 11.8; 2012: 6.8; 2013: 7.9; 2014: 7.6; 2015: 8.1 - Credit to private sector (2011–2015): 2011: 18.9; 2012: 11.3; 2013: 15.5; 2014: 7.5; 2015: 4.6 - Balance of payments (US$ billions; current account in percent of GDP in parentheses): - Current account balance (2011–2016): 2011: 60.6 (22.0); 2012: 49.8 (17.2); 2013: 54.1 (17.9); 2014: 58.8 (19.1); 2015: 62.9 (20.4); 2016: 62.0 (18.7) - Trade balance (2011–2016): 2011: 71.5; 2012: 67.5; 2013: 74.5; 2014: 76.4; 2015: 80.8; 2016: 80.7 - Exports, f.o.b. (2011–2016): 2011: 435.6; 2012: 439.4; 2013: 441.7; 2014: 437.3; 2015: 395.0; 2016: 427.0 - Imports, f.o.b. (2011–2016): 2011: -364.1; 2012: -371.9; 2013: -367.2; 2014: -360.9; 2015: -314.2; 2016: -346.3 - Gross official reserves (US$ billions): - 2011: 237.7; 2012: 259.3; 2013: 273.1; 2014: 256.9; 2015: 259.9; 2016: 267.7 - (Months of imports): 2011: (5.7); 2012: (6.1); 2013: (6.5); 2014: (6.8); 2015: (6.3); 2016: (6.0) - Exchange rates and competitiveness: - Singapore dollar/U.S. dollar (period average): 2011: 1.26; 2012: 1.25; 2013: 1.25; 2014: 1.27 - Nominal effective exchange rate (percentage change, 2011–2014): 2011: 3.7; 2012: 2.4; 2013: 2.6; 2014: 0.9 - Real effective exchange rate (percentage change, 2011–2014): 2011: 5.5; 2012: 4.7; 2013: 2.7; 2014: -0.3 ### Policy assessment and recommendations - Monetary and exchange rate policy: - MAS reduced the pace of NEER appreciation in January 2015; directors viewed the monetary policy framework as robust and flexible. - Recommendation: continue to respond flexibly to evolving inflation and real sector developments; use the flexibility intrinsic in the basket-band-crawl framework to allow NEER responses within the band. - Consider recalibrating band parameters (recentering, widening) on rare occasions of significant and sustained volatility; consider FX intervention at both ends of the band given comfortable reserves. - Monitor household and firm balance sheets and incorporate implications of expected higher interest rates and the financial cycle into monetary calibration. - Maintain biannual policy meeting frequency; off-cycle moves remain an option. - Fiscal policy: - Fiscal policy being recalibrated to address rapid population aging and maintain competitiveness while fostering equality of opportunity and inclusiveness. - The budget will deliver a sizable fiscal impulse in 2015; directors welcomed the expansionary fiscal stance given subdued inflation and downside growth risks. - Macroprudential and financial sector measures: - High regulatory and supervisory standards maintained; progress in implementing FSAP recommendations. - Macroprudential measures (TDSR framework; prudential limit on unsecured borrowing introduced in 2015) have moderated credit growth and smoothed housing market adjustments. - Directors urged continued vigilance given high household leverage and corporate debt; recommended monitoring and adjusting macroprudential tools as necessary. - Directors recommended continuous efforts to bring the AML/CFT framework in line with enhanced international standards. - Structural and restructuring policies: - Authorities aim to reduce reliance on foreign workers and boost productivity via investment in infrastructure, education, healthcare, and incentives to upgrade skills and business practices. - Directors highlighted merit of flexible, pragmatic restructuring, including potential adjustments to foreign worker policies and investment incentives as experience dictates. - Social and pension policies: - Directors supported efforts to reduce income inequality, raise labor force participation, and strengthen pensions and health care amid rapid aging. - Recent reforms to the defined-contribution pension system welcomed, including budget support for lower-income pensioners and measures to raise retirement income adequacy; further enhancements to the Central Provident Fund (CPF) and additional measures to enhance retirement savings were recommended. ### Structural and medium-term considerations - Restructuring implications: - Reduced reliance on foreign workers expected to raise capital-labor ratios and productivity over time but entails transition costs and implies lower steady-state growth. - Drawdown of accumulated pension savings, additional age-related spending, and lower immigration expected to moderate the current account surplus over the medium term. - Policy space and buffers: - Authorities assessed to have ample policy and response space; strong fundamentals and ample buffers can help absorb external shocks. - Staff and Board context: - Discussions held in Singapore during April 29–May 12, 2015; staff and Executive Directors commended sound macroeconomic and pro-growth policies. ### Developments in late-2014 and early-2015, including oil price effects - Oil price shock: - Singapore is a net oil importer with net oil trade balance of -5.6 percent of GDP in 2013. - Lower oil prices expected to raise the current account by about 1.5 percent of GDP in 2015. - Overall current account expected to increase by 1–1.5 percent of GDP in 2015. - Pass-through to domestic fuel prices and electricity and gas tariffs resulted in a 0.4 percentage point decline in headline inflation during the first four months of 2015. - Staff estimates: impact of the oil price shock on headline CPI inflation will be about 1 percentage point in 2015. - Impact on growth estimated to be not significantly different from zero; point estimates suggest a small negative effect in the first year and a positive effect in the second year. - International reserves and liquidity: - Official reserves fell by about 10.6 percent or US$29.6 billion during June 2014–March 2015 (valuation changes). - Official reserves cover about 25 percent of short-term external debt as of end-2014. - Assessment: reserves adequate for precautionary purposes; no clear case for further reserve accumulation for precautionary purposes. ### Financial sector, macroprudential stance, and housing - Banking and liquidity: - DBUs rely primarily on deposit funding; ACUs rely on cross-border bank funding. - Loan-to-deposit ratios around 1.1 for both ACUs and DBUs; local banks brought down loan-to-deposit ratios below 100 percent in domestic currency and U.S. dollar terms. - Recommendations: tailored measures of foreign currency liquidity risk, monitor LCR reporting (including for significant foreign currencies), encourage public disclosure of LCRs, implement Basel III NSFR from January 2018. - Housing market and household leverage: - Further measured decline in residential real estate prices likely due to large new supply and expected increase in interest rates. - Maintain core macroprudential measures: TDSR, ceilings on loan-to-value ratios, and loan tenure limits. - MAS estimates households’ monthly debt repayment could increase by 8–9 percent of their income if mortgage rates rise by 300 bps. - Phasing in a limit on unsecured credits to individuals from June 2015 welcomed; preemptive prudential measures for over-indebted individuals recommended. - Corporate sector and banks’ exposure: - Corporate debt about 75 percent of GDP and has risen since the global financial crisis. - Loans to SMEs about 20 percent of domestic corporate loans; NPL ratios falling below 1 percent. - Supervisory actions: stress tests and surveys of banks’ exposure to SMEs; continued vigilance urged. ### Regulatory, resolution, and AML/CFT developments - Basel III and FSAP follow-up: - Basel III LCR requirements phased in smoothly since January 2015. - Progress on 2013 FSAP recommendations: enhanced granular debt data collection for individuals; improvements in recovery and resolution arrangements underway. - AML/CFT: - Strengthened customer due diligence requirements for agents and regulated entities; broadened tax coverage to deter laundering of evaded foreign taxes. - Planned assessment by FATF and the Asia/Pacific Group on Money Laundering in 2015. - Staff recommended continuing efforts to align AML/CFT framework with enhanced international standards. ### Social, pension, and demographic policies (CPF and aging) - Demographic challenge: - Working-age population projected to decline by above 10 percentage points between 2010 and 2040 for Singapore (2010: 73.6; 2040: 61.7; change: -11.9). - CPF and retirement adequacy: - CPF is a fully-funded, defined-contribution pension system; about half of active CPF members who turned 55 in 2013 could not accumulate enough CPF savings to meet the Basic Retirement Sum that provides monthly payouts of about S$700. - Recent and proposed measures: - Minimum legislated interest rates and extra interest features: legislated minima ranged from 2.5 to 4 percent since 1999; extra 1 percent introduced in 2008 on first S$60,000; from 2016 additional extra interest on first S$30,000 for members aged 55 and above. - Reforms from Jan 2016: raise salary ceiling for CPF contributions from S$5,000 to S$6,000; increase CPF contribution rates for older workers; higher extra interest for members aged 55+ on first S$30,000; Silver Support Scheme from Q1 2016; options for Enhanced Retirement Sum and guided retirement planning services. - Net withdrawals for housing in 2014: net withdrawals for housing 32.3 percent of total contributions and 55.5 percent of total withdrawals. - Policy recommendations: - Continuously review adequacy of retirement incomes, develop market-based schemes to facilitate monetization of housing wealth, reduce bias toward housing purchase, raise returns on CPF asset portfolio, and improve guided retirement planning services. - Social safety nets: - Silver Support: quarterly cash transfers to elderly in the lowest 30 percent; about 150,000 elderly expected to receive Silver Support payouts between S$300 and S$750 per quarter under the permanent scheme from Q1 2016. - Workfare and other targeted programs augment redistribution and support for lower-income groups. ### Productivity, structural change, and growth prospects - Long-run record: - Average annual growth since independence: 7.7 percent; per capita real GDP growth: 5.4 percent. - Growth accounting and medium-term prospects: - Current estimate of potential growth: about 3.2 percent per year. - Projected contributions: Capital 1.3 percentage points; TFP 1 percentage point; Labor quality 0.6 percentage points; Labor quantity 0.3 percentage points. - Projected labor productivity growth: about 2 percent per year. - Medium-term growth expected to slow to about 3 percent as restrictive foreign worker policies and rapid aging lower labor force growth. - Restructuring strategy: - Measures to reduce reliance on foreign labor: higher levies, DRCs, SkillsFuture, investment incentives, wage subsidies and temporary support (with sunset clauses). - Transition support measures include Wage Credit Scheme, Productivity and Innovation Credit Bonus, Temporary Employment Credit, and grants/tax credits. - Staff recommended flexibility to recalibrate DRCs or additional support if activity falls or productivity does not pick up. ### External position, risks, and the Oil Price Shock - External position: - Current account at 19.1 percent of GDP in 2014; assessed to be substantially stronger than consistent with medium-term fundamentals and desirable policies (current account at 19.1 percent of GDP in 2014 is 2−8 percent of GDP larger than the norm). - Factors expected to moderate current account surplus: drawdown of pension savings, increased public spending for aging, stronger social safety net, lower growth of foreign workforce. - Oil shock quantitative impacts: - SVAR analysis: source of shocks matters; second half of 2014 shocks mainly supply and oil-market-specific. - Pass-through reduced headline inflation by 0.4 percentage point during first four months of 2015. - Staff estimate: impact on headline CPI inflation about 1 percentage point in 2015. - Oil price decline expected to raise current account by about 1.5 percent of GDP in 2015; overall current account expected to increase by 1–1.5 percent of GDP in 2015. - Trade and sectoral offsets: high imported petroleum product content in exports and potential export declines in marine and offshore sectors. ### Risk Assessment Matrix (selected risks and policy responses) - Key risks and staff-assessed likelihoods: - Protracted slower growth in advanced and emerging economies: Likelihood — Euro Area and Japan: High; Emerging markets: Medium; Expected Impact: Medium to High. - Global financial volatility and persistent dollar strength: Likelihood — High; Expected Impact: Medium. - Sharp slowdown in China: Likelihood — Medium (insufficient reform) / Low (sharp slowdown in 2015–16); Expected Impact: Medium to High. - Disorderly property price correction: Likelihood — Low; Expected Impact: Medium. - Structural reform shortfalls: Likelihood — Medium; Expected Impact: Medium. - Retreat from globalization / AML delays: Likelihood — Medium to Low; Expected Impact: Medium. - Recommended policy responses (high-level): - Use temporary and targeted fiscal stimulus, loosen monetary policy and recalibrate macroprudential policies as necessary for global growth shocks. - Ensure financial institutions maintain prudent risk management, adequate liquidity and capital buffers; maintain close cross-border supervisory links. - Monitor banks’ exposures to China and region; provide temporary targeted fiscal support if China slowdown materializes. - Adjust macroprudential policies to manage property correction risks and use targeted transfers for adversely affected households. - Recalibrate foreign worker policies and provide transitional support to firms if structural reform shortfalls emerge. - Fully implement international AML standards and strengthen cross-border supervisory cooperation. ### Public sector debt sustainability (selected projections and indicators) - Nominal gross public debt (percent of GDP): 2013: 96.8; 2014: 103.3; 2015: 99.3; 2016: 102.0; 2017: 102.0; 2018: 96.9; 2019: 92.2; 2020: 88.1; 2020 projection year: 84.5 - Public gross financing needs (percent of GDP, selected): 2013: -7.0; 2014: -5.5; 2015: -4.3; 2016: 6.1; 2017: 7.6; 2018: 8.1; 2019: 4.0; 2020: 0.8; projection: 1.9 - Real GDP growth (percent): 2013: 6.8; 2014: 4.4; 2015: 2.9; 2016: 2.9; 2017: 3.1; 2018: 3.2; 2019: 3.2; 2020: 3.2 - Effective interest rate (percent): 2013: 0.0; 2014: 0.0; 2015: 0.0; 2016: 3.0; 2017: 3.3; 2018: 3.8; 2019: 4.4; 2020: 5.0; projection end: 5.4 - Primary (noninterest) revenue (percent of GDP, 2013–2020): 20.1; 20.3; 21.1; 21.1; 21.4; 21.7; 22.0; 21.3 - Primary (noninterest) expenditure (percent of GDP, 2013–2020): 14.6; 16.3; 18.3; 20.6; 19.9; 20.1; 20.3; 19.6 ### Monetary policy rule estimation (MAS reaction function) — main findings - Estimated reaction-function coefficients (sample 1991Q1–2014Q4) — selected results: - Lagged NEER difference (policy inertia): L.neer_dif ~ 0.641–0.707 across specifications; all highly significant (*** p<0.01). - Expected inflation coefficients (inf_forward, inf_exp, inf_core_forward): positive and in some specifications large and significant (e.g., inf_exp 0.748***; inf_core_forward 1.030**). - Output gap response: around 0.115–0.171 in significant specifications. - Interpretation: - High degree of policy inertia (lagged NEER coefficient ~0.65–0.7). - MAS increases NEER appreciation by 1.33 percent when future inflation increases by one percentage point (implied REER appreciation of 0.33 percent). - Model-based NEER prediction for 2015 using specification 2 (gap_desk): average equilibrium NEER appreciation predicted for 2015 about zero; estimated NEER appreciation of 0.14 percent given inputs and lagged NEER effects. *Source: IMF staff report for the 2015 Article IV consultation for Singapore (text provided in the content unit).* ### 4.4 percent in 2013, on the back of the slow global recovery, domestic restructuring, and the ### _cr15199 - 4.4 percent in 2013, on the back of the slow global recovery, domestic restructuring, and the ### Recent performance and near-term outlook - Real GDP growth: 4.4 percent in 2013; 2.9 percent in 2014; projected about 2.9 percent in 2015; projected 3.1 percent in 2016. - Inflation: CPI inflation declined to 1 percent in 2014 from 2.4 percent in 2013. Headline and core inflation are expected to average 0 and 1 percent in 2015, respectively, before both rising to 1.8 percent in 2016. - Monetary policy response: In January 2015, the Monetary Authority of Singapore (MAS) reduced the pace of appreciation of the nominal effective exchange rate. - Financial conditions: Private sector credit growth and house prices continued to ease, supported by the total debt service ratio (TDSR) framework. Financial markets have been resilient to volatility associated with diverging global monetary conditions. - External sector: Current account surplus rose by 1.2 percentage points to 19.1 percent of GDP in 2014. The current account surplus is projected to increase by about 1.3 percent of GDP (in 2015) on the back of lower oil import prices. - Risks: Exposure to external shocks (slower growth in advanced and emerging economies; volatility in global financial markets) and elevated levels of private indebtedness could amplify adverse outcomes. ### Key macroeconomic projections and statistics (selected) - Nominal GDP (2014): US$308 billion - GDP per capita (2014): US$56,287 - Population (June 2014): 5.47 million - Unemployment rate (2014): 2.0 percent - Selected growth and demand components (percentage change): - Real GDP: 2011: 6.2; 2012: 3.4; 2013: 4.4; 2014: 2.9; 2015: 2.9; 2016: 3.1 - Total domestic demand: 2011: 3.6; 2012: 6.9; 2013: 2.8; 2014: 0.3; 2015: 3.8; 2016: 4.0 - Private consumption: 2011: 4.0; 2012: 3.4; 2013: 3.6; 2014: 2.5; 2015: 3.5; 2016: 3.5 - Gross capital formation: 2011: 5.0; 2012: 14.0; 2013: -0.7; 2014: -2.4; 2015: 3.8; 2016: 4.1 - Saving and investment (percent of GDP): - Gross national saving: 2011: 49.2; 2012: 47.2; 2013: 46.9; 2014: 46.7; 2015: 47.5; 2016: 46.5 - Gross domestic investment: 2011: 27.3; 2012: 30.0; 2013: 29.0; 2014: 27.6; 2015: 27.1; 2016: 27.8 - Fiscal indicators (central government, percent of GDP): - Revenue: 2011: 22.7; 2012: 22.5; 2013: 21.7; 2014: 21.5; 2015: 21.4; 2016: 21.6 - Expenditure: 2011: 14.7; 2012: 14.5; 2013: 15.6; 2014: 17.6; 2015: 19.7; 2016: 19.7 - Overall balance: 2011: 8.0; 2012: 8.0; 2013: 6.1; 2014: 3.9; 2015: 1.7; 2016: 1.9 - Primary balance: 2011: 0.4; 2012: 1.4; 2013: 0.3; 2014: -1.1; 2015: -2.8; 2016: -2.7 - Money and credit: - Broad money (M2): 2011: 11.8; 2012: 6.8; 2013: 7.9; 2014: 7.6; 2015: 8.1 - Credit to private sector: 2011: 18.9; 2012: 11.3; 2013: 15.5; 2014: 7.5; 2015: 4.6 - Balance of payments (billions of U.S. dollars; current account in percent of GDP in parentheses): - Current account balance: 2011: 60.6 (22.0); 2012: 49.8 (17.2); 2013: 54.1 (17.9); 2014: 58.8 (19.1); 2015: 62.9 (20.4); 2016: 62.0 (18.7) - Trade balance: 2011: 71.5; 2012: 67.5; 2013: 74.5; 2014: 76.4; 2015: 80.8; 2016: 80.7 - Exports, f.o.b.: 2011: 435.6; 2012: 439.4; 2013: 441.7; 2014: 437.3; 2015: 395.0; 2016: 427.0 - Imports, f.o.b.: 2011: -364.1; 2012: -371.9; 2013: -367.2; 2014: -360.9; 2015: -314.2; 2016: -346.3 - Gross official reserves (In billions of U.S. dollars): 2011: 237.7; 2012: 259.3; 2013: 273.1; 2014: 256.9; 2015: 259.9; 2016: 267.7 - (Months of imports): 2011: (5.7); 2012: (6.1); 2013: (6.5); 2014: (6.8); 2015: (6.3); 2016: (6.0) - Exchange rates and competitiveness: - Singapore dollar/U.S. dollar exchange rate (period average): 2011: 1.26; 2012: 1.25; 2013: 1.25; 2014: 1.27 - Nominal effective exchange rate (percentage change): 2011: 3.7; 2012: 2.4; 2013: 2.6; 2014: 0.9 - Real effective exchange rate (percentage change): 2011: 5.5; 2012: 4.7; 2013: 2.7; 2014: -0.3 ### Policy assessment and recommendations - Monetary and exchange rate policy: - MAS reduced the pace of NEER appreciation in January 2015 in response to lower expected inflation and a more uncertain growth outlook. - Directors considered that monetary policy should continue to respond flexibly to evolving inflation and real sector developments. - The monetary policy framework is described as robust and flexible; vigilance is warranted because of rising domestic leverage and heightened global interest rate and exchange rate volatility. - Fiscal policy: - Fiscal policy is being recalibrated to address rapid population aging and to maintain competitiveness while fostering equality of opportunity and inclusiveness. - The budget will deliver a sizable fiscal impulse in 2015. - Directors welcomed the authorities’ expansionary fiscal stance given subdued inflation prospects and downside risks to growth. - Macroprudential and financial sector measures: - High regulatory and supervisory standards maintained; progress in implementing FSAP recommendations. - Macroprudential measures (including the TDSR framework and a prudential limit on unsecured borrowing introduced in 2015) have moderated credit growth and smoothed housing market adjustments. - Directors urged continued vigilance given high household leverage and corporate debt and recommended monitoring and adjusting macroprudential tools as necessary. - Directors recommended continuous efforts to bring the AML/CFT framework in line with enhanced international standards. - Structural policies and restructuring: - Authorities aim to transition to a new growth model that reduces reliance on foreign workers and boosts productivity through investment in infrastructure, education, healthcare, and incentives to upgrade skills and business practices. - Directors highlighted the merit of a flexible and pragmatic approach to restructuring, including potential adjustments to foreign worker policies and investment incentives as experience dictates. - Social and pension policies: - Directors supported efforts to reduce income inequality, raise labor force participation, and strengthen pensions and health care amid rapid aging. - Recent reforms to the defined-contribution pension system were welcomed, including budget support for lower-income pensioners and measures to raise the adequacy of retirement incomes. Further enhancements to the Central Provident Fund and additional measures to enhance retirement savings were recommended. ### Structural and medium-term considerations - Restructuring implications: - The restructuring to reduce reliance on foreign workers is expected to raise capital-labor ratios and productivity growth over time but entails transition costs and implies lower steady-state growth. - The drawdown of accumulated pension savings, additional age-related spending, and lower immigration are expected to moderate the current account surplus over the medium term. - Policy space and buffers: - Despite risks and elevated private indebtedness, the authorities are assessed to have ample policy and response space. Strong fundamentals and ample buffers can help absorb external shocks. - Staff and Board context: - Discussions were held in Singapore during April 29–May 12, 2015. Staff and Executive Directors commended sound macroeconomic and pro-growth policies and supported the authorities’ efforts on restructuring, inclusiveness, and fiscal recalibration. *Source: IMF staff report for the 2015 Article IV consultation for Singapore (text provided in the content unit).* ### 4. Singapore’s economy continues to perform well in 2014–15 but activity has been ### 4. Singapore’s economy continues to perform well in 2014–15 but activity has been impacted by reduced reliance on foreign workers, the slow global recovery, and the turning of credit and housing cycles. ### Economic performance and cyclical developments - Growth moderated from 4.4 percent in 2013 to 2.9 percent in 2014, partially reflecting the transition to a lower trend growth rate due to reduced contribution from labor supply. - Cyclical factors also weighed on growth: slow and uncertain global recovery, and the turning of credit and housing cycles. - In 2014: - Consumption growth slowed considerably. - Gross fixed investment contributed negatively to growth, held back by the uncertain economic outlook and its impact on investor confidence. - Growth in Q1 2015 was robust at 3.2 percent (q/q) in annualized seasonally-adjusted terms, following a strong Q4 2014, with both consumption and investment showing signs of modest pick-up. - Private sector credit growth slowed to 4.6 percent in April 2015 (y/y), the slowest pace in five years. - House prices declined modestly and were below peaks by: - 9 percent in the public resale segment as of Q1 2015. - 6 percent in the private market segment as of Q1 2015. - The pace of house price decline has been slower over the past 7 quarters, suggesting policy measures (for example, the TDSR framework introduced in mid-2013) helped engineer a targeted soft landing. ### Inflation, labor market, and costs - Headline inflation fell to -0.3 percent (y/y) in Q1 2015, down from an average of 1 percent in 2014, and 2.4 percent in 2013. - Core inflation eased to 1.1 percent (y/y) in Q1 2015. - Labor market remained strong: - Unemployment declined below 2 percent. - Labor force participation ratio reached a new record high, supported by a remarkable increase in hiring of resident workers. - Pass-through of rising unit labor costs, partly driven by wage increases, has been smaller than expected amid weak demand and uncertain business outlook, contributing to subdued inflation. ### External sector and balance of payments - The current account surplus rose to 19.1 percent in 2014, up by 1.2 percentage points relative to 2013, driven by both the goods and services balance. - The trade balance improved significantly in Q1 2015, reflecting mainly the impact of the oil price shock. - Exports have been relatively weak due to the slow global recovery and supply-side constraints. - The overall balance of payments surplus narrowed in 2014 and recorded a deficit in Q1 2015, amid higher net outflows in the financial account. ### Financial markets and exchange rate developments - The Singapore dollar depreciated by about 10 percent vis-à-vis the U.S. dollar between end-August 2014 and mid-March 2015, reflecting broad-based U.S. dollar strength and expectations after the January policy stance change. - During mid-March to end-May 2015 the Singapore dollar appreciated by about 3 percent vis-à-vis the U.S. dollar. - The stock market performed well over the past year and in early-2015, peaking in April. ### Outlook and risks - Growth is expected to average 2.9 percent in 2015, despite domestic and external uncertainties. - Factors expected to support a broad-based recovery in domestic demand include: - Loosening of the monetary policy stance in January 2015. - A supportive fiscal policy stance. - Lower energy prices. - A temporary pause in the hike of foreign worker levies announced in the 2015 budget. - Projected gradual recovery in external demand. - These supporting factors are expected to offset drags from continued housing market softness and an expected increase in interest rates. - Inflation projections: - Headline inflation expected to average 0 percent in 2015. - Core inflation expected to average 1 percent in 2015. - Both headline and core inflation expected to rise to 1.8 percent in 2016 on recovering energy and commodity prices. - Medium-term outlook: - Lower growth rates are expected as restrictive policies on foreign workers and rapid population aging lower labor force growth, slowing economic growth to about 3 percent over the medium-term. - Economic restructuring should ultimately raise capital-labor ratios and productivity growth but will be subject to transitional costs in the near-term. - Risks to the baseline are tilted to the downside: - Protracted slower growth in advanced and emerging economies. - Surges in financial volatility and persistent U.S. dollar strength and asynchronous monetary policies in advanced economies. - Growth slowdown and financial risks in China. - Elevated indebtedness of domestic household and corporate sectors could amplify adverse effects. - Delays in realizing investment and productivity gains from restructuring. - Singapore’s strong macroeconomic fundamentals (skillful macroeconomic management, a substantially strong external position, adequate foreign reserves, large fiscal buffers, and strong bank balance sheets) could help absorb shocks and facilitate countercyclical policy responses. ### Authorities’ views - Authorities are confident in Singapore’s economic strength and view short-term risks as manageable. - External uplift from firmer recoveries in the U.S., Europe and Japan may be partially offset by global developments including China’s slowdown, tighter financial conditions, potential capital reversals from U.S. normalization, corporate realignments in the IT industry, and lingering weakness in oil-related transport engineering. - Domestic industries will be aided by firm demand and the temporary deferment in foreign worker levy hikes. - Authorities agreed with staff that near-term key risks relate to growth prospects in advanced economies and key emerging markets and noted Singapore’s sensitivity to developments in China. - Authorities are confident in handling increased volatility associated with U.S. monetary policy normalization given ample policy buffers and macroeconomic management track record. ### Policy discussions — Monetary and exchange rate policy - In January 2015 MAS loosened its policy stance by reducing the pace of appreciation of the NEER band; this was an off-cycle decision and the first such move since 2001. - Staff estimates post-change: - NEER band is appreciating at an annual rate of 1 percent, down from about 2 percent before January. - NEER band has a width of about ±2 percent. - MAS stayed pat in its April meeting, judging current settings appropriate for medium-term price stability. - Assessment: the current monetary policy setting is appropriate given benign near- to medium-term inflation outlook and a closed output gap. - Near-term inflation risks are circumscribed by the large and sustained oil price decline and the gradual decline in house prices and their second-round effects. - With pass-through of cost pressures relatively benign and external demand risks tilted to the downside, monetary policy can afford to be less restrictive. - In the medium term, projected increases in U.S. policy rates are expected to raise Singapore’s interest rates, contributing to a market-driven tightening of monetary conditions. - Policy recommendations and considerations: - Use the flexibility intrinsic in the basket-band-crawl framework to allow the exchange rate to respond within the band to minor, temporary shocks. - Recalibrate band parameters (recentering, widening) on rare occasions when significant and sustained increases in real and financial volatility warrant reparameterization. - Consider widening the policy band in case of a significant and sustained increase in volatility, weighing flexibility against reduced controllability of the policy stance. - Use FX intervention at both ends of the band given a comfortable reserve position. - Monitor household and firm balance sheets and incorporate implications of expected higher interest rates, potential asset price adjustments, and the financial cycle into monetary calibration, recognizing higher sensitivity of activity to interest rates amid elevated leverage. - Maintain the biannual policy meeting frequency as it balances medium-term orientation and flexibility for rare off-cycle moves; more frequent meetings are an option but may run counter to long-term orientation. ### External position assessment - Singapore’s external position is assessed to be substantially stronger than consistent with medium-term fundamentals and desirable policies, though the current account surplus is projected to moderate over the medium term. - Since 2010: - The current account has narrowed by about 4.6 percentage points of GDP. - The REER has appreciated by about 13 percent. - At 19.1 percent of GDP in 2014, the current account is 2−8 percent of GDP larger than the norm (Appendix II). - Non-standard factors complicate quantitative assessment: high openness, financial center status, very high per-capita income, rapid aging, and defined-contribution pension system. - Factors expected to moderate the current account surplus over the medium term include: - Drawdown of accumulated pension savings in response to aging. - Additional government spending to strengthen health care infrastructure and make intergenerational consumption distribution more even. - The changing growth model with much smaller absorption of foreign workers, expected to reduce the current account surplus by leading to real exchange rate appreciation and productivity gains in non-traded sectors. *Source: IMF staff report excerpt (section 4).* ### 17. Developments in late-2014 and early-2015, including the decline in the energy import ### 17. Developments in late-2014 and early-2015, including the decline in the energy import ### External position and oil price developments - Singapore is a net oil importer, with a net oil trade balance of -5.6 percent of GDP in 2013. - The recent oil price decline triggered a significant first-round increase in the oil trade balance at end-2014 and so far in 2015. - Offsetting factors that reduce the overall current account gain from the oil shock: - High imported petroleum product content in Singapore’s exports of petrochemicals and other oil intensive products and services. - Expected export declines in sectors linked to global oil market investment, such as the marine and offshore industries, particularly if a large component of the oil price decline is long-term in nature. - Net effect on current account: - Lower oil prices are expected to raise the current account by about 1.5 percent of GDP in 2015. - A weaker outlook for external demand and more accommodative fiscal policies are expected to reduce the current account, partially offsetting the oil-related gain. - The recent easing of monetary policy is not expected to materially affect the external balance. - Overall, the current account is expected to increase by 1–1.5 percent of GDP in 2015. ### International reserves - Singapore’s international reserves are assessed as adequate for precautionary purposes. - Decline in official reserves: - Official reserves fell by about 10.6 percent or US$29.6 billion during June 2014–March 2015, reflecting valuation changes. - Coverage: - Official reserves cover about 25 percent of short-term external debt as of end-2014. - The relatively low ratio reflects sizable short-term liabilities of Singapore’s international banking system, concentrated in foreign banks operating in Singapore and largely covered by banks’ short-term external financial assets. - Assessment: - While Singapore’s position as a financial center warrants high reserve buffers, current levels appear adequate and there is no clear case for further reserve accumulation for precautionary purposes. ### Authorities’ views on external assessment and monetary policy - Authorities’ view on monetary policy: - Monetary policy stance is related to the position and slope of the NEER band, as opposed to NEER movements within the band. - Interest rates are factored into their calibration as part of a general equilibrium approach. - Considerable uncertainty exists about the effects of rising interest rates after a prolonged period of very low rates and higher leverage; they assume a conservative, higher sensitivity in calibration. - Divergent monetary policies in advanced economies can create volatility and risks in currency markets; simultaneous tightening across advanced economies could be more challenging for emerging markets and Singapore. - Authorities’ view on external position assessment: - Disagree that Singapore’s external position is substantially stronger than warranted by medium-term fundamentals and desirable policies. - Argue the large current account surplus reflects Singapore’s role as a global financial center, trading and production hub, and its city-state geography—not “inappropriate policies.” - Emphasize exchange rate is used to achieve internal balance objectives; targeting external balance directly would compromise those objectives. - Stress focus should be on longer-term considerations: consumption smoothing over a life-cycle, preserving intergenerational equity and sustainability. - Expect the current account surplus to decline over time as population aging lowers saving rates and government size rises to address old-age dependency and infrastructure needs. ### Financial sector and macroprudential policies — overall assessment - Moderation of credit growth to residents and nonresidents during the past year is welcome and supported by active macroprudential policies. - Moderation of credit growth to nonresidents also reflects a narrowing of interest rate differentials vis-a-vis China, weakening demand for investment and trade credits. - Rising domestic interest rates and expected further upward adjustment from U.S. normalization should help contain household and corporate indebtedness and reduce reliance on macroprudential measures. ### Foreign currency liquidity risk and regulatory steps - Progress made in reducing foreign currency liquidity risk: - High non-Singapore dollar loan-to-deposit ratio risk reduced due to declining credit growth and banks’ issuance of medium- and long-term bonds and attraction of foreign currency deposits. - Local banks brought down their loan-to-deposit ratio below 100 percent in both domestic currency and U.S. dollar terms, reducing reliance on short-term wholesale funding and foreign currency swaps. - Recommendations and measures: - More tailored measures of foreign currency liquidity risk desirable given foreign banks’ structural reliance on intra-group funding. - Continued monitoring via stress tests and phasing in of Basel III Liquidity Coverage Ratio (LCR) to local banks, including reporting of LCRs for significant foreign currencies, is welcomed. - Application of LCRs, from 2016, to domestic systemically important foreign banks’ operations in Singapore and subsidiarization of their operations is a significant step forward. - Staff recommends MAS encourage banks to publicly disclose LCRs to promote careful liquidity risk management and ensure voluntary holding of adequate liquid assets. - Planned implementation of Basel III Net Stable Funding Ratio requirements from January 2018 should complement the framework. ### Housing market, household leverage, and macroprudential stance - Housing outlook: - A further measured decline in residential real estate prices seems likely due to: - Large supply of new homes coming on the market in the next two years. - Expected increase in interest rates reducing demand. - Price adjustments to date have been modest and gradual; robust demand for new housing projects suggests low risk of disorderly adjustment. - Macroprudential policy guidance: - Maintain core measures such as the TDSR, ceilings on loan-to-value ratios, and loan tenure limits to prevent excessive leverage and systemic risks. - Consider relaxing other measures, e.g., stamp duties, only if there are signs of excessive house price declines accompanied by clear evidence of tightening financial conditions. - Household leverage and interest rate risk: - Household leverage remains elevated; risks from interest rate increases are pertinent. - MAS estimates that households’ monthly debt repayment could increase by 8–9 percent of their income, should mortgage rates rise by 300 bps. - Household balance sheets remain strong in aggregate; pockets of risk exist but additional debt service burden generally manageable. - Preemptive prudential measures to discourage additional lending to over-indebted individuals are recommended. - Phasing in a limit on unsecured credits to individuals from June 2015 is welcomed. - Continue assistance measures for overextended individuals, including debt restructuring and financial education. ### Corporate sector and banks’ exposure - Corporate indebtedness: - Overall corporate debt is about 75 percent of GDP and has risen since the global financial crisis, warranting caution. - Most publicly listed companies maintain high interest coverage ratios and appear able to withstand interest rate and earnings shocks. - SME exposure: - Loans to SMEs represent about 20 percent of domestic corporate loans, are highly collateralized, subject to strong underwriting standards, with NPL ratios falling below 1 percent. - Supervision and monitoring: - Staff welcomes MAS’ close monitoring of corporate sector risks through stress tests of listed companies and surveys of banks’ exposure to SMEs. - Important for bank supervisors to remain vigilant in anticipation of interest rate normalization and restructuring effects on corporate profitability. ### Regulatory, resolution, and AML/CFT developments - Regulatory and supervisory standards: - Singapore maintains high regulatory and supervisory standards with stringent capital requirements above Basel minimum norms. - Basel III LCR requirements have been phased in smoothly since January 2015. - Progress observed in implementing the 2013 FSAP recommendations, including enhanced collection of granular debt data for individuals. - MAS is working with D-SIBs and the Singapore Exchange (SGX) to enhance recovery and resolution arrangements; planned strengthening of the recovery and resolution framework is welcomed and closer cross-border coordination is encouraged. - AML/CFT framework: - Measures to prevent misuse of ownership structures strengthened by imposing customer due diligence requirements on agents who help third parties set up Singapore companies and elaborating such requirements for other regulated entities. - Tax coverage broadened to make laundering of evaded foreign taxes harder. - Regulated entities required to undertake comprehensive ML/TF risk assessments and increase scrutiny of cross-border transfers. - Further steps planned to address risks from virtual currencies. - The Financial Action Task Force and the Asia/Pacific Group on Money Laundering will jointly assess Singapore’s AML/CFT regime in 2015, including effectiveness. - Authorities’ view: - Confident financial system remains resilient to the turn in the financial cycle. - Committed to proactive surveillance and continued improvements in supervision and regulation to address tail risks and pockets of vulnerabilities. - Note limits to matching loans and deposits in each foreign currency in a financial center; LCR requirements in all currencies and domestic currency are appropriate. ### Fiscal policy and near-term stance - Fiscal objectives and context: - Overarching objectives: support economic growth and efficiency while ensuring long-term sustainability of public finances. - Small size of government and low taxation have supported business climate and growth; sustained over-performance on conservative fiscal rule (balanced budget over the political term) resulted in buildup of large fiscal reserves. - These savings allow the government to meet expanding spending needs for infrastructure and aging society. - FY2015/16 budget priorities and projected spending: - Focus on boosting productivity, raising inclusiveness and reducing inequality, and managing rise in old-age dependency ratio. - Government plans to raise social and infrastructure spending over the next five years, resulting in a modest increase in the size of government spending of about one-two percentage points of GDP. - Planned higher outlays on healthcare, education and training, public transport and airport expansion, and domestic security. - Inclusion of Temasek in the “Net Investment Returns” framework could help promote a more equitable inter-generational distribution of income. - Note: Under the “Net Investment Returns framework”, spending is capped at 50 percent of the expected long-term real returns on the fiscal reserves held by the GIC and MAS only. Temasek’s net portfolio is 223 billion Singapore dollars, with a geographic allocation tilted towards Singapore and other Asia. - Fiscal stance assessment: - Staff welcomes steps in FY2015/16 budget to reduce income inequality, including: - Increase by two percentage points in the marginal personal income tax rate for the highest income bracket. - Quarterly cash transfers to elderly with income in the lowest 30 percent (“Silver Support”). - The fiscal impulse, projected at 1.6 percent of GDP in FY2015/16, is judged opportune given higher downside risks to the external outlook and prospective tightening of domestic credit conditions. *International Monetary Fund staff report excerpt: "Developments in late-2014 and early-2015, including the decline in the energy import bill" (content unit)._ ### 35. There is scope to enhance the clarity and transparency of the fiscal accounts. The policy ### _cr15199 - 35. There is scope to enhance the clarity and transparency of the fiscal accounts. The policy ### Clarity and transparency of fiscal accounts - Main finding: Scope exists to enhance clarity and transparency of the fiscal accounts to better inform debates about sustainability, fairness, and intergenerational equity under the fiscal rule that limits drawdown of accumulated government assets. - Technical issues identified: - Several items require adjustments to the reported fiscal balance to obtain a macroeconomically relevant measure, including government investment income, intra-government transfers via special funds and programs, and land sales. - The Constitution anchors the presentation of fiscal accounts in the annual budget; however, supplementing that presentation with an alternative based on the overall fiscal balance in line with Government Finance Statistics Manual (GFSM) 2001 would: - Clarify additions to the government’s fiscal reserves (held at the MAS, GIC, and Temasek) implied by the budget. - Reveal the budget’s implications for fiscal sustainability and evolution of fiscal reserves. - Current disclosures: - General government finance data in GFSM format are made available in the Yearbook of Statistics. - All revenue data, including government land sales and investment income, are included in the Budget documents. - The Ministry of Finance publishes the fiscal impulse as part of the Budget documents. ### Authorities’ views on fiscal presentation and performance - Rationale: Multiple presentations of the budget document could lead to confusion and possible misinterpretation of fiscal spending permissible under the Constitution. - Position: The Constitution’s requirements drive presentation choices; analysts can make necessary adjustments using the detailed data provided. - On budget over-performance: - The Ministry of Finance aims for accuracy in budget planning; there is no deliberate or consistent conservatism in projections. - Recent revenue over-performance was attributed to unexpectedly buoyant demand for real estate and vehicles. ### Economic restructuring: overview and policy implications - Nature of restructuring: - Shift to a growth model relying less on foreign workers, prompting multi-year, multidimensional, transformative restructuring focused on: - Upgrading worker skills. - Investing in capital broadly defined (tangible and intangible, e.g., organizational capital and business processes). - Effects and dynamics: - Tighter foreign worker limits have led to a permanent increase in real wages relative to the cost of capital, raising firms’ long-term desired capital-labor ratio and expected to increase investment as restructuring matures. - Short-run effects include compressed firm profits and a temporary weakening of investment, with staff expecting private investment to rebound over time. - Policy measures supported: - Investment tax credits and temporary wage subsidies (with planned sunset clauses) to encourage capital accumulation and smooth transition. - Targeted fiscal support to businesses through grants and tax credits. - Flexibility in calibrating foreign worker levies is welcomed. - Risks and monitoring: - Restructuring entails risks: higher transitional costs (e.g., frictional unemployment, hollowing out in some sectors), potential delays in productivity gains. - The looming full implementation of sectoral foreign worker quotas (Dependency Ratio Ceilings, DRCs) in services on July 1, 2015, could add short-term pressures if firms must release foreign workers to meet DRCs. - If activity falls or productivity does not pick up, recalibration of DRCs or additional support measures could be warranted. - Labor market indicators (reported): - Vacancy Rate and Overall Unemployment Rate shown in Beveridge Curve (In percent). (Data source: Ministry of Manpower, Singapore.) - Net Hiring by Residential Status presented as annual net change in employment (in thousands) for Residents and Foreigners. (Sources: Singapore, Ministry of Manpower; and IMF staff calculations.) ### Authorities’ views on restructuring - Budget emphasis: The 2015 budget furthers restructuring by emphasizing long-term investment in human, physical, and organizational capital; encourages businesses to innovate and internationalize; and sharpens incentives to invest and improve productivity. - Labor market context: - Restructuring is occurring while Singapore is operating at full employment, which makes productivity improvements harder to force and takes several years. - Higher participation of older workers can be structurally positive but may hold back productivity during transition. - Take-up rate under the Productivity and Innovation Credit scheme increased from 33 percent of active companies in 2011 to 46 percent in 2014. - Policy timeline: - Pause in raising foreign worker levies for manufacturing and services does not alter structural targets. - Final tightening in quotas for the services sector is set for July 2015 when DRCs become applicable to companies’ entire workforces. ### Policies to address aging: challenges and reforms - Demographic challenge: - Working-age population projected to experience a sharp decline of above 10 percentage points between 2010 and 2040. - Change in working-age population ratio during 2010–40 (selected entries from table): - Korea 72.7 56.8 -15.9 - Singapore 73.6 61.7 -11.9 - Thailand 71.8 61.1 -10.7 - Japan 63.8 53.3 -10.5 - China 73.5 63.4 -10.1 - Europe 68.3 60.2 -8.1 - U.S 67.1 60.4 -6.7 - Asia 67.7 66.1 -1.6 - Malaysia 67.5 68.2 0.7 - Indonesia 65.2 66.8 1.6 - (Source: United Nations, World Population Prospects-2012 Revisions.) - Pension system characteristics: - Central Provident Fund (CPF) is a fully-funded, defined-contribution pension system. - Advantages: safeguards financial sustainability relative to defined-benefit, pay-as-you-go systems. - Concern: weaker protection in terms of retirement income adequacy, especially for workers with interrupted work histories (women, self-employed, others). - Use of CPF resources for housing and healthcare can make retirees asset-rich but cash-poor. - About half of active CPF members who turned 55 in 2013 could not accumulate enough CPF savings to meet their Basic Retirement Sum that provide life-long monthly payouts of about S$700 estimated to cover basic expenditure needs during retirement. - Recent and proposed measures: - Steps taken to raise retirement adequacy and provide targeted, budget-financed support for low-income pensioners; encourage work beyond normal retirement age and higher saving while employed. - Continued review of replacement rates recommended to ensure adequacy amid changes in living costs, life expectancy, and labor markets. - Increase in healthcare spending and commitment to increase it further over the medium term. - Potential enhancements to CPF: - Develop market-based and other schemes to facilitate monetization of housing wealth and reduce bias toward housing purchases. - Raise returns on CPF asset portfolio; historically CPF funds mostly invested in non-tradable special Singapore government bonds since 1955. - Government offers CPF the higher of market rates benchmarked to deposit rates or the interest rate of Singapore government bonds and a fixed minimum guaranteed rate; since 1999 the minimum guaranteed return ranging from 2.5 to 4 percent has been applied. - Allowing CPF contributors to share more on the upside of investment returns could help increase retirement income. - Constraint: CPF contribution rates are already high at around 37 percent, limiting scope to enhance retirement income via higher contribution rates. - Productivity and labor market policies: - Continued investments in education and infrastructure and labor market policies remain critical. - Possible scope to raise women’s participation rates further while also promoting higher fertility. - Suggested measures: improve availability of childcare facilities, part-time or flexible work arrangements, and job-matching and placement programs. ### Authorities’ views on aging and CPF - Policy stance: - Commitment to promote inclusive growth amid rapid aging and rising income gaps, with personal responsibility as core value. - Various schemes support low-income households (e.g., Workfare program supplements incomes and tops up CPF accounts; higher interest on lower CPF balances). - From 2016 the Silver Support Scheme will be a permanent feature to support lower-income elderly. - CPF and home ownership: - Home ownership is emphasized as important to a secure retirement; high home ownership rates even among lower-income households. - Programs exist to help elderly monetize housing assets (e.g., Lease Buyback scheme selling part of flat lease to HDB). - Risk-free CPF returns of up to 3.5 percent on ordinary accounts and up to 5 percent on medical and special accounts are described as relatively high among countries with defined contribution schemes. - Various investment options with higher risk-return profiles are available to CPF members. - Retirement sum forming basis of monthly payouts will be gradually increased from 2017 to 2020, accounting for inflation and increases in standard of living. - CPF Advisory Panel (established 2014) studied enhancements, including more flexibility to invest in private investment plans and private annuities as alternatives to CPF Life; panel recommendations were released and endorsed by the government this year, with further recommendations expected later this year. ### Staff appraisal: macroeconomic outlook and policy guidance - Near-term macro outlook (staff projections and observations): - Growth: 2014 growth moderated; growth expected to pick up during the year and average 2.9 percent in 2015. - Inflation: Headline and core inflation expected to average 0 and 1 percent in 2015, respectively. - Labor market: Expected to remain tight. - Risks: Exposure to external risks (protracted slow growth abroad, global financial market volatility), elevated private indebtedness, and disorderly correction in property prices. - Policy assessment: - Monetary policy: Current setting appropriate; should continue to respond flexibly to evolving inflation and real developments. Projected gradual increase in domestic interest rates will tighten monetary conditions. - Fiscal policy: Medium-term orientation and enhanced emphasis on inter- and intra-generational equity and inclusion are commendable; near-term fiscal impulse supports aggregate demand during restructuring and helps raise potential growth. - Financial sector: Regulatory and supervisory standards remain among the highest globally; new capital and liquidity requirements phased in smoothly since January 2015; progress on 2013 FSAP recommendations; AML/CFT framework being aligned with enhanced international standards. - Macroprudential measures: Recent measures have contributed to gradual moderation of credit and house prices. - Recommendations and cautions: - Continue careful monitoring of the ambitious restructuring and maintain a flexible approach to recalibrate incentives for firms and households to achieve policy objectives. - Monitor transition closely and respond quickly with targeted measures that foster business transformation with minimal disruption. - If compressed profit margins and managerial challenges persist and disincentivize investment or hold back productivity growth, consider recalibration of labor policies and incentives to firms and workers. - Staff welcomes targeted fiscal support (grants, tax credits) and flexibility in foreign worker levy calibration; additional measures to support investment and encourage adoption of new business and organizational models could be called for if activity falls or productivity does not pick up. *Source: IMF staff report excerpt as provided in the content unit.* ### 52. Staff commends the ongoing efforts to strengthen institutional arrangements to deal ### _cr15199 - 52. Staff commends the ongoing efforts to strengthen institutional arrangements to deal ### Retirement incomes, CPF, and aging - Staff commends ongoing efforts to strengthen institutional arrangements to deal with the rapid aging of the population and suggests continuous review of the adequacy of these arrangements, especially retirement incomes of lower income groups. - Authorities are encouraged to continue to provide targeted, budget-financed old age support for lower-income elderly groups. - The CPF is described as being fully-funded and "well designed to safeguard fiscal sustainability." - Staff recommendations to strengthen CPF outcomes: - Continuously review the adequacy of retirement incomes provided through the CPF, to ensure retirement savings are adequate in light of changes in living costs, life expectancy, interest rates, and labor market conditions, taking into account Singapore’s high home ownership rate. - Continue to develop market-based and other schemes to facilitate the monetization of housing wealth. - Reduce the bias in the system towards housing purchase. - Raise the returns on the CPF asset portfolio. ### External position and medium-term outlook - Singapore’s external position is assessed to be substantially stronger than consistent with medium-term fundamentals and desirable policies. - The current account surplus is projected to moderate over the medium term. - Assessment caveats: uncertainty due to Singapore’s very open economy, role as a global trading and financial center, the existence of a fully funded pension system, and other idiosyncratic factors. - Factors likely contributing to moderation of the current account surplus: - Expected drawdown of accumulated private savings. - Increased public spending in response to aging in coming years. - A stronger social safety net. - Lower growth of the foreign workforce. - It is proposed that the next Article IV consultation with Singapore be held on the standard 12-month cycle. ### The Oil Price Shock: key findings and quantitative impacts - Staff’s SVAR analysis (1979Q1–2014Q4) following Kilian (2009) finds the source of the oil price shock matters; shocks in the second half of 2014 were mainly supply and oil-market-specific shocks, with a smaller role for demand shocks. - Relative impacts: - Oil supply shocks: relatively small effects on inflation and output. - Global aggregate demand shocks and oil-market-specific shocks: larger effects. - A negative global aggregate demand shock leads to an immediate decline in output and the price level. - A negative oil-market-specific shock that lowers oil prices has a positive effect on output realized with a lag. - Observed and estimated quantitative effects: - Pass-through to domestic fuel prices and electricity and gas tariffs has resulted in a 0.4 percentage point decline in headline inflation during the first four months of 2015. - Based on staff’s estimates, the impact of the oil price shock on headline CPI inflation will be about 1 percentage point in 2015. - The impact on growth is estimated to be not significantly different from zero; point estimates suggest a small negative effect in the first year and a positive effect in the second year. - Marine and offshore engineering sectors may show some softness. - Trade and sectoral considerations: - Singapore’s oil trade deficit has averaged about 5 percent of GDP during 2010–13, reaching a peak of 6.6 percent of GDP in 2012. - A large share of oil and gas imports are used as inputs in exports (petroleum products, petrochemicals, water and air transport), so the oil-trade deficit alone can overstate the windfall. - The recent oil shock is expected to have a modest, positive effect on the trade balance (by about 1.5 percent of GDP) in 2015. - The positive impact on the trade balance is expected to be partially offset by a potential slowdown in exports from the marine and offshore engineering sectors due to investment cuts upstream in the global oil industry. - Additional quantitative notes: - The share of items directly affected by the oil price shock (fuels and lubricants under private road transport and electricity and gas under housing and utilities) make up 5 percent of the total CPI basket. - The global price of petrochemicals declined by about 40 percent during the second half of 2014. ### Monetary policies in advanced economies and transmission to Singapore - AEs’ monetary policies diverged in 2014 and were expected to remain asynchronous near- to medium-term: U.S. Fed winding down asset purchases and expected to raise policy rates in late 2015-early 2016; ECB and BOJ expanding asset purchases in early 2015 and late 2014 respectively. - Main transmission channels to Singapore: - Exchange rate movements. - Interest rates and the term premium. - Indirect spillover effects via trading partners. - Volatility in global financial markets and funding conditions. - Exchange rate and interest rate interactions: - Singapore dollar depreciated against the U.S. dollar but appreciated against the Euro and the Japanese Yen in 2014–15. - Historically, a one percentage point increase in the U.S. rates on average is associated with a 0.4 percentage point increase in domestic rates. - Interest rates in Singapore increased by about 85 basis points during November 2014-March 2015, driven by expectations of S$ depreciation vis-à-vis the U.S. dollar and higher exchange rate volatility. - Risks and effects: - Uncertainty about U.S. policy rates could lead to abrupt and larger-than-anticipated increases in domestic interest rates, affecting businesses and households given a large share of borrowing based on variable interest rates. - Indirect spillovers: U.S. tightening may have far-reaching effects on Singapore’s trading partners and thus on Singapore through its regional linkages. - Volatility and funding: divergence in AE policies can heighten volatility and trigger liquidity tightening, though easing in the Euro area and Japan could partially offset withdrawal of U.S. dollar liquidity. - Global banks in Singapore can transmit liquidity shocks from advanced economies to Singapore and Asia. ### Recent real, monetary, and financial sector indicators (selected figures cited) - Real sector and labor: - Growth moderated in 2014 on slowing consumption and weak investment; net exports held up. - Information and communication, and the finance and insurance sectors were bright spots. - Construction sector showed little growth in 2014 after prior strong cumulative growth since 2007. - The overall unemployment rate remains low; employment posted a decline in 2015Q1 for the first time since 2009. - Inflation and prices: - Core inflation amounted to 0.1 percent in May (y/y). - Overall inflation fell to -0.4 percent (y/y) on lower oil prices and moderating COE premiums and house prices. - Monetary and financial indicators: - Short-term interest rates edged up; real short-term rates are now at a 5-year high. - Broad money growth picked up to 8 percent (y/y) in April. - Interest rates: historical correlation and recent moves noted above (one percentage point U.S. → 0.4 percentage point domestic; about 85 basis points rise Nov 2014-Mar 2015). - Financial services exports reached about 8 percent of GDP in 2014. - Financial services activity in Singapore has been highly correlated with economic activity in ASEAN-5 countries and slows during periods of heightened global risk sentiment. - Cross-border banking activity is dominated by East-Asian and European regions; since the crisis, net lending to nonbank customers in East Asia and bank funding from Europe turned positive. _ _cr15199 - 52. (IMF staff report excerpt)_ ### 7.7 percent (y/y) in 2015Q1. ### _cr15199 - 7.7 percent (y/y) in 2015Q1. ### Banking sector structure and exposures - DBUs rely primarily on deposit funding; ACUs rely on cross-border bank funding, reflecting the global operations of foreign bank branches. - Loan to deposit ratios are around 1.1 for both ACUs and DBUs. - 48 percent of total DBU loans consist of housing loans and loans to the building and construction sectors. - Growth in DBU loans to non-residents has slowed down. - The big 3 domestic banks now have about 45 percent of their loan portfolio in other Asia (excluding Singapore). - Note: 1/ Asian currency unit (ACU) banking books are for non-Singapore dollar transactions, while domestic banking unit (DBU) books may include transactions in Singapore dollars and other currencies. Historically, ACU and DBU were analogous to foreign and domestic banks, respectively. More recently, banks with full banking licenses may maintain both DBU and ACU books, and DBU books are not restricted to Singapore dollar activities. Thus, while the ACU-DBU distinction has become blurred, data under an alternative classification that would be more economically relevant is not available. ### Housing market developments and household balance sheets - Singapore’s housing market is cooling. - The house price-to-income ratio increased again after the fall in 2014. - The house price-to-rent ratio has declined slightly and remains close to its historical trend. - Housing transactions in the public market segment edged up in 2014; the private market remains subdued. - The vacancy ratio has reverted to the historical average on easing supply constraints. - Supply bottlenecks owing to rapid population growth with limited new housing supply look set to ease as a pipeline of housing supply is expected to come on the market in the coming years. - Banks have a substantial exposure to private housing loans. - MaPs helped improve banks’ credit risk profile and limited banks’ exposure to overextended households. - Households have strong balance sheets in aggregate, as house price appreciation in the recent past pushed up households’ wealth. - However, households are highly indebted. A rise in the overall indebtedness and debt-servicing burden could pose risks for groups of households. ### External sector and spillovers - The current account surplus has averaged about 20 percent of GDP over the past decade. - Negative valuation changes have kept Singapore’s NIIP position at about 186 percent of GDP over the past 4 years. - Singapore has a net asset position in portfolio assets and a net liability position in FDI holdings. - Gross official foreign reserves declined in 2014 weighed down by valuation losses. The forward position was reduced. - The financial account is characterized by net FDI inflows and net portfolio outflows. - Official flows and FDI are the largest contributors to net financial flows, while bank-related flows are smaller but more volatile. - Singapore depends mainly on foreign final demand from the E.U. and U.S., while China, Japan, Indonesia and India are important partners in the region. - Inward FDI are also dominated by the E.U. and the U.S. and are mainly concentrated in the finance and insurance sector. - Singapore has large portfolio assets, which would make its external balance sheet vulnerable to shocks in the U.S and several 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 a banking sector stress in Singapore. - Cross-border exposures of domestic banks in Greater China and other Asian economies increased, leading to higher spillovers from the region. ### Social, labor, and demographic indicators - Wages trended up in recent years, with a widening gap. - Industrial earnings grew more than other sectors. - Median household income increased by 41 percent in the last 15 years. - Real incomes of lower income groups have recently increased considerably. - The recent decline in inflation benefits all income groups. - Government policies (taxes and benefit payments) contribute to a reduction in inequality. - 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. - Labor force growth has declined in recent years, after a period of very strong growth during 2005−2009, contributing to a gradual increase in the capital to labor ratio. ### Selected key statistics and projections (preserve source figures) - Nominal GDP (2014): US$308 billion - Main exports (percent of total domestic exports): Electronic products (19%); chemical products (17%) - Population (June 2014): 5.47 million - Unemployment rate (2014): 2.0 percent - Real GDP growth (2011–2016 row): 6.2 3.4 4.4 2.9 2.9 3.1 - CPI inflation (2011–2016 row, period average, percent): 5.2 4.6 2.4 1.0 0.0 1.8 - Current account balance (US$ billions, 2011–2016 row): 60.6 49.8 54.1 58.8 62.9 62.0 - (In percent of GDP): (22.0) (17.2) (17.9) (19.1) (20.4) (18.7) - Gross official reserves (US$ billions, 2010–2015 row): 237.7 259.3 273.1 256.9 259.9 267.7 - (Months of imports): (5.7) (6.1) (6.5) (6.8) (6.3) (6.0) - Total loans to nonbanks (in billions of Sing. dollars, end of period): 668 827 907 1,081 1,180 1,173 1,239 (annual percentage change rows: 13.3 23.9 9.7 19.2 9.2 3.6 5.0) - Financial sector indicators (selected, 2010–2015): - Broad money (M2, percent change, y/y): 7.6 11.8 6.8 7.9 7.6 8.1 - Private sector credit (percent change, y/y): 13.2 18.9 11.3 15.5 7.5 4.6 - Credit to the property sector (percent change, y/y) 1/: 18.2 19.5 16.3 11.8 9.0 8.0 - Share of property sector credit in total nonbank credit (percent) 1/: 51.4 47.2 47.0 44.9 46.3 47.7 - NPL ratio (local banks, percent): 1.6 1.2 1.2 1.1 1.0 0.9 - Capital adequacy ratio of local banks (percent): 18.6 16.0 18.1 16.4 16.0 ... - Table highlights (monetary and macro projections): - Medium-term real GDP growth projections (2016–2020): 3.1 3.2 3.2 3.2 3.2 - Current account balance (percent of GDP, medium-term): 20.4 18.7 17.5 16.4 15.6 14.7 - Gross official reserves projections (US$ billions, 2015–2020): 260 268 278 292 306 321 - Financial soundness indicators—local banking sector (selected): - Regulatory capital to risk-weighted assets (2010–2014): 18.6 16.0 18.1 16.1 16.4 16.0 - NPLs to nonbank loans (2010–2014): 1.6 1.2 1.2 1.1 1.0 0.9 - Total provisions to NPLs (2010–2014): 110.9 125.5 128.3 131.2 135.4 148.6 - Housing loans share in nonbank loans (selected years): 23.2 20.7 … 22.0 20.4 19.8 20.4 *Source: IMF staff report content as presented in the provided PDF excerpt.* ### Appendix I. Singapore—Risk Assessment Matrix 1/ ### Appendix I. Singapore—Risk Assessment Matrix 1/ ### Key Risks, Likelihood, Transmission, and Expected Impact - Protracted period of slower growth in key advanced and emerging economies - Likelihood: Euro Area and Japan: High; Emerging markets: Medium - Transmission: Direct and intraregional trade linkages; Singapore’s high degree of openness and position as a financial center and a trading hub imply large spillovers from advanced or emerging economies’ lower growth. High household leverage and potential asset price corrections could exacerbate a slowdown in economic activity, with potential spillovers to banks. Financial linkages: potential inward spillovers from banks in advanced markets with significant presence in Singapore’s domestic market. - Expected Impact: Medium to High - Side-effects from global financial conditions: A surge in financial volatility; Persistent dollar strength - Likelihood: High - Transmission: Corrections in asset prices and in exchange rates due to sustained capital flow reversals and higher-than-expected increases in interest rates could affect growth prospects through wealth effects and deteriorate banks’ capital, especially given elevated household and corporate debt and prevalence of variable interest rates. Decline in financial sector activity could slow growth. Liquidity risks from sudden retrenchment of interbank—including intragroup—funding of offshore banks and funding pressures due to foreign currency liabilities of domestic banks. Dollar denominated loans offshore could see an increase in arrears. - Expected Impact: Medium - Sharp growth slowdown and financial risks in China - Likelihood: Insufficient progress with reforms leads to a continued buildup of vulnerabilities: Medium; Sharp slowdown in 2015–16: Low - Transmission: Direct and intraregional trade linkages—significant slowdown in China would affect Singapore’s exports and tourism; domestic demand hit via worsening investment sentiment. Financial linkages: domestic banks’ lending to China largely trade finance but total exposures grown to around 40 percent of GDP; widespread corporate defaults could lead to rising NPLs. Financial stress in China could lead to decline in investor sentiment, pullback of funding and market volatility. - Expected Impact: Medium to High - Disorderly or excessive correction in property prices - Likelihood: Low - Transmission: Decline in collateral values and wealth effects could trigger a fall in economic activity and bank lending with further adverse feedback effects on household indebtedness and property prices. - Expected Impact: Medium - Structural reforms fail to generate significant productivity gains and increased investment - Likelihood: Medium - Transmission: Sharp increase in unit labor costs and loss of competitiveness. Limited access to foreign workers may reduce competitiveness and profitability and provide disincentives to invest in some sectors. Higher than expected transitional costs (high frictional unemployment or hollowing out in some sectors) can have long-term effects on growth. - Expected Impact: Medium - Retreat from globalization and international cooperation; Delays in the implementation of AML standards and associated reputational risks - Likelihood: Medium to Low - Transmission: Decline in cross-border banking activity; regulatory arbitrage, financial fragmentation, weakening of global financial safety net. Reputational risks from opaque ownership structures in the wealth management sector could adversely affect the industry’s viability. - Expected Impact: Medium ### Recommended Policy Responses - Protracted slower global growth: - Use temporary and targeted fiscal stimulus, loosen monetary policy and recalibrate MaPs as necessary while maintaining financial stability. - Global financial volatility and dollar strength: - Ensure financial institutions maintain prudent risk management practices and have adequate liquidity and capital buffers. Maintain close links with home country supervisors. Recalibrate macroprudential policies to mitigate financial sector stress. In an extreme event, the strong official reserve position could provide an additional cushion. Swap lines with other central banks could complement this. - China slowdown risks: - Provide temporary and targeted fiscal support and loosen monetary policy to offset headwinds. Continue to monitor banks’ exposures to China and the rest of the region. Use prudential policies and bank supervision to ensure risks are managed well. - Property price correction: - Adjust macroprudential policies while safeguarding financial stability. Use targeted fiscal transfers to households whose debt servicing capacity is adversely affected. - Structural reform shortfalls: - Adjust foreign worker policies to relax tightness in labor markets. Provide temporary and targeted fiscal transfers or incentives to companies in impacted sectors during the transition. - Retreat from globalization / AML delays: - Ensure regulatory standards and risk management practices keep up with international regulatory norms. Continue collaboration with financial sector supervisors in other major jurisdictions. Fully implement international AML standards. Ensure service providers report suspicious transactions, and close accounts where supporting evidence of beneficial ownership is incomplete. ### Notation and Staff Assessment Clarifications - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). - The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. *Source: Appendix I. Singapore—Risk Assessment Matrix 1/* ### Appendix III. Singapore—2013 FSAP Key Recommendations and ### Appendix III. Singapore—2013 FSAP Key Recommendations and Actions Taken ### Short-Term Implementation (within 12 months) - 1. Increased attention to onsite inspections of banks’ credit risk. - MAS has instituted a multi-year credit onsite inspection schedule for major banks and updated the relevant guidance to supervisors. MAS is also in the process of conducting a thematic inspection of selected banks to assess their credit underwriting standards and lending practices. - 2. Monitor LCR ratios for significant foreign currencies. - MAS monitors LCRs for consolidated currency, Singapore dollar and significant foreign currencies (including the U.S. dollar) for locally incorporated banks headquartered in Singapore on a monthly basis since January 2015. Foreign banks subject to the LCR framework will start reporting the LCRs from January 2016. - 3. Mitigate legal risks to CCPs from conflicts of law across jurisdictions. - MAS has engaged with the U.S. and EU authorities to address cross-border legal risks to CCPs. The Singapore Exchange Derivatives Clearing Limited (SGX-DC) is now registered with the U.S. Commodity Futures Trading Commission (CFTC) as a derivatives clearing organization, enabling US clients to clear trades on SGX-DC. The Singapore CCP regime has been recognized by the European Commission as equivalent, enabling European clients to clear trades on CCPs within the Singapore CCP regime. - 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. - The Singapore Exchange (SGX) concluded that it is not practicable to require posting of non-cash collateral at this point. A study in 2014 by SGX concluded that, although Singapore government securities already qualify as eligible collateral, cash collateral was preferred by clearing members of the Central Depository (Pte) Limited and SGX-DC, because cash is most easily valued and transferable. - 5. Consider subjecting loans for owner-occupied housing to a limit to be set by MAS. - MAS decided not to introduce a limit on owner-occupied loans. When granting an owner occupied housing loan, a bank is primarily exposed to the financial position of the borrower, and its exposure to the property collateral is secondary. The TDSR Framework has also helped to contain household leverage and associated stability risks. - 6. Encourage over-extended households to reduce their leverage. - MAS has taken preemptive measures to curb excessive borrowing. - (i) Rules on unsecured credit facilities: Effective in June 2015, financial institutions may not extend further credit to borrowers whose interest-bearing unsecured debt exceeds 24 times of monthly income. The limit will be lowered to 18 times in June 2017 and 12 times in June 2019. The industry-led Repayment Assistance Scheme also offers a lower interest rate to help overextended borrowers to gradually pay down debts. - (ii) TDSR framework continues to work through the system by encouraging households to be prudent when they take up property loans. - (iii) Outreach and education: The December 2014 Financial Stability Review by MAS warned about vulnerabilities of highly leveraged households to interest rate or income shocks. In addition, MoneySENSE, a national financial education program, provides financial education on managing debt through, inter alia, talks and workshops. - 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 loans, as well as global and domestic macroeconomic conditions. The series of property-related measures taken over the past few years have dampened momentum in the property market. Prices and transactions have moderated and the risk profile of housing loans has improved. ### 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 is on track to implement the countercyclical capital buffer framework by January 2016, in line with the Basel III timelines. - 9. Further develop SGX recovery plans, identifying additional scenarios. - SGX is in the process of developing its recovery and resolution plans to be in line with the CPMI-IOSCO Recovery Report for FMIs and the FSB Key Attributes on Effective Resolution. - 10. Upgrade the collateral that covers credit exposures related to the link with the Chicago Mercantile Exchange (CME). - SGX is reviewing the use of letter of credit (LC) and will consult CME as appropriate. SGX is also reviewing if the clearing fund can be used to cover losses from the Mutual Offset System (MOS) link. - 11. Formalize bilateral cooperative crisis management agreements for FMIs. - The existing supervisory cooperation MOU with CFTC allows MAS to engage with CFTC in emergency situations. MAS will consider international standards on crisis management and include more details on crisis coordination, where appropriate, in consultation with CFTC. - 12. Collect more granular data on household balance sheets, drawing on surveys and strengthened credit bureau practices. - Data collected by the consumer credit bureau have been enhanced since June 2014, providing comprehensive information on a borrower’s overall credit limits and aggregate outstanding debt balances across lenders. In addition, effective in April 2015, members of the credit bureaus have access to information on the interest-bearing outstanding unsecured debt balances of borrowers. - 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 has issued a consultation paper in 2015Q2 on proposals to enhance resolution regimes in Singapore. As work on resolution funding remains at a nascent stage internationally, MAS will continue to study and develop possible arrangements that are best suited to Singapore’s context. MAS will also draw on evolving international practices/standards, before finalizing the details of the resolution funding framework. - 14. Ensure that the banking industry adequately contributes to the costs of bank failures. - (No specific actions stated in the source text.) - 15. Further facilitate cross-border cooperation in bank resolution. - MAS has engaged with foreign authorities to understand the systemic importance of Singapore banks overseas, and will take this into consideration in the resolution plans for the Singapore banks. MAS also participates in the Crisis Management Groups of global systemically important foreign banks. During times of crisis, MAS will step up the level of engagement with home supervisors or resolution authorities. In addition, MAS will issue a consultation paper on proposals to enhance its resolution framework. Amongst others, MAS will consult on proposed powers for MAS to impose temporary stays on early termination rights on financial contracts. This will contribute to orderly cross-border resolutions. - 16. Consider changes to the structure of the MAS Board to strengthen operational independence in financial supervision. - No action will be taken. In MAS’ view, MAS has legal and institutional safeguards that protect against potential conflicts of interest and maintains full operational independence. 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. - 18. Review and strengthen the resolution framework to enhance MAS' operational independence in bank resolution. - The recommendation is under review. --- ### Appendix IV. Singapore—Estimating a Monetary Policy Rule for MAS ### MAS reaction function (framework) - MAS policy characterized by the “basket-band-crawl” (BBC) framework; MAS is not an inflation targeter but one objective in the MAS Act is “to maintain price stability conducive to sustainable growth of the economy.” - The policy rule estimated replaces the short-term interest rate by NEER appreciation and follows: - ∆e_t = (1−ρ) ∆e_t* + ρ ∆e_{t−1} + τ_t - ∆e_t* = ∆e + β (E[π_{t+n} | φ_t] − π*) + γ (E[y_{t+m} | φ_t] − y*) - Reduced form: ∆e_t = (1−ρ) α + (1−ρ) β π_{t+n} + (1−ρ) γ x_{t+m} + ρ ∆e_{t−1} + ε_t - Where α = ∆e − β π* and x_t = y_t − y*. - Prior literature finds: - High degree of policy inertia. - Strong and significant response to expected inflation and the output gap. - IMF (2013) found unit labor costs (ULCs) as an alternative target gave a more robust relationship. ### Updated estimates (sample and specifications) - Sample: 1991Q1–2014Q4. - Inflation, ULC and import price inflation: 4-quarter ahead, 4-quarter moving average of inflation, ULC increase and import price inflation respectively. - Contemporaneous value of the output gap used. - Four lags of inflation and output gap used as instruments. - Specifications: - Specification 1: IMF staff estimate of output gap (rgdp_gap). - Specification 2: HP filter estimate of output gap (gap_desk). - Specification 3: uses one-year-ahead inflation expectations from Consensus (inf_exp). - Specification 4: breaks down inflation into ulc_forward and import_forward. - Specification 5: uses core inflation (inf_core_forward). ### Estimated coefficients (selected results) - Table of key estimated coefficients (variable: coefficient; robust standard error in parentheses): - Specification (1) neer_dif: - inf_forward 0.365* (0.193) - rgdp_gap 0.149** (0.075) - L.neer_dif 0.683*** (0.066) - Constant -0.204 (0.390) - Observations 92; R-squared 0.624 - Specification (2) neer_dif: - inf_forward 0.427** (0.193) - gap_desk 0.115* (0.068) - L.neer_dif 0.680*** (0.066) - Constant -0.351 (0.382) - Observations 92; R-squared 0.612 - Specification (3) neer_dif: - inf_exp 0.748*** (0.249) - gap_desk 0.171*** (0.050) - L.neer_dif 0.641*** (0.061) - Constant -1.100** (0.529) - Observations 92; R-squared 0.691 - Specification (4) neer_dif: - ulc_forward 0.292** (0.127) - import_forward 0.069 (0.064) - gap_desk -0.098 (0.142) - L.neer_dif 0.707*** (0.068) - Constant 0.045 (0.239) - Observations 88; R-squared 0.698 - Specification (5) neer_dif: - inf_core_forward 1.030** (0.468) - gap_desk -0.013 (0.106) - L.neer_dif 0.704*** (0.065) - Constant -1.241 (0.784) - Observations 88; R-squared 0.562 - Significance notation: *** p<0.01, ** p<0.05, * p<0.1 ### Main findings - Lagged NEER coefficient is always significant and large (around 0.65-0.7), indicating a high degree of policy inertia. - The coefficient for expected future inflation implies: - MAS increases NEER appreciation by 1.33 percent when future inflation increases by one percentage point, yielding a REER appreciation of 0.33 percent (based on the estimated relationships described). - Estimates of β using Consensus inflation expectations and core inflation are higher at 2 and 3.5 percent respectively. - In some specifications the response to the output gap is significant at around 0.12–0.17. - Model fit is very good under all specifications (R-squared range reported above). - Rolling window estimates show a higher coefficient on inflation more recently under all specifications, except the specification using inflation expectations from Consensus. ### Model-based NEER predictions - Using specification 2 (gap_desk) and MAS’s estimated reaction function: - The average equilibrium NEER appreciation predicted for 2015 is about zero, reflecting low inflation and closed output gap. - Toward end-2015, equilibrium NEER rises reflecting the assumption that inflation will pick up somewhat. - Predicted NEER growth depends on lagged NEER appreciation; with the given inputs this gives an estimated NEER appreciation of 0.14 percent. - If expected inflation 4-quarters ahead is lower than baseline (about zero) and the economy is softer than baseline (output gap becomes negative), and assuming lagged NEER growth is 0, the model predicts a small NEER depreciation. The equilibrium change in NEER implies a larger depreciation, highlighting the importance of policy inertia. *Source: Appendix III and Appendix IV, _cr15199 - Appendix III. Singapore—2013 FSAP Key Recommendations and Actions Taken (IMF staff content provided).* ### Appendix V. Singapore Productivity and Growth―Record and ### Appendix V. Singapore Productivity and Growth―Record and Prospects ### Overview: long-run performance - The economy has grown at an average annual rate of 7.7 percent since independence. - Annual growth in living standards (per capita real GDP) has reached 5.4 percent. - Growth was faster (8.7 percent per annum) until 2000. ### Growth accounting and drivers - Capital accumulation: over 40 percent of growth historically; the largest growth driver. - Effective labor: about a third of growth, reflecting both increases in labor force and substantial improvements in labor quality. - Total Factor Productivity (TFP): about a quarter of growth overall; its contribution fell by about 1 percentage point in the 1980s, partly compensated by rising labor quality. - Temporal profile: contributions were stable except for TFP which declined in the 1980s. ### Post-1995 record (1995–2010) - Average growth: 5.7 percent per annum. - Contributions to growth (1995–2010): - Physical capital accumulation: 2.5 percentage points (45 percent). - Labor: 1.7 percentage points (30 percent). - Improvements in labor quality: 9 percent. - TFP: 15 percent. ### Capital accumulation and recent investment trends - Investment made an important contribution after the global financial crisis, unlike many Advanced Economies (AEs) where investment was subdued. - Factors supporting investment: trade and financial links with Emerging Asia. - Recent weakening: investment has weakened during the transition to Singapore’s new growth model (which relies less on foreign workers) and amid an uncertain global recovery. - 2014: gross fixed investment contracted for the first time in more than ten years. - Projection: investment is expected to rebound to an average annual rate of growth of 3.6 percent as firms raise their capital-labor ratios amid lower growth in foreign labor inputs. ### Role of services and structural change - Services share in GDP doubled from 16 to 32 percent between 1965 and 2014. - Recent drivers of services and services exports: financial and business management, accounting, engineering, legal and other professional services, which now account for 40 percent of services exports. - Services exports add more value per dollar exported and are expected to grow in importance. - Trade policy: reductions in barriers in trade services in ASEAN and other high quality trade agreements can provide an important boost to services trade and activity. - Value added: value added by services exports has grown; value added by goods has remained constant in relation to GDP. ### Potential growth and short-to-medium term outlook - Current estimate of potential growth: about 3.2 percent per year. - Drivers of the slowdown: rapidly aging population and domestic restructuring policies resulting in reduced inflows of foreign workers. - Projected contributions to potential growth: - Capital: 1.3 percentage points. - TFP: 1 percentage point. - Labor quality: 0.6 percentage points. - Labor quantity: 0.3 percentage points. - Projected labor productivity growth: about 2 percent per year. - Labor force growth projections: - Ministry of Manpower expects resident workforce growth to slow to an average of 20,000 per year in the second half of the 2010s (less than a third of the 66,000 of the last five years). - Workforce growth projected at 1–2 percent during 2015–20, taking into account aging, reduced numbers of foreign workers, and already high participation of older workers and women. - Foreign labor force growth projected at 0.7 percent per year. - Implications: Slower labor input growth could drive up wages and unit labor costs and the wage-rental ratio. Investment and TFP growth are subdued in recent years but are projected to recover as firms adjust to higher desired capital-labor ratios. ### Labor productivity: patterns and drivers - Post-crisis (2009–14) labor productivity growth slowed to 2½ percent per year. - Employment composition changes: employment growth for high skilled workers moderated while that for low skilled workers rose during the restructuring. - Higher participation of older workers lowered economy-wide productivity. - Sectoral productivity: - Productivity grew more in export-oriented sectors, including biomedical manufacturing, precision engineering and transport engineering. - Gains were partially offset by employment shifts toward less productive sectors, including Construction and Food & Beverage Services. - Higher employment in construction partly reflects increased investment in public housing and Mass Rail Transit (MRT). - Capital intensity: labor productivity was boosted by gains in capital intensity (machinery and equipment; buildings and infrastructure). Recently, machinery and equipment investment has slowed due to global uncertainty and ongoing restructuring. ### Scope for further productivity gains - Singapore has already high labor productivity in several sectors, particularly subsectors in manufacturing. - Comparison with the United States indicates room for productivity improvements in construction, services, and some other sectors. - Reforms in services sectors of high productivity economies can provide a benchmark for Singapore. ### Restructuring strategy and policies - Objectives: raise labor productivity and TFP growth and achieve potential growth consistent with the physical limits of a city state. - Measures enacted to reduce reliance on foreign labor: - Stricter quantitative restrictions and higher levies since 2010. - Progressive gradual increases in levies for firms hiring foreign workers. - Sector-specific quotas via Dependency Ratio Ceilings, which have been reduced. - Human capital: SkillsFuture program finances spending in education and training, covering on-the-job education and training and training outside any job relationship. - Incentives to support innovation and internationalization: - Capability Development Plan supports SMEs. - National Research Fund increased funding for product development and commercialization. - Business Angels Scheme, Startup Enterprise Development Scheme, and Venture Debt Risk-Sharing Program help finance start-ups. - Double Tax Deduction for Internationalization Scheme covers salaries for Singaporeans posted to new overseas entities. - International Growth Scheme reduces taxes for income from international activities. - Mergers and Acquisitions Scheme and Internationalization Finance Scheme encourage scaling up international business operations. ### Transition support measures and their effects - The restructuring involves a lengthy transition; mitigation measures will be gradually phased out. - Key transition measures and private-sector effects: - Wage Credit Scheme: co-funds wage increases of Singaporean employees earning below S$4,000. - Corporate Income Tax Rebate: mitigates impact of rising costs related to restructuring. - Productivity and Innovation Credit Bonus: lowers the cost of investing in technology. - Temporary Employment Credit: offsets contributions to CPF and lowers the cost of labor. - Summary policy-effect mapping (as described in the source): - Increased levies → Increased cost of foreign labor - Lower Dependency Ratio Ceilings → Reduced supply of foreign labor - SkillsFuture → Lower cost of training - Grants and Tax Credits → Lower costs of projects supporting innovation and internationalization - Transition Support Package → Transitional support lowering costs of labor and investment - Temporary Employment Credit → Lowers the cost of labor *Source: Appendix V. Singapore Productivity and Growth―Record and Prospects, IMF staff summary as provided in the supplied content.* ### 2.5 percent for the Ordinary Account and a floor interest rate of 4 percent for the Special, Medisave, ### _cr15199 - 2.5 percent for the Ordinary Account and a floor interest rate of 4 percent for the Special, Medisave, ### Minimum legislated interest rates and extra interest features - Legislated minimum guaranteed returns have ranged from 2.5 to 4 percent since 1999. - Extra interest introduced in 2008: additional 1 percent paid on the first S$60,000 of a CPF member’s combined balances, with up to S$20,000 from the Ordinary Account. - From 2016, additional extra interest applies on the first S$30,000 of CPF balances for members aged 55 and above. - In the current low interest rate environment, computed interest rates (based on the interest rate peg formula) are about 0.2 percent for the OA and about 3.3 percent for the SMRA, which are significantly lower than the legislated minima. - The compounding effect of the extra 1 percent interest, on top of long term bond rates, is intended to shore up members' CPF balances over the long run, especially for lower-income groups. ### CPF adequacy, usage for housing, and monetization of housing wealth - Older generations have lower CPF retirement savings due to: significantly lower past wages and pre-retirement withdrawals for housing, education, and health care. - As of 2013, around a third of CPF contributors were using CPF savings for housing mortgages, producing many retirees who are asset rich but cash poor. - Net withdrawals for housing: 32.3 percent of total contributions and 55.5 percent of total withdrawals in 2014. - Home ownership rate is about 90 percent; many older Singaporeans have fully paid homes that could be monetized to supplement retirement incomes. - Schemes to monetize housing for the elderly include the Enhanced Lease Buyback scheme and the Silver Housing Bonus; reverse mortgage uptake faces risks and operational, legal and reputational constraints. - The Valuation Limit (VL) caps CPF usage for housing: VL is the lower of purchase price or property value at purchase; CPF usage beyond VL requires first setting aside the Basic Retirement Sum; absolute CPF usage for housing capped at 120 percent of VL. - Recent tightening of mortgage financing: maximum HDB loan tenure reduced from 30 years to 25 years to limit over-leveraging. ### Replacement rates and international comparison - OECD income replacement rate for men in Singapore: 38.5 percent in 2012. - Comparison benchmarks: 54 percent in OECD countries, 56 percent in South Asia, 44 percent in East Asia/Pacific. - About half of active CPF members who turned 55 in 2013 could not accumulate enough CPF savings to meet the Basic Retirement Sum that provides monthly payouts of about S$700. - Caution: international replacement rate comparisons are complicated by Singapore’s high rate of home ownership and the use of CPF balances for housing, which reduces housing-related expenses in retirement. ### Inflation protection and asset composition - CPF payouts are not indexed to prices; inflation is a key risk to retirement adequacy. - Authorities have sought to provide stable returns above inflation via extra interest on lower balances; housing ownership is also a hedge against inflation for many members. - There is scope to enhance CPF returns through diversification of the CPF asset portfolio and by enabling members to take more risk (subject to higher volatility). ### Reforms under way and planned changes - CPF Advisory Panel created Sep 2014; Part One recommendations accepted by the Government; second phase due to be completed by end- 2015 covering improvements to CPF LIFE and more member flexibility to take risk for higher return. - Reforms aim to strengthen redistributive functions, provide greater flexibility, and strengthen adequacy especially for low-income pensioners. - Key ongoing and announced measures: - Creation of three minimum sums with different payout options. - Option to receive higher payout for working beyond 65. - Higher salary ceiling for CPF contributions. - Equating contribution rates for older workers with younger ones. - Higher interest rates for members aged 55 and above on the first S$30,000 of CPF balances, enabling up to 6 percent risk-free on retirement balances. - From Q1 2016, a new Silver Support Scheme introduced as a permanent feature targeted at the bottom 20 percent of Singaporeans aged 65 and above, with lower support extended to up to 30 percent; about 150,000 elderly expected to receive Silver Support payouts of between S$300 and S$750 per quarter; assessment based on lifetime wages, household support, and housing type without requiring application by eligible people. - The CPF Advisory Panel’s second phase to study improving CPF LIFE and providing more flexibility for risk-taking (study due end- 2015). ### Enhancing returns and investment options - CPF Investment Scheme (CPFIS) allows members to invest some CPF savings in shares and loan stocks, unit trusts, government bonds, statutory board bonds, bank deposits, fund management accounts, endowment insurance policies, investment-linked insurance policies (ILPs), exchange traded funds (ETFs) and gold. - Singapore Savings Bonds (SSBs): a special type of Singapore government securities allowing individual investment up to 10 years with as little as S$500; MAS expects to launch the Savings Bonds program in the second half of 2015. Further details, including whether SSBs will be open to CPF monies, to be announced later. - Diversifying asset portfolios could deliver one or two percentage points’ difference per annum, substantially affecting lifetime outcomes. ### Strengthening redistribution and voluntary schemes - CPF progressivity is being increased via extra interest on lower balances and budget-funded transfers (Workfare, housing grants, Medisave top-ups) that are funded from the Singapore government budget rather than intergenerational transfers. - Voluntary contributions: individuals and employers can make voluntary CPF contributions with tax benefits; Income Tax Act provides tax deductions to employers for corporate retirement plans; Supplementary Retirement Scheme (SRS) is available for private-sector savings with tax benefits. ### Policy recommendations and directions highlighted - Facilitate monetization of housing wealth to help asset-rich but cash-poor seniors (e.g., promote market-based reverse mortgage schemes while addressing associated risks). - Reduce the tilt toward housing purchase to make CPF more focused on providing retirement income. - Continuously review replacement rates to ensure CPF savings dedicated to CPF annuities are adequate given changes in standard of living, life expectancy and labor market developments. - Consider enhancing CPF rate of return through investment scheme changes and broader diversification to allow members to share upside of higher returns while managing risks. - Improve guided retirement planning services: one-to-one planning introduced to help members understand options and decide the best suited choices. ### Table of changes to CPF, with effect from January 2016 (selected items) - The salary ceiling for which CPF contributions are payable will be increased from S$5,000 to S$6,000 per month. - CPF contribution rates for older workers will be increased; older workers aged 50–55 will have the same contribution rates as their younger counterparts. - CPF members aged 55 and above will enjoy an additional extra interest of 1 percent on the first S$30,000 of their CPF balances, enabling members aged 55 and above to earn up to 6 percent risk-free interest on their retirement balances. - From the first quarter of 2016, a new Silver Support Scheme will be introduced as a permanent feature in Singapore’s social security system. - CPF members can make additional top-ups to an “Enhanced Retirement Sum” from age 55 to get lifelong payouts of up to about S$1,900 per month from age 65. - CPF members will need to meet a lower threshold of savings (i.e. the Basic Retirement Sum) before they can transfer their savings to their spouses’ CPF Accounts. - CPF members will only need to choose their CPF LIFE annuity plans when they want to start payouts, at age 65 or later, up to age 70, instead of choosing plans at age 55 with payouts starting at 65. - The CPF Board will introduce a guided one-to-one retirement planning service to help members better understand CPF options. - Starting from the cohort that turned 55 in 2013, CPF members will be able to withdraw up to 20 percent of their retirement savings when they reach their payout eligibility age of 65. *Source: _cr15199 (IMF).* ### Appendix VII. Singapore―Public Sector Debt Sustainability ### Appendix VII. Singapore―Public Sector Debt Sustainability ### Baseline DSA findings and projections - Nominal gross public debt: 96.8 (2013), 103.3 (2014), 99.3 (2015), 102.0 (2016), 102.0 (2017), 96.9 (2018), 92.2 (2019), 88.1 (2020), 84.5 (projection year sequence shown as percent of GDP). - Public gross financing needs: -7.0 (2013), -5.5 (2014), -4.3 (2015), 6.1 (2016), 7.6 (2017), 8.1 (2018), 4.0 (2019), 0.8 (2020), 1.9 (projection sequence) (in percent of GDP). - Real GDP growth: 6.8 (2013), 4.4 (2014), 2.9 (2015), 2.9 (2016), 3.1 (2017), 3.2 (2018), 3.2 (2019), 3.2 (2020) (in percent). - Inflation (GDP deflator): 2.0 (2013), -0.1 (2014), 0.2 (2015), -0.1 (2016), 2.7 (2017), 2.8 (2018), 2.7 (2019), 2.7 (2020) (in percent). - Nominal GDP growth: 9.0 (2013), 4.4 (2014), 3.1 (2015), 2.7 (2016), 5.9 (2017), 6.0 (2018), 6.0 (2019), 6.1 (2020) (in percent). - Effective interest rate (interest payments divided by debt stock): 0.0 (2013), 0.0 (2014), 0.0 (2015), 3.0 (2016), 3.3 (2017), 3.8 (2018), 4.4 (2019), 5.0 (2020), 5.4 (projection end). - Change in gross public sector debt (year-on-year): 0.7 (2013), -3.0 (2014), -4.0 (2015), 2.7 (2016), 0.0 (2017), -5.1 (2018), -4.7 (2019), -4.1 (2020); cumulative: -14.8. - Identified debt-creating flows (annual): -12.0 (2013), -6.9 (2014), -4.4 (2015), 1.1 (2016), -3.2 (2017), -3.7 (2018), -3.2 (2019), -2.6 (2020); cumulative: -13.8. - Primary deficit: -5.5 (2013), -4.0 (2014), -2.8 (2015), -0.5 (2016), -1.5 (2017), -1.6 (2018), -1.7 (2019), -1.7 (2020); cumulative: -8.7. - Primary (noninterest) revenue and grants: 20.1 (2013), 20.3 (2014), 21.1 (2015), 21.1 (2016), 21.4 (2017), 21.7 (2018), 22.0 (2019), 21.3 (2020); cumulative: 128.0. - Primary (noninterest) expenditure: 14.6 (2013), 16.3 (2014), 18.3 (2015), 20.6 (2016), 19.9 (2017), 20.1 (2018), 20.3 (2019), 19.6 (2020); cumulative: 119.4. - Automatic debt dynamics contribution: -7.8 (2013), -4.5 (2014), -3.1 (2015), 0.2 (2016), -2.4 (2017), -2.1 (2018), -1.5 (2019), -0.9 (2020); cumulative: -7.3. - Of which: real interest rate contribution: -1.8 (2013), 0.1 (2014), -0.2 (2015), 3.0 (2016), 0.6 (2017), 1.0 (2018), 1.4 (2019), 1.9 (2020); cumulative: 10.0. - Of which: real GDP growth contribution: -5.9 (2013), -4.5 (2014), -2.9 (2015), -2.8 (2016), -3.0 (2017), -3.0 (2018), -2.9 (2019), -2.8 (2020); cumulative: -17.3. - Exchange rate depreciation contribution: 0.0 across years shown. - Other identified debt-creating flows: 1.2 (2013), 1.6 (2014), 1.5 (2015), 1.4 (2016), 0.7 (2017), 0.0 (2018–2020); cumulative: 2.1. - Other change in financial assets: same as other identified flows; net privatization proceeds and contingent liabilities: 0.0 across series. - Residual, including asset changes: 12.7 (2013), 3.8 (2014), 0.4 (2015), 1.6 (2016), 3.3 (2017), -1.5 (2018), -1.5 (2019), -1.5 (2020); cumulative: -1.0 for projection horizon. ### Composition, ratings, and market indicators - Sovereign spreads: EMBIG (bp) and 5Y CDS (bp) marked as N/A in the table; ratings listed as Moody's Aaa, S&P's AAA, Fitch AAA (foreign and local). - Sovereign spreads noted alongside long-term bond spread over U.S. bonds (EMBIG). - Public sector defined as central government for the DSA. ### Debt dynamics interpretation - Debt declined from 103.3 (2014) to 99.3 (2015) largely due to negative identified debt-creating flows and favorable automatic debt dynamics reflecting strong real GDP growth contributions in earlier years. - Projected increases in effective interest rate from 0.0 (2015) to 5.4 (2020) raise the real interest rate contribution to debt dynamics (real interest rate contribution rises to 1.9 in 2020). - Residuals (including asset changes and interest revenues) are material in some years, e.g., 12.7 (2013) and 3.8 (2014), and then become negative in projection years (-1.5 annual from 2018 onward). ### Risks, scenarios, and buffers - The DSA highlights sensitivity to real GDP growth, real interest rate, and other identified debt-creating flows; scenario note 9/ indicates assumption that key variables remain at last projection year levels for alternate scenario. - Implicit fiscal buffer: primary (noninterest) revenue well above primary (noninterest) expenditure in cumulative terms over projections (128.0 vs. 119.4 cumulative), contributing to primary surpluses overall. ### Macroeconomic context, policy stances, and implications - Real GDP growth outlook: staff project GDP growth to come in at 2–4% in 2015; potential growth rate estimated at around 2–4% in the medium term. - Inflation: MAS Core Inflation and CPI-All Items Inflation averaged 0.8% and −0.4% in Jan–May 2015, respectively; projected for 2015 at 0.5–1.5% (MAS Core) and −0.5–0.5% (CPI-All Items). - Monetary policy: MAS reduced the slope of the S$NEER policy band in January 2015 but kept an appreciating bias; policy stance was maintained in April 2015 consistent with medium-term price stability and activity close to potential. - External and financial risks: exposure to external shocks (China slowdown, Eurozone volatility, uncertain Fed rate normalization) noted as potential headwinds to growth and inflation; deep and broad financial markets and S$NEER policy band are cited as mitigants. ### Policy recommendations and authorities' stance - Fiscal policy: authorities have been responsive to short-term fluctuations while ensuring medium-term consistency and sustainability; primary balances and revenue-expenditure composition in projections support debt-reducing dynamics. - Structural policy: authorities committed to policies facilitating transition toward more skill-intensive, productivity-driven growth to support medium-to-long-term sustainable and inclusive growth. - Monetary policy: continuation of managed exchange rate framework with calibrated adjustments (reducing slope but maintaining modest appreciation bias) to balance inflation and growth considerations and to absorb external currency fluctuations. *Source: IMF staff.* ### 4.1 The Singapore economy has been undergoing important structural changes ### The Singapore economy has been undergoing important structural changes ### Structural reforms and incentives - Since restructuring initiatives began in 2010 following the Economic Strategies Committee (ESC) report, broad incentive structures have been put in place to help firms reduce reliance on labour in favour of more skill, technology and capital-intensive techniques. - Budget 2015 recalibrated some incentives and support measures to help firms cope with the short-term costs of restructuring while sustaining efforts to improve productivity. - The Net Investment Returns (NIR) framework provides a steady and sustainable stream of revenue and ensures investment returns on reserves are spent in a sustainable manner to benefit both current and future generations. ### Skills and workforce development - Budget 2015 shifted the government’s approach by explicitly focusing on enhancing the stock of human capital and ensuring workforce capabilities are progressively raised and attuned to future employer needs in each industry. - SkillsFuture is a national movement to develop the skills of the future and help every Singaporean maximise his or her potential through working life. - New initiatives to encourage lifelong learning include: - credits for work-skills related courses; - awards and fellowships to deepen skills and develop mastery in niche areas; - enhanced training support for mid-career workers; - stronger industry collaboration. - These initiatives are being developed in collaboration with industry, unions and training institutes for all key sectors. ### Social safety nets and income support - The Silver Support Scheme was introduced in Budget 2015 to provide an income supplement for the bottom 30% of elderly Singaporeans based on their lifetime income, extent of family support and housing type. - The Silver Support Scheme complements Workfare, housing grants, GST Vouchers, Community Health Assist Scheme (CHAS), ComCare, and other government subsidies in healthcare and other areas. - Outside of Silver Support, an individual retiree in the bottom 30% receives on average about $640 a month today from the government in subsidies and transfers. - The initiatives implemented over the past five years together with further steps in Budget 2015 amount to a major programme to support lower- and middle-income Singaporeans. - Tight labour market conditions have benefited lower-income households: - Real household incomes from work for the lowest 30% of households grew in the range of 3.2–3.9% per annum in 2009–14, as compared to 0.6–2.6% in 2004–09, per household member. ### Fiscal framework and public finances - Singapore’s fiscal balances are presented in line with rules enshrined in the Constitution and decided upon by the Parliament—the fiscal rules allow the government to spend only the revenue it earns during its current term. - Detailed revenue and expenditure components are available in published Budget documents; general government finance data that follows the GFSM format is made available in the Yearbook of Statistics published by the Department of Statistics. - The Ministry of Finance publishes the fiscal impulse as part of the Budget documents to indicate the macro-economic impact of the Budget based on a commonly accepted methodology. - A major source of difference between fiscal balances under the Constitution and the GFSM is the treatment of proceeds from land sales: - The Overall Budget Balance excludes proceeds derived from the sale of land, as these are not available for spending during the current term of Government. - Under the Constitution, state land is protected as reserves accumulated before the current term of Government (“Past Reserves”) and the sale of land is a transformation of a land asset into a financial asset. - The Singapore government does not have any net debt and does not have any external debt. - Any primary deficit is financed by Net Investment Return Contributions and not debt. - Singapore Government Securities (SGS) are issued to develop Singapore’s debt markets; non-tradable Special Singapore Government Securities (SSGS) are issued solely to the CPF Board to provide a fully-guaranteed investment class for its funds. - All proceeds of securities issued by the government are invested; the Constitution and the Government Securities Act prohibit the government from spending monies raised from SGS and SSGS. ### CPF reforms and retirement adequacy - Recent CPF changes include: - raising the monthly salary ceiling for CPF contributions from $5,000 to $6,000 for all workers; - higher CPF contribution rates for older workers aged 50–65, with workers aged 50−55 enjoying the same level of contribution rates as their younger counterparts; - an additional 1% extra interest on the first $30,000 of CPF balances for those aged 55 and above. - The additional 1% extra interest will allow elderly members to enjoy up to 6% per year on their Special, Medisave, and Retirement Accounts (SMRA) savings. - These changes will take effect from 1 January 2016. - Among the cohort of active CPF members turning 55 in 2020, about 7 in 10 are expected to be able to accumulate enough CPF savings to meet their Basic Retirement Sum. - The CPF scheme, together with various housing grants, facilitates accumulation of housing assets; retirees can monetise housing assets to supplement retirement income if necessary. - Progress has been made in promoting monetisation options, with recent enhancements to the Lease Buyback Scheme (LBS): - On 1 April 2015, the LBS was extended to four-room Housing and Development Board (HDB) flats, covering 75% of elderly HDB households. - The qualifying income ceiling was increased from $3,000 to $10,000. - Households were given more flexibility in varying the length of lease to retain. - Over April–May 2015, 450 new households applied for the LBS, almost half of the 965 households that participated in the scheme since it was launched in 2009. - CPF Advisory Panel recommendations announced in February 2015 and accepted by the Government include: - choices of different payout levels and retirement sums; - flexibility to defer the payout start age to enjoy higher payouts; - allowance for a lump sum withdrawal of part of a member’s CPF savings at retirement; - lowering the sum CPF members need to set aside before transferring savings to their spouses’ CPF Special/Retirement account; - introduction of a guided one-to-one retirement planning service by the CPF Board. - Further recommendations expected later in the year will focus on provisions enabling CPF members more flexibility to seek higher returns through private investment plans and an option for members who prefer CPF payouts that are initially lower but rise with time. ### Financial sector developments - The authorities welcome the Staff’s acknowledgement of Singapore’s strong regulatory and supervisory standards. - Singapore’s financial system remains resilient amid volatility in global financial markets. - Foreign currency liquidity risk in the banking system has declined. - Macro-prudential policies have contributed to moderation in credit growth and modest and gradual price adjustments in the property market. - Debt levels in corporate and household sectors remain elevated, but balance sheets are strong and MAS stress tests indicate debt servicing remains manageable in the event of external shocks. - Enhanced rules on unsecured credit and credit cards have been implemented to help individuals avoid falling deep into debt. - Authorities will continue to maintain prudent lending standards, monitor developments in credit and asset markets, and adjust macro-prudential tools as necessary. ### Final remarks and outlook - The external economic environment is expected to be generally supportive of modest growth in the Singapore economy for the rest of the year. - The authorities will continue to carefully assess external and domestic developments and their impact on the economy and inflation, and will remain vigilant to risks. - The Singapore authorities expressed appreciation for the 2015 Article IV Consultation and agreed to the publication of the Staff Report and release of the Buff Statement at the same time. *Source: _cr15199 - 4.1 The Singapore economy has been undergoing important structural changes* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15199.pdf_