## 1. Transparency, Communication and the Conduct of Monetary Policy

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### Background and structural context
- Robust fundamentals: city state with a highly open economy diversified across manufacturing, trade, logistics, and financial and other services; global financial center with large fiscal and financial buffers and a very strong external position. The 2013 FSAP found Singapore’s regulation and supervision of the financial sector among the best globally.
- Political continuity: People’s Action Party consolidated power in the 2015 election, ensuring continuity amid a decade-long restructuring to a knowledge-based, labor-lean, and more inclusive economy.
- Restructuring constraints and headwinds:
  - Marked deceleration of actual and potential growth, constrained by an aging labor force and by tighter limits on foreign workers.
  - End of the commodities super cycle negatively affects oil extraction-related industries and private investment.
  - SME challenges from higher labor costs, competition from neighbors, and global trade slowdown.
  - External shocks: China’s bumpy transition and Brexit have notable direct and indirect effects.

### Recent macroeconomic developments
- Growth and output gap:
  - Real GDP growth: 1.8 percent in 2016Q1 (y/y), down from 2 percent in 2015 and 3.3 percent in 2014.
  - Output gap: small negative output gap; staff estimated output gap at –0.6 percent.
  - Near-term growth projections: 1.7 percent in 2016; 2.2 percent in 2017.
  - Medium-term growth projection: 2.6 percent over 2018–21.
  - Staff’s baseline conservatively estimates potential growth at about 2.5 percent over 2016–21.
- Sectoral details:
  - Production: 2015 manufacturing contracted by 5 percent; manufacturing contraction continued in 2016Q1 at a slower pace; construction expanded faster; services (about two-third of GDP) slowed further.
  - Expenditure: 2015 supported by private and public consumption and net exports; private investment negative; 2016Q1 supported by consumption and inventory accumulation while private investment remained a drag and net exports shrunk.
- Inflation and disinflation:
  - Headline inflation negative since November 2014.
  - MAS core inflation trended up since late 2015 and touched 1 percent in May 2016.
  - Drivers: lower energy, food and other commodity prices; lower premiums for car certificates of entitlement; softening in residential rental prices.
- Labor market and productivity:
  - Real wages continued to rise in 2015.
  - Unemployment rates: overall ~1.9 percent; resident unemployment ~2.8 percent.
  - Net employment generation slowed rapidly in 2015; resident net employment gains negligible in 2015.
  - Resident labor force participation reached a new high, supported largely by older workers.
  - Productivity: post-2011 economy-wide labor productivity dragged down by rising employment share of domestically-oriented sectors; staff finds evidence of growing skill mismatches. Pass-through of rising labor costs smaller than expected amid a negative output gap.
- Balance of Payments and financial flows:
  - Current account surplus: 19.8 percent of GDP in 2015, up by 2.3 percentage points of GDP from 2014.
  - Oil trade: oil trade deficit narrowed by 3.7 percentage points of GDP in 2015.
  - 2016Q1 CA surplus: 17.7 percent of GDP in 2016Q1, down by 3.7 percentage points of GDP compared to 2015Q1.
  - Portfolio flows: turned negative by about 15 percent of GDP in 2016Q1.
  - Deposit-taking corporations: took US$25 billion out of Singapore in 2016Q1; overall BOP recorded a deficit of more than US$6 billion.
  - Nonoil domestic export volumes remained weak through April 2016.

### External linkages: China and the United Kingdom
- Trade openness: gross trade in goods and services exceeded 300 percent of GDP in 2015.
- Exposures to China:
  - China is the single largest destination for goods exports; goods exports to China amounted to 16.3 percent of GDP in 2015.
  - Exports to China expanded at a compound annual growth rate of about 15 percent over the past two decades.
  - In gross exports, China accounted for about 14 percent in 2015 (up from 2011–14 average of 11.5 percent).
  - Staff spillover estimate: a 1 percent one-off slowdown in China’s GDP would impact Singapore’s GDP by –0.1 to –0.5 percentage points in the first year, with the highest impact when financial volatility spikes.
- Exposures to the United Kingdom and EU:
  - Services trade with the United Kingdom similar in magnitude as with China; goods trade with the United Kingdom much smaller.
  - Brexit: direct impact expected limited, but large indirect effects possible via exposure to the EU and global financial market volatility.

### Macro-financial and financial cycle developments
- Financial intermediation: Singapore intermediates credit globally; post-GFC loans to China and other emerging Asia expanded.
- Deleveraging signs:
  - Financial cycle has turned and deleveraging has begun, particularly in bank lending to nonresidents.
  - Overall growth of credit to nonbanks became negative (first since 2010).
  - Credit to resident nonbanks remained positive and projected to grow about 4.5 percent by end-2016.
- Property market:
  - Macroprudential measures and supply-side measures contributed to cooling private residential property prices—by 2016Q2 nearly 9½ percent below the 2013Q3 peak.
  - Commercial and industrial prices, except office space, declined from peaks by between 2–5 percent across segments.
- Banking sector exposures and asset quality:
  - Three local banks boast stable and high capital and profitability ratios.
  - Concerns: uptick in still-low NPLs; O&G exposures about 4–6 percent of total nonbank loans; exposures to other commodities and Greater China region 12–34 percent of total loans.
  - Domestic banks’ exposure to Greater China remained sizable at close to 25 percent of total loans in 2015.
  - Credit risk on Greater China loans deemed manageable because exposures are primarily short-term, self-liquidating collateralized trade finance to main state banks and larger borrowers.
  - Banks restructuring some O&G loans to more affected oil services firms.

### Outlook and risks
- Near-term forecasts and inflation:
  - Growth: 1.7 percent in 2016; 2.2 percent in 2017.
  - Headline and core inflation expected at –0.3 and 0.8 percent in 2016, respectively, before rising to 1.1 and 1.4 percent respectively in 2017.
- Medium-term projections:
  - Growth projected at 2.6 percent over 2018–21.
  - Potential growth: about 2.5 percent over 2016–21 (staff baseline).
- Key downside risks (tilted to the downside):
  - Weaker-than-expected global growth, including a significant downshift in China and other large emerging economies.
  - Brexit-related fallout and tighter or more volatile global financial conditions could lead to sharp asset price declines, a rise in credit spreads, and a surge in the U.S. dollar.
  - Domestic risks: delays in productivity gains, insufficient investment in domestically-oriented sectors, and persistent disinflationary pressures.
- Authorities’ near-term views:
  - Preparedness for increased market volatility from Brexit; markets continued to function orderly and authorities stand ready to provide additional liquidity.
  - Authorities confident they can manage increased volatility associated with U.S. monetary policy normalization given ample policy buffers and exchange rate flexibility.

### Staff risk scenarios and model (SGPMOD)
- SGPMOD: a quarterly, multi-region small calibrated model of the Singapore economy to examine MAS policy, tracking NEER components and using UIP vis-à-vis the U.S.
- Scenarios analyzed:
  - (1) sudden downward revision in China’s potential output growth;
  - (2) China scenario plus additional emerging market turmoil (including a 1 percentage point Singapore country risk premium shock in 2016);
  - (3) Brexit through financial market disruption and reduced growth in the UK and EU (onset 2016Q3).
- Key model implications:
  - MAS can ease target NEER to speed recovery but cannot prevent permanent declines tied to lower potential output abroad.
  - Under Brexit-like turmoil, MAS easing of NEER reduces depth and duration of Singapore GDP trough relative to no-action baseline; policy trade-offs complicated by UIP and country risk premium shocks.

### Staff assessment of vulnerabilities (summary)
- External position:
  - Staff assesses Singapore’s external position in 2015 as substantially stronger than consistent with medium-term fundamentals and desirable policies—by 3–9 percent of GDP.
  - NIIP: 210 percent of GDP in 2015, up by 13 percentage points from 2014.
  - Official reserves: 87 percent of GDP in 2015 (equivalent to 26 percent of short-term external debt); reserves appear adequate.
- Financial sector resilience and vulnerabilities:
  - Banking sector well capitalized; loan loss provisioning above 100 percent of unsecured NPLs.
  - Household leverage: households generally prudent; cash and deposits exceed total household debt; 5–10 percent of households have DSR exceeding 60 percent in banks’ housing loan portfolio.
  - Corporate sector: nonfinancial corporate leverage high regionally; firms hold ample cash; NPLs in the SME sector rising.
  - Stress tests: households generally resilient to rapid interest rate increases; tail scenarios could raise debt-at-risk substantially.
- Public debt and assets:
  - Gross public debt about 100 percent of GDP; gross financial assets about 200 percent of GDP; Temasek assets about 70 percent of GDP; CPF-related internal debt about 65 percent of GDP.
  - Staff projects gross public debt to decline to below 90 percent of GDP by 2021 under baseline.

### Key policy recommendations (staff appraisal and priorities)
- Monetary policy:
  - April 2016 slight reduction of NEER slope to zero was appropriate given inflation below target.
  - MAS should remain vigilant to downside risks (China currency volatility, Brexit, higher U.S. interest rates and U.S. dollar appreciation) and improve monetary policy communication.
  - Staff sees no need for further near-term easing beyond the April 2016 move.
  - MAS communication — recommended to:
    - Clarify future monetary policy path by contrasting past exchange rate path forecasts with actual outcomes and explain how deviations affect current stance and expected inflation path.
    - Better communicate inflation prospects, potentially via interpretation of inflation developments in monthly press releases to prime market participants.
    - Caution: such communication changes may cause short-run instability but dissipate with MAS credibility.
- Fiscal policy:
  - Staff view: increase in government spending (Budget 2016) is timely given rising near-term risks to growth.
  - Staff estimated Budget 2016 injected a fiscal impulse of 0.8 percent of GDP (staff methodology); staff recommend more fiscal stimulus would be useful to boost domestic demand, close the output gap (currently –0.6 percent), and insure against downside risks.
  - Recommended fiscal path to close output gap: provide an additional annual impulse of 0.4 percentage points of GDP relative to baseline for 3 years; provide more support if growth surprises on the downside.
  - Target additional measures to promote medium-term restructuring: tax rebates and wage credits for new and expanding businesses in dynamic sectors; more public infrastructure investment (including health care and transport); higher social spending.
  - Consider attuning fiscal rule to the business cycle and incorporate all government investment income to improve transparency.
- Financial sector and macroprudential policy:
  - Maintain structural macroprudential measures to prevent buildup of excessive leverage and systemic risks.
  - Consider selective relaxation of cyclical measures once systemic risks dissipate or if market uncertainties cause sharper-than-warranted price corrections.
  - Banks should monitor exposures to O&G and Greater China closely and adjust provisioning as appropriate.
  - Continue stress testing and supervisory vigilance; strengthen recovery and resolution framework and cross-border coordination.
- Structural and innovation agenda:
  - Boost public and private R&D (R&D about 2¼ percent of GDP in 2014); further nurture R&D ecosystem, including in financial sector.
  - Programs to reduce labor market frictions and improve skills matching; lifelong learning to lower skill mismatches.
  - Maintain targeted incentives for productivity improvement while avoiding excessive generalized support that could impede creative destruction.
  - Expand social insurance and safety nets (including unemployment insurance) to reduce precautionary saving and moderate current account surplus.

*Source: IMF staff report “SINGAPORE” (content unit: _cr16263 - 1. Transparency, Communication and the Conduct of Monetary Policy).*

### 1. Transparency, Communication and the Conduct of Monetary Policy  _______________________  26

### 1. Transparency, Communication and the Conduct of Monetary Policy

### Background
- Robust Fundamentals: Singapore is a city state with a highly open economy, diversified across manufacturing, trade, logistics, and financial and other services; it is a global financial center with large fiscal and financial buffers and a very strong external position. The 2013 FSAP found Singapore’s regulation and supervision of the financial sector among the best globally.
- Domestic Restructuring and Growth: The People’s Action Party consolidated power in the 2015 election, ensuring continuity at the half-way point of the decade-long restructuring to a knowledge-based, labor-lean, and more inclusive economy. Restructuring is taking place amid a marked deceleration of actual and potential growth, constrained by an aging labor force and by tighter limits on foreign workers. Transition costs have slowed efficiency gains. The end of the commodities super cycle negatively affects oil extraction-related industries and private investment, partially offsetting lower energy prices’ benefits to consumption. The SME sector faces challenges from higher labor costs, competition from neighbors, and the global trade slowdown. China’s bumpy transition and Brexit have notable direct and indirect effects (Figure 7, Appendix I).
- Past Fund Advice: Macroeconomic policies in 2015 were broadly in line with Fund advice. The MAS began an easing of monetary policy in January 2015 in response to a significant downward adjustment in Singapore’s inflation outlook starting in late 2014. The 2015/16 budget raised spending to strengthen infrastructure and social insurance and safety nets and support medium-term productivity gains. Authorities maintain macroprudential policies aimed at reducing risks from the property market.

### Recent Economic Developments
- Growth Slowdown: Real GDP grew by 1.8 percent in the first quarter of 2016 (year-on-year), down from 2 percent in 2015 and 3.3 percent in 2014, resulting in a small negative output gap. The annual average growth rate in the six years (2010–15) since the Global Financial Crisis (GFC) was lower by nearly 1.5 percentage points relative to the six-year period preceding the crisis (2002–07).
- Sectoral details:
  - Production side: 2015 deceleration due to a 5 percent contraction in the manufacturing sector, on weakness in electronics and marine and offshore engineering. In 2016Q1 manufacturing contraction continued at a slower pace; construction expanded at a faster pace; services (about two-third of GDP) slowed further.
  - Expenditure side: In 2015, strong contributions from private and public consumption (partly owing to measures related to the 50th anniversary of Singapore’s independence) and from net exports; partly offset by negative contributions from private investment and declining inventories. In 2016Q1 growth was supported by consumption and inventory accumulation, while private investment remained a drag and net exports shrunk.

### Disinflation
- Headline inflation has been negative since November 2014.
- MAS’ core inflation trended up since late 2015 and touched one percent in May 2016.
- Disinflation drivers: lower energy, food and other commodity prices; lower premiums for car certificates of entitlement; softening in residential rental prices.
- Recent data indicate inflation may be bottoming out, despite some volatility, along with international energy prices.

### The Labor Market and Productivity
- Labor market softness: Real wages continued to rise in 2015. Overall and resident unemployment rates remained broadly stable around 1.9 percent and 2.8 percent, respectively.
- Employment dynamics: Net employment generation slowed rapidly in 2015. Following sharp increases in 2013 and 2014, net employment gains for Singapore residents were negligible in 2015. Incidence of redundancy has risen in recent quarters.
- Labor supply: Residents’ labor force participation rate reached a new high, supported largely by older workers.
- Productivity: Post 2011, economy-wide labor productivity has been dragged down by the rising employment share of domestically-oriented sectors. Staff analysis finds evidence of growing skill mismatches contributing to the slowdown in labor productivity (Appendix III). Pass-through of rising labor costs has been smaller than expected amid a negative output gap and uncertain outlook.

### Balance of Payments (BOP)
- Current account surplus: Reached 19.8 percent of GDP in 2015, up by 2.3 percentage points of GDP from 2014.
- Oil trade: Decline in global oil prices caused the oil trade deficit to narrow by 3.7 percentage points of GDP.
- 2016Q1 developments: CA surplus narrowed to 17.7 percent of GDP in 2016Q1, down by 3.7 percentage points of GDP compared to 2015Q1, despite a further improvement in the terms of trade of about 4 percent (y/y).
- Financial flows: Portfolio flows turned negative by about 15 percent of GDP in 2016Q1, the largest since the GFC. Deposit-taking corporations took US$25 billion out of Singapore during the quarter, resulting in the overall BOP recording a deficit of more than US$6 billion.
- Nonoil domestic export volumes remained weak through April 2016.

### Linkages with China and the United Kingdom
- Trade openness: Gross trade in goods and services exceeded 300 percent of GDP in 2015.
- Exposures to China: Mainly through direct and indirect goods trade. Singapore ran a trade surplus with China in 2015. In value added terms, Singapore has a stronger linkage with China than with the United Kingdom.
- Services and goods with U.K.: Services trade with the United Kingdom is of similar magnitude as with China (Singapore ran a surplus in 2014), but goods trade with the United Kingdom is much smaller.
- FDI: Europe plays a bigger role than China in inward FDI. Half of FDI from the United Kingdom went to the financial sector, one-fifth to wholesale and retail trade, and nearly one-fifth to manufacturing. China accounted for nearly one-fifth of stock of Singapore’s outward FDI; both the United Kingdom and the EU (excluding the United Kingdom) individually accounted for less than half of China’s share.
- Spillover estimates: Staff analysis shows that a 1 percent one-off slowdown in China’s GDP would impact Singapore’s GDP by –0.1 to –0.5 percentage points in the first year, with the highest impact seen when financial volatility spikes.
- Brexit: The direct impact of Brexit is expected to be limited; however, there could be large indirect effects through exposure to the EU and global financial market volatility.

### Macro-Financial Developments
- International intermediation: Singapore intermediates credit globally. Pre-GFC, banks channeled savings from emerging Asia to Europe and developed Asia; post-crisis flows reversed with loans to China and elsewhere in emerging Asia expanding.
- Post-GFC environment: Low interest rates triggered domestic credit and property booms, increasing household and corporate leverage.
- Market performance: The Singapore dollar and the stock market came under pressure in 2015 and early-2016 but partly recovered. Financial markets recovered from initial reactions to the Brexit referendum; in the week following the referendum, the Singapore dollar NEER was flat and the stock market was up by 1.7 percent.

### The Financial Cycle
- Deleveraging: The financial cycle has turned and deleveraging has begun, particularly in bank lending to nonresidents. Overall growth of credit to nonbanks became negative, a first since 2010 (Table 3).
- Property market: Macroprudential measures (TDSR framework and stamp duties) and supply-side measures contributed to cooling of private residential property prices (as of 2016Q2, nearly 9½ percent below the 2013Q3 peak). Commercial and industrial prices, except for office space, declined from peaks by between 2–5 percent across segments.
- Credit to resident nonbanks: Remained positive and is projected to grow about 4.5 percent by end-2016, in line with medium-term nominal GDP growth.

*Source: IMF staff report “SINGAPORE” (content unit: _cr16263 - 1. Transparency, Communication and the Conduct of Monetary Policy).*

### 11.      The Banks. The three local banks boast stable and high capital and profitability ratios. But

### _cr16263 - 11.      The Banks. The three local banks boast stable and high capital and profitability ratios. But

### The Banks
- The three local banks have stable and high capital and profitability ratios.
- Recent concerns:
  - An uptick in still-low nonperforming loans (NPLs).
  - Significant exposures to the oil and gas (O&G) sector: 4–6 percent of total nonbank loans.
  - Exposures to other commodities finance and to the Greater China region: 12–34 percent of total loans.
  - Domestic banks’ exposure to Greater China declined slightly in 2015 but remained sizable at close to 25 percent of total loans.
- Credit-risk assessment:
  - Credit risk on Greater China loans is deemed manageable because exposures are primarily to the main state banks (as short-term, self-liquidating collateralized trade finance loans) and larger, more creditworthy borrowers.
- Bank actions:
  - Banks are restructuring some O&G loans to the more affected oil services firms.

### Outlook and Risks
- Near-Term Outlook:
  - Growth projected to slow to 1.7 percent in 2016.
  - Output gap estimated at –0.6 percent.
  - Private investment held back by uncertain outlook; companies report little appetite to hire and bank credit remains subdued.
  - Offsetting factors: lower energy prices should support private consumption; external demand should gradually recover in the second half of 2016.
  - Growth projected to improve to 2.2 percent in 2017 on the back of recovering private investment.
  - Staff’s baseline incorporates preliminary assessment of the fallout from the Brexit referendum.
  - Headline and core inflation expected at –0.3 and 0.8 percent in 2016, respectively, before rising to 1.1 and 1.4 percent respectively in 2017.
- Medium-Term Outlook:
  - Growth projected at 2.6 percent over 2018–21.
  - Staff’s baseline conservatively estimates potential growth at about 2.5 percent over 2016–21.
  - Drivers: structural reforms to help productivity recover, large public investment projects related to infrastructure and age-related facilities, and recovery in private investment; private consumption supported by an aging population.
  - Constraints: aging population and tight controls on foreign workers reduce labor force growth; uncertainties about global developments and turning of the credit cycle may dampen private investment recovery.
- Risks (tilted to the downside):
  - Weaker-than-expected global growth, including a significant downshift in China and other large emerging economies.
  - Brexit-related fallout and tighter or more volatile global financial conditions could lead to sharp asset price declines, a rise in credit spreads, and a surge in the U.S. dollar.
  - These risks could disrupt property price corrections and orderly deleveraging in household and corporate sectors.
  - Domestic risks: delays in productivity gains, insufficient investment in domestically-oriented sectors, and persistent disinflationary pressures.
- Authorities’ near-term views:
  - Risks related to growth prospects in advanced economies and key emerging markets.
  - Continued recovery in the United States, Europe, and Japan would support externally-oriented sectors in 2016 but may be offset by slowdown in China, Brexit-related uncertainties, tighter financial conditions, potential capital reversals associated with U.S. interest rate normalization, corporate realignments in global information technology, and lingering weakness in oil-related transport engineering.
  - Authorities indicated preparedness for increased market volatility from Brexit; markets continued to function orderly and authorities stand ready to provide additional liquidity.
  - Domestic demand expected to be bolstered by private and public consumption and public investment in transport infrastructure.
  - Authorities confident they can manage increased volatility associated with U.S. monetary policy normalization given ample policy buffers and exchange rate flexibility.

### Policy Discussions — Monetary Policy
- Mandate and framework:
  - Primary objective: maintain price stability conducive to sustainable economic growth (MAS Act).
  - MAS operates a basket, band, crawl (BBC) framework; trade-weighted nominal effective exchange rate (NEER) is the policy instrument.
  - Width of the band currently estimated at 2 percent.
  - The position of the band is adjusted to ensure NEER consistency with development of prices in the year ahead.
  - A long-run real appreciation of the effective exchange rate is built in, sustained by continual increases in productivity and competitiveness and high national savings.
- Recent monetary easing:
  - In April 2016, MAS reduced the slope of appreciation of the NEER from 0.25 percent to zero while maintaining the 2 percent band (as estimated by staff).
  - The April move was prompted by MAS’ expectation of medium-term core inflation falling below 2 percent and continues an easing cycle that began in January 2015.
- Near-term policy assessment:
  - Staff sees no need for further easing in the near term; the April move is sufficient to achieve the MAS inflation objective.
  - Rationale: growth below 2 percent, inflationary pressures not present, labor market pressures receding, unit labor costs rising by around 3 percent per annum, and relative prices, including for oil, stabilizing globally.
  - Inflation on track to reach a stable medium-term level of under 2 percent by end-2017; a downward re-centering of the band likely not required in October.
- Responding to near-term risks:
  - BBC framework well adapted to exogenous shocks; NEER movements within the band absorb minor temporary shocks.
  - Fiscal policy is first line of defense for sustained, substantial shocks; monetary policy can be supportive via recalibration (re-centering and widening of band).
  - Reliance on expansionary monetary policy alone could negatively affect interest-sensitive sectors and increase current account surplus.
  - Appendix VI and Selected Issues Paper 16/264 provide quantitative analysis using the SGPMOD model for scenarios including a large downward revision in China growth and Brexit effects.
  - MAS should remain vigilant and prepared to continue adjustments given downside risk skew.
- MAS communication — staff recommendations:
  - Clarify the future monetary policy path by contrasting past forecasts of the exchange rate path with actual outcomes and explaining how deviations affect current monetary policy stance and expected inflation path.
  - Better communicate inflation prospects, potentially via interpretation of inflation developments in monthly press releases to prime market participants.
  - Caution: introduction of such communication changes may cause short-run instability though would dissipate in the long run given MAS credibility.
- Authorities’ views on policy and communication:
  - MAS sees April 2016 move as part of a justified sequence of policy moves over past 18 months tied to internal balance; not aimed at competitiveness absent relative productivity gains.
  - On communication, authorities prefer biannual forecasts and rationale for policy stance to preserve medium-term orientation and avoid short-term market focus; retain flexibility to issue “off-cycle” statements if needed.

### Policy Discussions — Fiscal Policy
- Fiscal framework:
  - Singapore’s fiscal policy is prudent and medium-term oriented, enshrined in constitutional guarantees.
  - Constitution mandates a balanced budget over the term of each government and requires enhanced political support to access “past reserves.”
  - Sustained overperformance on the conservative fiscal rule has allowed buildup of large fiscal reserves.
- A rising government size:
  - Government spending as a share of GDP has risen steadily in recent years; last two budgets increased operating and development spending nearly as much as the increase in spending in response to the GFC.
  - Drivers of increased spending include:
    - Means-tested, categorical programs to improve access to healthcare, provide means-tested retirement support, and increase progressivity of personal income tax.
    - Policies to improve access to education and quality and raise labor productivity, notably SkillsFuture covering on-the-job education and training expenses; programs to facilitate job transitions via wage subsidies and support for training and job matching.
    - Expenditure for economic development (transport, manpower, communications, trade and industry) is up by 1.1 percentage points of GDP in the last two years.
    - Modest increase in targeted business support: tax rebates, selected deferrals of hikes in foreign worker levies, financial support for working capital and employment.
  - The increase in government size aims to address healthcare and aging needs, boost productivity, and invest in infrastructure.
- Enhancing inclusion:
  - Over the past decade, real household income from work rose across all income groups; income inequality widened pre-GFC and remained elevated for a few years after GFC, but fiscal policies have softened some of the rise and the last two years saw some decline in inequality.
  - Improvements in wage equality between men and women for similar work have been registered; resident female labor force participation increased, particularly for those aged 25 years and older, aided by policies to supplement family care (e.g., child care, healthcare for elderly, certain levy concessions for foreign domestic workers).
  - Overall female labor force participation remains below the average for advanced economies.

*Source: Excerpt from IMF staff report text provided in the content unit.*

### 26.      The 2016 Budget and Medium-Term Fiscal Policy. The increase in government spending

### The 2016 Budget and Medium-Term Fiscal Policy. The increase in government spending

### 2016 Budget: Rationale and Recommended Stance
- Staff view: increase in government spending is timely given rising near-term risks to growth and appropriate given Singapore’s large saving-investment imbalance.
- Staff support for:
  - Existing programs to reduce inequality.
  - New, more targeted initiatives to help businesses boost investment and encourage innovation.
- Recent fiscal impulse:
  - Staff estimated the budget injected a fiscal impulse of 0.8 percent of GDP (Appendix VII).
  - Staff view: more fiscal stimulus would be useful to boost domestic demand, close the output gap, and insure against downside risks to growth.
  - More expansionary fiscal policy would also help lower the large external current account imbalance.
- Recommended fiscal path to close output gap:
  - Output gap currently: –0.6 percent.
  - Authorities should aim to close the output gap gradually over 3 years by providing an additional annual impulse of 0.4 percentage points of GDP relative to the baseline scenario.
  - Recommendation to provide even more fiscal support if growth surprises on the downside.
- Targeting of additional measures:
  - Align additional fiscal impulse with measures that promote medium-term restructuring but in a more accommodative setting than envisaged by the authorities.
  - Examples of supportive measures: further tax rebates and wage credits for new and expanding businesses in dynamic sectors; more public infrastructure investment (including in health care and transport services); and higher social spending.

### Fiscal Rule and Stabilization
- Description of fiscal rule:
  - Requirement: balanced budget over each term of government.
  - Feature: escape clause for rare catastrophic events (e.g., the GFC) permitting drawdown on past reserves upon government request and presidential approval.
- Strengths and limitations:
  - Strengths: simple to understand, builds accountability, instills commitment to long-term fiscal sustainability.
  - Limitation: provides limited flexibility for fiscal policy to contribute to macroeconomic stabilization—could create a cautionary bias and make fiscal policy tighter than warranted during early years of a government’s term.
  - Historical pattern: fiscal policy is countercyclical overall, but fiscal balance is larger during the first two years after elections (exception: 2001 recession).

### Strengthening the Fiscal Rule
- Recent constitutional amendment: includes up to half of the expected long-term real returns of Temasek in the revenue stream (provides welcome scope for fiscal policy action if needed).
- Suggested reforms:
  - Consider incorporating all of the government’s investment income to improve transparency.
  - Gear the rule toward the business cycle rather than the political cycle, consistent with best practice of basing fiscal policy on a structural budget balance rule (e.g., Chile).
  - Implementation would require amending the constitution.
- Operational requirement: government would need to carefully monitor the level of potential output and the output gap—assessed as feasible given Singapore’s data collection and analysis framework.

### Authorities’ Views on Fiscal Policy
- Policy priorities: fostering fiscal prudence, individual responsibility, preparing society for future challenges, and promoting solidarity.
- On the size of fiscal stimulus:
  - Drivers of medium-term spending increases: healthcare and other aging-related spending, and investment in infrastructure.
  - Government view: current fiscal impulse balances medium-term and short-term considerations; closing the small negative output gap entirely would be difficult and could risk distortions in economic restructuring.
  - Government has brought forward some multi-year infrastructure projects (e.g., construction of MRT lines) but is mindful not to spend purely for short-term stimulus without due consideration of need and future operating viability.
  - Government stands ready to act if necessary; any further fiscal support should support medium-term restructuring and follow careful diagnosis (supply- or demand-driven, or due to credit conditions).
- On the fiscal rule:
  - Authorities view the rule as simple and effective for accountability and long-term sustainability.
  - Use of past reserves is possible with presidential approval; past reserves are used for land-related expenditure and returns from financial reserves can supplement the budget.
  - Fiscal deficit spending is allowed in any given year and drawing on past reserves can be effected to deal with crises even when there is no fiscal deficit (example: 2009 GFC drawdown).

### Financial Sector Issues — De-leveraging and Credit
- Credit growth trends:
  - Overall credit growth has turned negative.
  - Loans to residents have continued to grow at around 3 percent.
  - Nonresident loans have contracted.
- Effect on indebtedness and private investment:
  - Moderation of credit growth has helped contain household and corporate indebtedness.
  - Regression results (staff): a 1 percentage point change in real credit growth has on average been associated with a 0.6–0.9 percentage point change in real private fixed investment growth (Appendix IV).
  - Deleveraging is positive for long-term financial stability but likely to hold back private investment.

### Banking Sector Resilience
- Recent performance:
  - Banking sector profitability has declined in recent quarters as NPLs have ticked up, though profitability remains healthy.
  - Banks remain well capitalized; loan loss provisioning for the entire banking system is at above 100 percent of unsecured NPLs.
  - Local banks’ asset quality remains healthier than that of the overall banking system (Appendix VIII).
- Near-term risks:
  - Downside risks from exposures to Greater China and O&G, and from implications of the Brexit referendum.
  - O&G exposures are about 4–6 percent of total nonbank loans; these exposures are well diversified and many O&G firms focus on integrated, downstream business and commodity trading.
  - Lending to China is concentrated among larger creditworthy borrowers.
- Policy stance:
  - Banks should continue to monitor these risks closely and adjust provisioning as appropriate.

### Real Estate and Macroprudential Measures
- Price and transaction developments:
  - Macroprudential policies have aided a measured ongoing decline in residential real estate prices, now broadly in line with the long-term trend.
  - Transactions have moderated, but well-located and well-priced projects still enjoy favorable take-up.
  - Cooling measures have moderated resale activity and prices in the public housing sector, improving affordability.
  - Large supply of new homes coming on stream could exert downward pressure on prices.
- Policy recommendations:
  - Maintain structural macroprudential measures to prevent buildup of excessive leverage and systemic risks.
  - Consider relaxation of cyclical measures once systemic risks dissipate or if market uncertainties cause sharper-than-warranted price corrections.

### Household Leverage
- Household balance sheets:
  - Households are generally prudent: household cash and deposits exceed total household debt.
  - In banks’ outstanding housing loans portfolio, only about 5 to 10 percent of households have a debt service-to-income ratio exceeding 60 percent.
- Interest rate risk:
  - Risks from interest rate increases remain pertinent for selected households.
  - Stress tests indicate additional debt service burdens would generally be manageable even in a scenario of rapid interest rate increases above historical norms.
- Protective features and policies:
  - Banks’ exposures appear limited because (i) most properties are owner-occupied; (ii) tight loan-to-value limits require high down payments; and (iii) the share of borrowers in the lower TDSR band (i.e., less than 40 percent) has increased.
  - The Total Debt Service Ratio (TDSR) framework introduced in 2013 limits debt repayments to 60 percent of gross monthly income and applies to loans for purchase of all types of property, loans secured on property, and refinancing of such loans.
  - Staff welcomes the phasing in of a limit on unsecured credit to households from June 2015.
  - Continued efforts recommended to assist overextended households (debt restructuring, financial education).

### Corporate Leverage
- Trends and metrics:
  - Lending to corporates has started to moderate; corporate debt-to-GDP ratio has declined.
  - Nonfinancial corporate leverage (debt-to-equity ratio) is one of the highest in the region; larger firms tend to rely more on debt than equity.
  - Firms hold ample cash balances; net debt profile remains relatively benign.
  - Return on assets has weakened, especially in trade-related sectors.
  - Business cessations have increased; NPLs in the SME sector are on the rise.
- Resilience and risks:
  - Most publicly-listed companies maintain high interest coverage ratios and appear able to withstand modest interest rate and earnings shocks.
  - Debt-at-risk could rise considerably in a downside tail-risk scenario (Appendix IX).
- Supervisory actions:
  - MAS is closely monitoring financial sector risks related to corporates via stress tests of listed companies and surveys of banks’ exposure to SMEs.
  - MAS has regulatory safeguards to ensure banking system stability, closer supervision of banks, and maintenance of underwriting standards.
  - Continued monitoring of corporate debt developments is warranted amid weakened earnings and uncertain outlook.

### Regulation, Supervision, and International Standards
- Prudential standards:
  - Singapore has applied stringent minimum capital requirements above Basel III norms since January 2013.
  - Countercyclical and capital conservation buffers are being phased in per Basel timelines starting from January 2016.
  - MAS will consult on implementing the local net stable funding ratio by January 1, 2018.
- Liquidity and disclosure:
  - Phasing in since January 2015 of Basel III Liquidity Coverage Ratio (LCR) requirements for the three local banks, including reporting LCRs for foreign currencies.
  - LCRs, from 2016, apply to domestic systemically important foreign banks’ operations in Singapore.
  - Public disclosure of LCRs took effect on January 1, 2016.
  - In Q1 2016, average Singapore dollar and all-currency liquidity ratios were above the regulatory minimum of 100 percent and 70 percent, respectively, for all three local banks.
- Legislative enhancements:
  - Banking (Amendment) Bill, passed in February 2016, aims at enhancing prudential safeguards, corporate governance, and risk management controls, including requiring foreign banks deemed systemically important to subsidiarize retail operations in Singapore.

### FSAP, AML/CFT, and Supervisory Developments
- FSAP recommendations:
  - Important progress made on 2013 FSAP recommendations; Singapore Exchange has enhanced its recovery plan.
  - Staff welcomes planned strengthening of the recovery and resolution framework and encourages greater cross-border coordination for global bank resolutions.
- AML/CFT framework:
  - Continued efforts acknowledged to align AML/CFT framework with international standards and cooperate on tax matters.
  - 2016 FATF evaluation recommendations provide a basis to strengthen implementation, particularly regarding transparency of companies and trusts and AML/CFT supervision.
  - MAS created dedicated departments effective August 1, 2016 to combat money laundering and strengthen enforcement; intended to streamline responsibilities and monitor AML-related risks via onsite supervision.

### Authorities’ Views on Financial Sector Risks and Policy Responses
- Overall assessment: authorities consider the financial system resilient to the turn in the financial cycle and able to withstand near-term risks.
- Banks:
  - Authorities acknowledged rise in credit risks but noted the system remains well-capitalized with adequate provisions and liquid assets well above LCR requirements; primarily funded by nonbank deposits.
  - Near-term impact of Brexit assessed as contained; MAS stands ready to provide liquidity support if needed.
  - Industry-wide stress tests indicate resilience under various severe stress scenarios.
- Households:
  - Authorities view household balance sheets as healthy in aggregate but recognize emerging pockets of risk.
  - Macroprudential measures have slowed household leverage growth; MAS will continue to monitor leverage and encourage financial prudence through assistance measures and financial education.
- Corporates:
  - Authorities note weakened earnings but generally resilient corporate balance sheets; leverage has started to stabilize.
  - MAS has included a countercyclical capital buffer to curb excessive credit growth.
- Macroprudential policies:
  - Authorities state macroprudential policies have helped a measured decline in property prices; measures are targeted and contain structural and cyclical components.
  - Authorities remain vigilant for signs of renewed froth and stand ready to recalibrate macroprudential policies when appropriate.

*Source: IMF staff report text (The 2016 Budget and Medium-Term Fiscal Policy; Financial Sector Issues; Authorities’ Views) contained in the provided PDF content.*

### 40.      Innovation-Based Growth. The restructuring aims to spur knowledge-based growth, raise

### Innovation-Based Growth

### Innovation objectives and human capital
- The restructuring aims to spur knowledge-based growth, raise productivity, and turn Singapore into a global innovation hub.
- A high-level Committee on the Future Economy has been convened and will announce its priorities by end-2016.
- Policies that promote innovation, including higher levels of R&D spending, are appropriate for advanced economies such as Singapore that are at the knowledge frontier.
- Equally important are policies to promote human capital accumulation, especially lifelong learning that facilitates skill updating, lowers skill mismatches and helps reduce labor market frictions.
- Empirical evidence suggests that research intensity and human capital formation have both had a significant impact on raising living standards in Singapore over the years, though by somewhat less than in other advanced economies (Appendix IV).

### R&D spending: status and implications
- R&D spending has risen in Singapore over the past two decades to about 2¼ percent of GDP in 2014.
- Cross-country evidence suggests that in countries like Singapore that are close to the global technology frontier, increased competition, research-oriented education, and targeted support—particularly aimed at newer firms and not necessarily smaller firms—could help boost long-term GDP.
- Staff welcomes the emphasis on productivity enhancement and the more targeted approach adopted in the last budget.
- Recommendation: Further nurture the R&D ecosystem to aid discovery and launch of new goods and services, including in the financial sector (Appendix IX).

### Macroeconomic policy stance and restructuring
- An accommodative macroeconomic environment of low real interest rates and fiscal support for new, innovative firms can help speed up innovation and economic growth.
- Caution: Avoid excessive or generalized support that could disrupt creative destruction and prevent dissolution of nonviable firms.
- Policy package to support innovation-based growth:
  - An additional, well-targeted boost to R&D spending in Singapore’s public and private sectors.
  - Programs to reduce labor market frictions and improve skills matching, especially for higher value-added jobs.
  - Smoothing the business cycle to boost private investment in R&D and innovation, particularly for firms/sectors reliant on external finance and/or intangible capital (see IMF, Fiscal Monitor, Chapter 2, April 2016).
- Staff view: Maintaining more accommodative macroeconomic policies would facilitate restructuring by reducing uncertainty and helping to boost private investment, including in R&D and innovation.

### Authorities’ approach and views
- As Singapore restructures to a labor-lean economy, the authorities adopted a more targeted approach to incentives for productivity improvements aimed at businesses while maintaining existing social insurance and safety net programs for households.
- The authorities expect this approach to continue to facilitate technological upgrading, including through inducing firms to restructure.
- The authorities emphasize the need to continue to promote supportive economic growth conditions.

### External sector implications and key statistics
- Staff assesses Singapore’s external position to be substantially stronger than consistent with medium-term fundamentals and desirable policies (Appendix X).
- Current account dynamics:
  - The CA surplus narrowed by 5.4 percentage points of GDP during 2004–14.
  - The CA surplus rose by 2.3 percentage points in 2015, reflecting a narrowing of the oil trade deficit by 3.7 percentage points of GDP and buoyant consumption.
  - Staff judges the CA balance is substantially stronger, by 3–9 percent of GDP, than consistent with medium-term fundamentals and desirable policies.
  - Singapore’s status as a financial center, high corporate saving, and foreign investment rates contribute to the large CA balance.
- Projections and demographic effects:
  - Lower oil prices will further raise the CA surplus, to about 20 percent of GDP in 2016.
  - Over the medium term, the CA is expected to decline as the population ages and public spending, including on social safety nets, rises.
  - Over the long term, Singapore’s elderly dependency ratio is expected to increase significantly by 30 percentage points in the next 20 years, and private saving is expected to decline by 15 percentage points of GDP (Box 2).
- External assets and reserves:
  - The net international investment position stood at 210 percent of GDP in 2015, up by 13 percentage points of GDP from 2014.
  - Current official reserves are at 87 percent of GDP —equivalent to 26 percent of short-term external debt.
  - Staff view: Official reserves appear adequate and there is no clear case for further reserve accumulation; Singapore also has other official liquid external assets.
- Policy recommendation to moderate the CA surplus:
  - Strengthen social insurance and social safety nets, including unemployment insurance, to reduce precautionary saving, boost private consumption, and reduce inequality.
  - Rapid population aging and reforms to boost domestic demand—better health, pension, and other social insurance arrangements, and public investment—should lead to a significant reduction in external imbalances over time.

### Staff appraisal — policy recommendations and priorities
- Monetary policy:
  - The slight reduction of the NEER slope to zero in April was appropriate given inflation running below target.
  - MAS should remain vigilant to downside risks (China currency volatility, Brexit, higher U.S. interest rates and U.S. dollar appreciation) and improve monetary policy communication.
- Fiscal policy:
  - Continued implementation of long-term investment projects and social programs to reduce income inequality is appropriate.
  - The 2016 budget measures to boost innovation and strengthen productivity, including financial support for the new economy and working capital for SMEs, are appropriate.
  - More fiscal stimulus than envisaged in the budget would be useful to boost domestic demand, close the output gap, and provide insurance against downside risks to growth.
  - Consider attuning the fiscal rule to the business cycle rather than the political cycle and include all the government’s investment income in the budget’s revenue stream.
  - Accelerate infrastructure spending; expand means-tested, categorical income transfers to families; and do more to help dynamic, innovative, credit-constrained businesses.
  - In case of a sustained negative shock, fiscal policy should be the first line of defense, with monetary policy playing a supporting role.
- Financial sector:
  - The financial system has been resilient, aided by large capital and liquidity cushions and high regulatory standards.
  - Continue monitoring exposures to China and liquidity needs; retain macroprudential policies that contain household indebtedness, but consider selective relaxation if systemic risk dissipates.
  - Stress tests indicate households would be resilient to a rapid increase in interest rates and most corporates could handle combined shocks, though elevated household and corporate leverage warrants continued monitoring.
- Restructuring:
  - Adjustments to a labor-lean economy and a more targeted approach to boosting automation and innovation are appropriate.
  - Maintain and expand social insurance and safety net arrangements to smooth transition risks.
  - A boost to R&D spending in public and private sectors, and programs to reduce labor market frictions and improve skills matching, are important to drive an innovation-based growth model.

*Source: IMF staff report text (excerpts) from _cr16263 - 40. Innovation-Based Growth.*

### 2.1 percent of GDP. A third of this increase was due to health spending, which rose by 73 percent

### _cr16263 - 2.1 percent of GDP. A third of this increase was due to health spending, which rose by 73 percent

### Fiscal spending increase and composition
- Total increase: 2.1 percent of GDP.
- A third of this increase was due to health spending, which rose by 73 percent over this period.
- Recently-introduced programs that will further raise aging-related spending:
  - Pioneer Generation Package
  - Silver Support

### Demographic indicators and projections
- Old-age dependency ratio and population growth series shown for:
  - Old-age dependency ratio-2015 vintage
  - Old-age dependency ratio-2012 projections
  - Population growth-2015 vintage
  - Population growth-2012 projections
- Time span on chart: 1990, 1995, 2000, 2005, 2010, 2015, 2020, 2025, 2030, 2035, 2040.

### Comparative old-age dependency ratios (selected Asian countries)
- Countries listed in chart (time span: 1990 to 2050): Japan, Korea, Hong Kong, Singapore, Thailand, China, Viet Nam, Malaysia, Indonesia, Philippines.
- Percentage axis range shown: 0 to 90 (in percent).
- Time points on chart: 1990, 1995, 2000, 2005, 2010, 2015, 2020, 2025, 2030, 2035, 2040, 2045, 2050.

### Chart sources
- United Nations, World Population Prospects-2012 and 2015 Revisions.
- United Nations, World Population Prospects-2015 Revisions.

*Source: SINGAPORE — INTERNATIONAL MONETARY FUND*

### Box 2. Singapore—Aging, Savings and the Current Account Balance: Illustrative Projections

### Box 2. Singapore—Aging, Savings and the Current Account Balance: Illustrative Projections

### Life-cycle hypothesis and baseline expectation
- Saving behavior is age dependent: people save during working years and run down savings during retirement.
- Aging is expected to reduce Singapore’s high saving rate and consequently the current account.

### Empirical projections and scenario results
- Based on panel regression results cited from the November 2008 Regional Economic Outlook for Asia and the Pacific:
  - Singapore’s aging, outpacing that of its trading partners, was projected to reduce its current account balance by about 6 percent of GDP over a 30-year horizon.
- Based on a 1997 survey paper result:
  - A one percentage point change in the elderly dependency ratio is typically found to result in approximately a one half of one percentage point change in the private saving rate.
- Using the UN’s latest projections for the elderly dependency ratio and an assumed modest decline in the investment to GDP ratio (reflecting projected shrinkage of the working age population and hence relatively more abundant capital that, other things equal, depresses returns on capital):
  - The scenario implies a narrowing of Singapore’s current account surplus by about 15 percent of GDP over the next two decades.

### Role of government saving and fiscal buffers
- The overall effect of aging on the current account also depends on the response of government saving and investment.
- If government saving declines owing to higher spending on the elderly, the decline in private saving in Singapore—and hence the current account—could be larger than indicated in the illustrative chart.
- Given Singapore’s large fiscal buffers, the private sector would be unlikely to raise its own savings in response to a reduction in government savings.

### Key quantitative statements (preserved verbatim)
- Current account balance decline projected by November 2008 REO (panel regression): about 6 percent of GDP over a 30-year horizon.
- Elasticity from 1997 survey paper: one percentage point change in the elderly dependency ratio → approximately a one half of one percentage point change in the private saving rate.
- Scenario projection using UN elderly dependency ratio and modest decline in investment/GDP: narrowing of Singapore’s current account surplus by about 15 percent of GDP over the next two decades.

*Source: IMF staff calculations and analysis as presented in Box 2. Singapore—Aging, Savings and the Current Account Balance: Illustrative Projections.*

### Appendix I. Linkages with China

### Appendix I. Linkages with China

### A. Trade Links
- Trade exposure
  - China is Singapore’s single largest destination for goods exports.
  - In 2015, exports to China were nearly equal to the combined exports to the European Union and the United States.
  - Singapore’s exports to China expanded at a compound annual growth rate of about 15 percent over the past two decades.
  - The share of exports going to China has approximately quintupled.
  - Among the ASEAN-5, Singapore is the most exposed to China through goods trade.
  - Goods exports to China amounted to 16.3 percent of GDP in 2015 (Malaysia: 8.8 percent).
  - In gross exports, China accounted for about 14 percent (up from the 2011–14 average of 11.5 percent).
  - Commodity composition of exports to China:
    - Capital goods account for about three-fifth of exports to China.
    - Intermediate goods represent about one quarter of the share.
  - Services exports to China in 2014:
    - Accounted for about 6.8 percent of Singapore’s total services exports (or, nearly 3 percent of GDP).
    - Nearly as big as services exports to Japan, about one-third to one-half of those to Europe or North America, respectively.

- Trade in value-added terms
  - Singapore’s exposure in value-added terms is second highest among the ASEAN-5, after Malaysia.
  - Singapore’s shares in value-added in China’s final domestic demand and exports have increased over time.

- Recent changes in goods exports (2015)
  - Goods exports to China went down by 7.4 percent (in U.S. dollar terms) in 2015.
  - Domestic exports to China were down by 17.3 percent in 2015.
  - Re-exports to China were up by 2.4 percent in 2015.
  - Exports to other parts of the world, excluding the United States, were down by nearly thrice as much (exports to the U.S. were flat).
  - The large fall in domestic exports to China was driven by chemicals and manufactured goods.
  - Volume of domestic exports to China was also down in 2015, the first time since the Great Financial Crisis (GFC).
  - Total goods exports were down by 14.5 percent in 2015.
  - In Singapore dollar terms, total goods exports were down by about 7 percent, but those to China were up by 0.5 percent.

- Indirect trade links
  - Indirect trade links through regional partners are important: Singapore has the highest exposure to value-added embedded in other ASEAN-5 domestic demand and exports.
  - In gross value terms, the ASEAN-4 economies together with Japan and Korea accounted for nearly 34 percent of Singapore’s total goods exports in 2015.
  - Services exports to the ASEAN-4 countries and Korea were about twice as high as those to China in 2014.

### B. Financial Linkages
- Background
  - As an international financial center, Singapore intermediates credit globally.
  - Pre-GFC: banks in Singapore channeled surplus savings from emerging Asia to Europe.
  - Post-GFC: flows reversed with net lending to nonbank customers in emerging Asia and bank funding from rest of the world turned positive.
  - Credit growth was strong during 2009–2014, driven primarily by demand from China and other emerging Asia.

- Direct financial exposure
  - The stock of China’s FDI from Singapore is over 30 percent of Singapore’s GDP.
  - Singapore’s portfolio investment in China is about 27 percent of Singapore’s GDP.
  - A material fraction of investment in China via Singapore may originate in other countries.

- Banking sector exposure
  - The three big banks in Singapore—DBS, OCBC, and UOB—have significant lending exposure to the greater China region.
  - Problem loans (as a proportion of gross loans) arising from greater China have risen mildly in 2015.
  - Credit risk from mainland China is mitigated because exposure is predominantly trade finance related—short-term loans, mostly backed by letters of credit from systemically important Chinese banks.
  - Substantial exposure to Hong Kong SAR and other Asian economies including Malaysia and Indonesia requires careful monitoring.
  - On March 31, 2016, Moody’s changed the outlooks on the three big banks from stable to negative due to increasingly challenging domestic and external operating environment for banks.

- Carry trade and offshore RMB (CNH)
  - Offshore RMB market facilitated a profitable interest rate arbitrage since 2010: borrowing short term overseas at relatively low interest rates and investing in high-yielding Chinese assets amid expectations of renminbi appreciation.
  - Three main channels through which the RMB carry trade built up: trade over/under invoicing, black market channels, and copper-backed commodity financing.
  - RMB depreciation led to unwinding of carry trade, large capital outflows in China, and fall in trade finance activities.
  - Falling demand for RMB in offshore markets, including Singapore, evidenced by continued shrinkage of offshore renminbi deposits.

- Turning point in credit cycle
  - Nonbank loans to China started falling in mid-2014.
  - The share of trade bills in nonbank loans fell from a peak of 15 percent in June 2014 to 8 percent in February 2016.
  - Cross-border exposure of domestic banks in Greater China region, which increased from 2010 to 2014 and fell slightly in 2015, is still sizable at close to 25 percent.

- Indirect financial exposure
  - Developments in China affect Singapore indirectly via regional and global financial conditions.
  - RMB depreciation and uncertainty about the Chinese economy led to spikes in the VIX in August 2015 and in January 2016 and sizable capital outflows (mostly equity) from Singapore.
  - Continued uncertainty about the Chinese economy and policymaking could adversely affect global investors’ outlook about Asia, especially impacting financial centers like Singapore and Hong Kong SAR.

- Exchange rate co-movement
  - Singapore dollar and the Chinese renminbi have commoved against the U.S. dollar since the latter’s step devaluation in August 2015, when Singapore dollar slid to a five-year low.
  - Singapore’s currency is highly responsive to changes in renminbi as exporters have a high degree of exposure to China.
  - The renminbi is believed to be included in the undisclosed currency basket used by the MAS to manage monetary policy.
  - Continued renminbi depreciation pressure could keep the Singapore dollar under pressure and put upward pressure on Sibor interest rates.

### C. China Spillovers
- Estimated GDP impact
  - A 1 percent one-off slowdown in China’s GDP would have varying impact on the ASEAN-5 economies, amplified if combined with a China-induced spike in global financial volatility.
  - The impact on Singapore’s GDP in the first year after the shock is estimated at –0.1 to –0.5 percentage points, with the highest impact when financial volatility spikes.
  - Estimates incorporate a positive spillover from a China slowdown—lower global commodity prices—which would help Singapore as a net importer of commodities.

*Source: Appendix I. Linkages with China, _cr16263.*

### Appendix Table II.1. Singapore—Long-Term Phillips Curve Relation 1/

### Appendix Table II.1. Singapore—Long-Term Phillips Curve Relation 1/

### Long-term Phillips curve estimates (dependent variable: actual inflation; sample: 1987Q1–2016Q1)
- Measures of cyclical unemployment (columns):  
  - 1987Q1–2016Q1 average unemployment rate  
  - Hodrick-Prescott (HP) trend unemployment rate  
  - NAIRU following Blagrave and others (2015)  
  - NAIRU following a modified version of Ali (2015)

- Long-term inflation expectation coefficients (absolute values) and p-values:  
  - 0.70 (0.00)  
  - 0.52 (0.00)  
  - 0.16 (0.23)  
  - 0.12 (0.27)

- Cyclical unemployment coefficients (absolute values) and p-values:  
  - 0.58 (0.04)  
  - 1.87 (0.00)  
  - 1.46 (0.0)  
  - 1.79 (0.00)

- Note: Numbers in parentheses are the p-values based on robust standard errors (a p-value less than 0.05 implies statistical significance at the 5 percent level).

### Inflation expectations: levels, anchoring, and measurement
- Inflation expectations have mostly hovered between 1.5 percent and 2.5 percent over the last two decades.  
- Near-term inflation expectation aligns with the Monetary Authority of Singapore (MAS) survey of professional forecasts.  
- Long-term inflation expectation used in the regressions: the average of the 6–10 year-ahead consumer price inflation forecasts from Consensus Economics.  
- Method to test anchoring: regress changes in successive semi-annual Consensus Economics survey forecasts on changes in actual inflation between surveys (horizons h include 3-, 5-, and 10-year ahead; semi-annual surveys in April and October).

- Empirical findings on anchoring:  
  - Since the mid-1990s, surprises in actual inflation significantly affect expectations up to 2-year ahead (marginally significant at 3 years), with insignificant impact beyond 3 years.  
  - Expectations have become better anchored over the last decade: larger impacts of surprises on current-year forecasts, muted impacts on medium-term forecasts.

### Measures and methodology for cyclical/structural unemployment
- Four measures of long-term/structural unemployment used:  
  - average unemployment rate over 1987Q1–2016Q1;  
  - HP trend unemployment rate;  
  - NAIRU from a multivariate Kalman filter (MVF) framework (Blagrave and others, 2015);  
  - NAIRU from a modified MVF (Ali, 2015) accounting for changes in labor force participation.  
- Cyclical unemployment is actual unemployment minus the chosen trend/NAIRU measure.

### Short-run dynamics, error-correction model, and rolling GMM estimates
- Error-correction model specification includes: long-term inflation expectation (average of 6–10 year-ahead Consensus Economics forecasts), cyclical unemployment, import price inflation (year-on-year change in import prices relative to the GDP deflator), and lagged variables; parameters allowed to vary using a rolling ten-year window; GMM with robust standard errors and lagged cyclical unemployment and import prices as instruments.
- Key empirical points from rolling 10-year GMM regressions and diagnostics:  
  - Results are sensitive to the measure of cyclical unemployment. Two measures indicate virtually no cyclical unemployment in recent years.  
  - Long-term Phillips curve relationship holds in the long run (negative 10-year rolling simple correlation), but the correlation has weakened since 2011 for three of the cyclical measures.  
  - Variability: headline inflation standard deviation was 2.4 percent over 2011Q1–2016Q1 and 2.7 percent over 2007Q1–2010Q4; unemployment standard deviation fell from 0.5 percent to 0.1 percent over the same periods.  
  - Regression fit (in-sample forecasting): the specification using the 1987Q1–2016Q1 average unemployment rate yields the best fit, followed by the HP trend; of the two MVF NAIRU regressions, the unmodified MVF yielded a relatively better fit. A weighted average of the four regressions (weights based on adjusted R-squared) is used for summary series.  
  - The responsiveness (slope) of inflation to cyclical unemployment strengthened around the GFC but has weakened since 2011 and more rapidly over the last three years. Alternative parameter estimates display large variability due to GFC effects in rolling windows and measurement uncertainty during Singapore’s economic transformation.  
  - The relevance of past inflation in explaining current inflation has weakened over the last decade, while the role of inflation expectations has strengthened (except during the GFC). Alternative parameter estimates are now more tightly bound than in earlier years.  
  - Import price inflation’s impact on headline inflation is higher in the post-GFC period, but no clear recent strengthening; however, given large commodity price declines since late 2014, the total impact could be larger.

### Labor market and matching context relevant for Phillips curve dynamics
- Sample and measurement context: cyclical unemployment measures and labor market dynamics influence short-run Phillips curve responsiveness. Important labor market facts:  
  - Resident labor force participation rose to a record level after 2011, driven largely by persons aged 50 years and above (they accounted for about 90 percent of the change in the resident participation rate since mid-2011).  
  - Ongoing restructuring toward a labor-lean, innovation-based model accompanied by tighter restrictions on foreign worker inflows (33.7 percent of total employment excluding foreign domestic workers in end-2015).  
  - Labor market loosened in recent quarters: vacancy-to-unemployed ratio fell from a peak of 1.42 in 2014Q2 to about unity in 2016Q1. Redundancies rose to post-GFC highs.  
  - Job matching efficiency (DMP framework) details: the matching probability gamma is estimated at about 0.52. In 2015, median unemployment duration was 8 weeks; workers made redundant had a 54 percent chance of being reemployed after three months. Matching efficiency (m0) has declined over time (a mid-2000s estimate of m0 would have been 0.63). Matching efficiency has improved recently but remains below the pre-GFC average, consistent with higher skill mismatch or changes in search/recruitment.

### Key conclusions and policy implications
- The long-run inflation–unemployment trade-off held in Singapore over a longer period, but the short-run relationship has weakened in recent years.  
- Inflation expectations are better anchored relative to the past, reflecting the credibility of the MAS monetary policy framework, prudent fiscal policy, pragmatic macroeconomic management, and strong institutions.  
- Despite increased volatility in global commodity prices, the marginal impact of import price inflation on headline inflation has not clearly increased in recent years, though the total impact may be larger because of the magnitude of commodity price declines since late 2014.  
- Policy recommendation: Singaporean authorities should continue policies to preserve credibility and anchoring of inflation expectations; labor market policies should actively aim to improve skill matches and reverse the decline in matching efficiency.

*Source: IMF staff estimates.*

### Appendix IV. Potential Growth and Productivity

### Appendix IV. Potential Growth and Productivity

### Overview
- Singapore’s growth rate has slowed down in recent years, driven by both cyclical and structural factors.
- Aging population and tight immigration policies have led to slower labor force expansion, despite a record high labor participation rate.
- A decline in private investment has contributed to slower capital formation.
- Productivity has slowed post-Global Financial Crisis (GFC), weighing on potential growth.
- Staff projects potential output to grow at about 2.5–3 percent rate over the medium term, with productivity improvement backed by human capital formation, R&D, and innovation-based output.

### Potential growth: recent assessment and baseline
- Staff estimates that potential growth slowed to 2.75–4.5 percent range in 2015, compared with 4.5–5.5 percent seen in the recent past.
- Over the medium term, staff estimates potential growth to further decelerate to 2.5–3 percent range.
- Staff’s baseline macro-framework is anchored on the conservative estimates of potential growth.

### Demographics and labor force
- Growth in working-age population (aged 15–64 years) has dropped from above 5 percent in 2007 to 1.4 percent in 2015.
- Growth in nonresident labor force has fallen from an average of 6 percent over 2010–12 to 3 percent over 2013–15.
- Resident labor force participation reached an all-time high in 2015, aided by older age workers who likely joined in low-productivity jobs.
- Given negative growth in population aged below 15 years, a fast pace of aging, and an already high labor force participation rate, resident labor force growth is forecast to about halve over the medium term, compared to 2009–15 (i.e., annual average addition of about 20,000 workers, in line with official forecast, compared to 46,000 over 2009–15).
- Staff assumes that average net addition to nonresident workforce will also halve over the medium term, compared to 2013–15.

### Capital formation and private investment
- Net capital formation slowed from a compound growth rate of 5.5 percent over 2010–12 to 4.5 percent over 2013–15.
- Uncertainties about global and regional developments, including in China, are impacting investments in physical capital, particularly in the private sector.
- With capacity utilization presumably low in the manufacturing sector and a prolonged commodity price cycle, staff expects the pace of capital formation to further slow over the medium term.
- Staff regression analysis using annual data from 1975 finds that a 1 percentage point slowdown in real credit growth could lower private real fixed investment by 0.6–0.9 percentage points. The estimated impact is fairly robust across different specifications.
- The regression results also indicate:
  - Growth in labor force positively impacts private fixed investment.
  - A lower share of the manufacturing sector drags private investment down.
  - Counter-cyclical fiscal policies (public fixed investment weakly correlated with output gap in the sample) also drag private investment down.

### Productivity (TFP and labor productivity)
- Productivity growth has slowed considerably post-GFC, driven by a weaker manufacturing sector and higher labor participation in less-productive, domestically-oriented sectors.
- Official statistics show that total factor productivity (TFP) contributed negatively to real GDP growth in every year since 2012 (longest streak of negative contributions, though cumulatively smaller than negative contributions witnessed during past recessions).
- Staff assumes productivity to improve at a pace slower than its trend growth in the near term and will move closer to its trend growth later in the medium term.
- Contributions from all factors of production, with the exception of human capital formation, are expected to pull potential growth down over the medium term.

### Key quantitative highlights
- Potential growth in 2015: 2.75–4.5 percent (staff estimate).
- Potential growth in recent past: 4.5–5.5 percent.
- Medium-term potential growth projection: 2.5–3 percent.
- Working-age population growth: above 5 percent in 2007 → 1.4 percent in 2015.
- Nonresident labor force growth: average 6 percent over 2010–12 → 3 percent over 2013–15.
- Net capital formation compound growth rate: 5.5 percent over 2010–12 → 4.5 percent over 2013–15.
- Resident labor force annual average addition: about 20,000 workers (medium term forecast) vs 46,000 over 2009–15.
- Estimated impact of 1 percentage point slowdown in real credit growth on private real fixed investment: 0.6–0.9 percentage points.

*Source: IMF staff — Appendix IV. Potential Growth and Productivity.*

### Appendix Table IV.2. Singapore – Estimates of and Contributions to Potential Growth

### Appendix Table IV.2. Singapore – Estimates of and Contributions to Potential Growth

### The Simple Production Function Approach
- Estimated potential growth (In percent) and contributions (In percentage points)
  - 1993–2002
    - Estimated potential growth: 6.5
    - Capital formation: 4.0
    - Labor force: 1.3
    - Total factor productivity: 1.2
  - 2003–2012
    - Estimated potential growth: 5.2
    - Capital formation: 2.5
    - Labor force: 1.6
    - Total factor productivity: 1.1
  - 2013–2015
    - Estimated potential growth: 4.6
    - Capital formation: 2.6
    - Labor force: 1.1
    - Total factor productivity: 1.0
  - 2016–2021 (proj.)
    - Estimated potential growth: 4.6 (note: table shows "(proj.)" under period and numeric contributions)
    - Capital formation: 2.5
    - Labor force: 1.2
    - Total factor productivity: 0.6
    - (Table header shows 2016–2021 (proj.) then columns 2.5, 1.2, 0.6, 0.7 in augmented table; see Augmented section for alternate breakdown)

### The Augmented Production Function Approach
- Estimated potential growth (In percent) and contributions (In percentage points)
  - 1993–2002
    - Estimated potential growth: 6.5
    - Capital formation: 4.0
    - Resident labor force: 0.6
    - Human capital formation: 0.4
    - Nonresident labor force: 0.8
    - Total factor productivity: 0.7
  - 2003–2012
    - Estimated potential growth: 5.3
    - Capital formation: 2.5
    - Resident labor force: 0.7
    - Human capital formation: 0.5
    - Nonresident labor force: 0.9
    - Total factor productivity: 0.6
  - 2013–2015
    - Estimated potential growth: 5.1
    - Capital formation: 2.6
    - Resident labor force: 0.5
    - Human capital formation: 0.8
    - Nonresident labor force: 0.6
    - Total factor productivity: 0.6
  - 2016–2021 (proj.)
    - Estimated potential growth: 3.1
    - Capital formation: 1.2
    - Resident labor force: 0.3
    - Human capital formation: 0.8
    - Nonresident labor force: 0.3
    - Total factor productivity: 0.6

### Key Findings on Productivity, R&D, and Structural Drivers
- Aggregate assessment
  - Against slower growth in physical inputs, productivity enhancement will be vital for Singapore’s growth over the medium term.
  - Authorities announced multi-year plans to raise R&D; help workers enhance their skills; and provide incentives to firms to promote investment in automation and robotics.
  - Committee on the Future Economy expected to unveil plans by end-2016 on Singapore’s future economic strategies.
- R&D in Singapore (empirical and descriptive points)
  - R&D spending in relation to GDP had been rising from low levels prior to the GFC but has leveled off in recent years.
  - Latest cross-country data as of 2014 show R&D share of output in Singapore is lower than in the G-5 and in Korea and has not changed much from its 2003 level.
  - When expressed in per capita terms (at current purchasing power parity prices), Singapore’s R&D expenditure is higher than these economies.
  - Research conducted in the private sector accounts for 60 percent of the total spending (data as of 2014).
  - Compared to the G-5 countries and Korea, industry-financed R&D expenditure appears to be low per unit of government-financed expenditure.
  - Sectoral allocation: engineering and technology has a 59 percent share, biomedical research 19 percent, and research in other natural sciences 13 percent.
  - Total manpower associated with R&D (researchers, technicians, and support staff) grew at a compound annual growth rate of 4.4 percent during 2004–14, faster than growth in overall labor force (4.2 percent during 2004–14).
  - Total expenditure on R&D and researcher intensity (full-time equivalent as percentage of total labor force) could be further improved.
- Empirical effect
  - Empirical work suggests R&D spending investment in Singapore has had a significant effect on total factor productivity and growth, although by less than in other advanced economies.
  - Footnote estimate: The long-term elasticity of output with respect to R&D spending in Singapore is about 8.14 percent.

### An Alternative Growth Accounting Based on Innovation
- Methodology summary
  - Follows Jones (2002) and Fernald and Jones (2014); uses investment in R&D spending to estimate growth in total factor productivity.
  - Extended Jones’ G-5 set by including Korea and Singapore.
  - Analysis conducted from 1991 due to data limitations on labor force series.
  - Included overtime hours in total hours; used updates to OECD R&D data.
- Main quantitative contributions to long-term per capita growth (Singapore, 1991–2015)
  - Contribution of R&D to growth is large, almost 50 percent of growth in per capita output.
  - Contribution of population growth: about 30 percent.
  - Contribution of human capital: 20 percent.
  - Decline in capital/output ratio since the Asian Financial Crisis has led to an insignificant contribution to growth from physical capital formation.
- Comparative point
  - The long-term contributions pattern for Singapore accords qualitatively with Jones’ findings for the United States.

### Technical Details on Estimation of Potential Growth
- Hodrick-Prescott (HP) Filter
  - Standard HP filter applied to quarterly data since 1975.
  - To account for end-of-period estimation problems, staff forecasts of real GDP growth over 2016Q1–2017Q4 are incorporated.
- Augmented HP Filter (financial-cycle augmented)
  - Augmented to incorporate financial cycle information; Kalman filter used to derive new estimates of potential output, following Borio and others (2013).
  - Motivation: incorporate financial imbalances (real credit growth and real property price growth) because inflation alone may not capture unsustainable output paths.
  - Model specification (state-space form and augmentation)
    - Δy_t = Δy_{t-1} + ε_{0,t}
    - y_t = y_{t-1} + ε_{1,t}
    - Augmented equation for potential output includes lags of output gap, real credit growth (Δcr) and real property price growth (ΔPropPrice) with chosen lags k_cr and k_prop to maximize fit:
      - y_t − y_{t−1} = β (y_{t−1} − y_{t−2}) + γ_1 Δcr_{t−k_cr} + γ_2 ΔPropPrice_{t−k_prop} + ε_{2,t}
    - Kalman Filter used for estimation.
  - Preserve HP filter business-cycle duration: λ_1 = 1600 for quarterly data; set λ_2 (signal-to-noise ratio) so that variances of trend and cyclical components match those implied by the standard HP filter.
- Multivariate Filter (MVF) Approach
  - Extension of Blagrave and others (2015) to account for the effect of ageing on labor force participation.
  - Model components and key equations
    - Output gap: y = Y − Y^_ (log terms)
    - Potential output level evolves with potential growth and level shocks:
      - Y^_t = Y^__{t−1} + G_t + ε^{level}_t
    - Potential growth G_t follows autoregressive adjustment to steady-state with shocks.
    - Output gap evolves with persistence and demand shocks: y_t = φ y_{t−1} + ε^{demand}_t
    - A Phillips curve added for identification:
      - π_t = π_{t+1} + λ_1 y_t + λ_2 π_{t−1} + β ε^{phillips}_t
    - Unemployment and labor force participation dynamics added (Okun’s law and LFP gap equations) and NAIRU modeled as time-varying with shocks.
    - Consensus forecasts data used to capture rational expectations (model-consistent and actual expectations for growth and inflation for horizons j = 0,1,...,5).
  - Data and estimation
    - Annual data (1971–2015) on real GDP growth, inflation, unemployment rate, and labor force participation used.
    - Bayesian estimation technique (Kalman filter) applied to estimate parameters.
- Production Function (PF) Approaches (two variants)
  - Both approaches estimate separate contributions from resident and nonresident labor forces.
  - Augmented PF approach adds human capital formation to resident labor contribution.
  - General PF with human capital (nonstandard notation preserved)
    - Y_t = A_t K_t^{α} (L_RES_t^{β} H_t^{(1−α−β)}) ??? (notation in source: nonstandard expressions; human capital H_t constructed below)
    - R_t = ... (source equations preserved in conceptual description)
    - Human capital H_t = exp(φ S_t) with φ assumed 7 percent (return on education).
    - S_t: years in schooling from Barro-Lee database.
    - L_NR_t: Nonresident labor employment.
    - L_RES_t: Resident labor employment.
    - α: share of capital.
    - β: share of resident labor in the total labor force.
  - Annual data used; due to lack of sufficient time series on resident and nonresident labor force, data from 1991 are used.
- Alternative (Jones-style) innovation accounting
  - Cobb-Douglas production function with human capital formation used (as in Jones/Fernald-Jones).
  - Idea production process:
    - Ȧ_t = δ A_t^{θ} L_A_t^{ψ}, A_0 > 0 (notation reflective of source)
    - Effective world research effort H_A is a weighted sum of number of researchers in each economy; Jones originally used G-5, extended here to include Korea and Singapore.
  - Output per worker derived with research intensity i_s (fraction of labor producing ideas), producing contributions of R&D to per capita growth.

*Source: IMF staff estimates and technical appendix material in Appendix Table IV.2.*

### Appendix V. Risk Assessment Matrix 1/

### Appendix V. Risk Assessment Matrix 1/

### Major identified risks, likelihoods, transmission channels, and expected impact
- Sharper-than-expected global growth slowdown
  - Likelihood:
    - Significant China slowdown: Medium to Low
    - Significant slowdown in other large EMs and frontier economies: Medium
    - Structurally weak growth in key advanced and emerging economies, including as a result of Brexit: Medium
  - Transmission:
    - Direct and intraregional trade linkages: large spillovers to Singapore’s exports and tourism; domestic demand hit via worsening investment sentiment; high openness and role as financial center amplify spillovers; high household leverage and potential asset price corrections could exacerbate slowdown with spillovers to banks.
    - Financial linkages: substantial bank exposures to China (assessed high quality but large in aggregate); widespread corporate defaults could raise NPLs; decline in investor sentiment, pullback of funding, and market volatility; inward spillovers from banks in advanced markets present in Singapore.
  - Expected impact: Medium to High
  - Recommended policy response:
    - Provide temporary and targeted fiscal support and loosen monetary policy to offset headwinds.
    - Continue to monitor banks’ exposures to China and the rest of the region.
    - Use prudential policies and bank supervision to ensure risks are managed well.
    - Ensure stress tests are up to date in an evolving environment.
    - If domestic demand weakens substantially, use temporary and targeted fiscal stimulus, loosen monetary policy and recalibrate macroprudential as necessary while maintaining financial stability.

- Tighter or more volatile global financial conditions
  - Likelihood:
    - Sharp asset price decline and decompression of credit spreads: Medium
    - Surge in the US dollar: High
  - Transmission:
    - Corrections in asset prices and exchange rates from capital flow reversals and higher-than-expected interest rates affect growth via wealth effects and deteriorate banks’ capital given elevated household and corporate debt and prevalence of variable rates.
    - Decline in financial sector activity could slow growth.
    - Liquidity risks from sudden retrenchment of interbank—including intragroup—funding of offshore banks; funding pressures from foreign currency liabilities of domestic banks; dollar-denominated offshore loans could see arrears.
  - Expected impact: Medium
  - Recommended policy response:
    - Ensure financial institutions maintain prudent risk management and adequate liquidity and capital buffers.
    - Maintain close links with home country supervisors.
    - Recalibrate macroprudential policies to mitigate financial sector stress.
    - In an extreme event, use strong official reserves as cushion; swap lines with other central banks could complement this.

- Persistently lower energy prices
  - Likelihood: High
  - Transmission:
    - Singapore’s marine engineering sector exports equipment and services for offshore exploration and production; banks lend to the oil sector. Negative impact mitigated by oil refineries and downstream operations benefiting from lower input costs.
  - Expected impact: Medium to Low
  - Recommended policy response:
    - Provide temporary and targeted fiscal support to businesses in the sector.

- Disorderly or excessive correction in property prices
  - Likelihood: Medium to Low
  - Transmission:
    - Decline in collateral values and wealth effects could reduce economic activity and bank lending, with adverse feedback on household indebtedness and property prices.
  - Expected impact: Medium
  - Recommended policy response:
    - Adjust macroprudential policies while safeguarding financial stability.
    - Use targeted fiscal transfers to households whose debt servicing capacity is adversely affected.

- Low growth in productivity and 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 disincentivize investment in some sectors.
    - Higher-than-expected transitional costs (high frictional unemployment or hallowing out) can have long-term effects on growth.
  - Expected impact: Medium
  - Recommended policy response:
    - Adjust foreign worker policies to relax tightness in labor markets.
    - Provide targeted and temporary fiscal stimulus and loosen monetary policy.

- 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, and decline in cross-border banking activity if uneven progress across jurisdictions.
    - Reputational risks from opaque ownership structures in wealth management could affect industry viability.
  - Expected impact: Medium
  - Recommended policy response:
    - Maintain regulatory standards and risk management consistent with international norms.
    - Maintain 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.

- Note on RAM probabilities: "low" indicates probability below 10 percent, "medium" between 10 and 30 percent, and "high" between 30 and 50 percent. The RAM reflects staff views at time of discussions; risks may interact and materialize jointly.

### SGPMOD (Singapore Global Policy MODel): purpose and structure
- Purpose:
  - A quarterly, multi-region small calibrated model of the Singapore economy designed to examine the conduct of monetary policy by the Monetary Authority of Singapore (MAS), particularly the role of MAS in offsetting downside risks (e.g., a downward revision to China’s growth path, and Brexit).
- Key features:
  - Tracks all components of the nominal effective exchange rate (NEER).
  - Interest rates determined by uncovered interest parity (UIP) vis-à-vis only the U.S., reflecting Singapore's link to the United States.
  - Calibrated from larger IMF structural models to link shocks to long-term trends and short-term gap variables.
  - MAS operates an inflation-targeting (IT) regime pursuing a target NEER under the "Basket-Band-Crawl" (BBC) framework:
    - Basket = currency composition weighted by trade shares (e.g., Malaysia, Indonesia, China, the U.S., the euro area, and other countries including most south-east Asian countries).
    - Band = permitted percentage variation around target NEER.
    - Crawl = permitted quarterly change in target NEER (often a rate of appreciation, sometimes zero).
  - MAS likely targets core inflation and places weight on the output gap.

- Singapore block: canonical gap model with four building blocks
  - I-S curve: links output gap to domestic interest rate gap, REER gap (influenced by MAS), and rest-of-world output gap.
  - Phillips curve: links MAS core CPI inflation with expected and lagged inflation, REER gap, and output gap. MAS core inflation excludes costs of accommodation and private road transport; includes food prices and non-road-transport energy costs.
  - UIP condition: links domestic short-term interest rate with U.S. short-term interest rate, accounting for expected exchange rate movement and country risk premium.
  - Monetary policy rule: NEER reaction function for IT regime.

### MAS monetary policy reaction function and estimates
- Form:
  - The MAS NEER reaction function is similar to a standard interest rate reaction function with deviations of core inflation from target and the output gap as key inputs; it includes the U.S. short-term interest rate gap because Singapore cannot set independent interest rates.
- Estimation results (Appendix Table VI.1: SGPMOD’s NEER Reaction Function — IMF staff estimates)
  - Lagged change in NEER: 0.624***
  - Expected Inflation: 1.202***
  - Output Gap: 0.178***
  - U.S. Fed Funds Rate: 0.115*
  - Observations: 96
  - R-Squared: 0.7058
  - Notes: *** significant at .01 level; ** significant at .05 level; * significant at .10 level. Estimation method: GMM regression, with four lags of output gap and inflation used as instruments.

- Implication:
  - Including the U.S. rate in the NEER reaction function helps the MAS spread nominal adjustment between the NEER and Singapore interest rates, reducing volatility relative to letting UIP alone determine outcomes.

### Monetary policy transmission mechanism in SGPMOD
- General behavior to a negative domestic demand shock:
  - Output gap enters excess supply → disinflation → monetary policy responds expansionarily → aggregate demand encouraged → output gap moves toward positive → inflation rises → MAS withdraws stimulus → inflation returns to target and output gap closes.
- On impact under NEER reaction function:
  - MAS depreciates NEER immediately; REER depreciates (sticky prices), boosting net trade (exports up, imports down) and narrowing the output gap; inflation starts rising.
  - Through UIP, the nominal bilateral US$ exchange rate depreciates with NEER; Singapore’s short-term interest rate increases relative to the U.S., raising real interest rate (RR) because of sticky inflation; the higher real rate counteracts REER depreciation effects, making immediate net effect ambiguous depending on variable weights.
- Contrast with an interest-rate reaction function:
  - With interest-rate rule, policy rate would fall, real rate would fall, and exchange rate would depreciate — both instruments work in same direction, producing lower volatility and faster adjustment in SGPMOD. However, an interest-rate reaction function is impractical for Singapore given open capital account and UIP-determined rates.
- Medium to long term dynamics:
  - After initial year, temporary shock unwinds; REER returns toward equilibrium and appreciates; real bilateral US$ rate appreciates; by UIP Singapore short-term interest rate falls relative to U.S.; monetary policy becomes stimulative as falling real interest rate offsets some NEER-based withdrawal of stimulus, slowing withdrawal in medium term.

### Downside risk scenarios analyzed with SGPMOD
- Overview:
  - Three scenarios considered: (1) sudden downward revision in expected potential output growth in China; (2) China scenario extended to additional turmoil in other emerging markets; (3) effects of Brexit through financial market disruption and reduced growth in the UK and EU.
  - Risk onset assumed in 2016Q2 (Brexit scenario: 2016Q3). Outcomes presented relative to a baseline forecast through 2018Q4.
  - Two MAS responses considered: ongoing policy adjustments to the target NEER; or MAS staying with baseline target NEER path (in which case Singapore short-term interest rates move with U.S. per UIP).
- Example scenario (China potential growth shock):
  - Consider a permanent downward revision in China’s potential output growth of one percent (quarter-on-quarter, at annual rates).
  - Additional assumption: fall in potential output growth lowers expected household wealth in China, translating into an additional fall in China’s output gap of roughly (figure reference in source; scenario outcomes shown in SGPMOD simulations).

*Source: _cr16263 - Appendix V. Risk Assessment Matrix 1/_*

### 0.25 percentage points. Moreover, there is constant upward pressure on China’s inflation, because of

### _cr16263 - 0.25 percentage points. Moreover, there is constant upward pressure on China’s inflation, because of

### China slowdown: transmission to Singapore via Emerging Asia
- China’s lower-than-expected potential output raises costs and creates “constant upward pressure on China’s inflation, because of the higher costs associated with the realization that potential output is not expanding as fast as originally expected.”
- Indirect channel: Emerging Asia’s output decline (primarily from strong trade links with China) reduces their imports from Singapore, manifesting as a lower Singaporean output gap.
- Direct channels from China to Singapore:
  - Singaporean output declines along with import demand from China.
  - China weakening causes the renminbi to depreciate against all currencies, pushing up in the short term Singapore’s NEER.
  - With sticky prices, the REER appreciates as well.
  - Net effect: lower output gap and REER appreciation are disinflationary.

### Monetary policy role (MAS) under a permanent China share contraction
- Monetary policy can smooth the transition to a lower long-term level of real GDP but cannot prevent the permanent contraction in China’s share in the global economy.
- Comparison outcomes when MAS follows baseline vs. new target NEER path:
  - Under the baseline NEER path, in the medium term the NEER is too appreciated and interest rates are too high, causing much larger output declines.
  - Output decline under baseline is driven by the output gap in the near term (not potential output), illustrating monetary policy’s limitation to demand-side effects.
  - Inflation is weaker under the baseline NEER path.

### Lower expected potential output growth in China with emerging market turmoil (amplified scenario)
- Additional assumptions relative to the “calmer” China scenario:
  - A 1 percentage point increase in Singapore country risk premium in 2016, which declines to zero by 2017q3.
  - Additional country risk in emerging Asia leading to additional depreciation in their real exchange rate gap vis-à-vis the U.S.
- Consequences for Singapore:
  - Additional negative impacts from further falls in emerging Asia’s output gap and real exchange rate gap.
  - The increase in Singaporean risk premium leads to a higher domestic short-term interest rate on impact (via UIP), increasing real short-term interest rates and causing an even larger decline in real GDP.
  - Short-term inflation falls further than in the “calmer” China scenario; medium-term inflation is higher, implying greater relative cyclicality in Singaporean inflation.
- Policy reaction:
  - Higher future inflation relative to the “calmer” China scenario means MAS does not need to move the target NEER as much—“inflation stabilization is more important than output stabilization” in its reaction function.
  - MAS faces constraints:
    - Trade weights of Singapore’s trading partners permanently diverge from the composition in the official NEER basket as Emerging Asia shrinks relative to others.
    - UIP is broken by the country risk premium shock; MAS actions are no longer the sole determinant of the short-term interest rate vis-à-vis the U.S.
  - Overall: Singapore is worse off in the short term with emerging markets turmoil, though MAS action improves outcomes relative to holding steady over 2016 to 2018.

### Effects of Brexit with near-term global turmoil (scenario starting 2016Q3)
- Scenario features:
  - Medium-term contraction of trade between the UK and the EU as free trade links are reduced toward WTO standards, widening output gaps in the near term.
  - Considerable uncertainty among consumers and firms worsens outcomes.
  - By end-2018: EU output gap is 0.4 percent, and the UK translates into 0.45 percent for the remaining countries block.
  - UK and EU financial sectors see tighter lending conditions, peaking in 2017; weakens their bilateral US$ exchange rate gaps.
- Global spillovers and policy reactions:
  - Direct trade spillovers on China result in real GDP falling by 0.1 percent as end-2017.
  - U.S. real GDP troughs around 0.25 percent at end-2016; U.S. short-term interest rate falls by about 1.1 percent by the start of 2018 relative to the baseline.
  - Other regions’ output gaps fall, reaching –0.4 percent by end-2018.
  - Safe-haven flows: US dollar and Japanese yen appreciate; China and rest of emerging Asia depreciate.
- Implications for Singapore (no MAS NEER action case):
  - Singapore NEER depreciates until end-2018 by almost one percent.
  - Real GDP contracts by more than 0.4 percent until end-2018, led by reduced demand for Singapore’s exports by emerging Asia, China, and the U.S. (in that order).
  - Short-term domestic interest rate rises in 2016 (UIP-driven), then retreats as U.S. monetary policy loosens in 2017.
  - Broad-based lower foreign demand and generally positive real interest rate are disinflationary despite NEER depreciation.
  - Additional country risk: Singapore’s country risk premium increases by roughly 25 basis points in second half of 2016 and unwinds over 2017; this lowers real GDP by 0.1 percentage points relative to otherwise.
- Implications for Singapore (MAS eases target NEER — baseline policy case):
  - MAS eases target NEER: short-term depreciation of around 0.2 percent by end-2016 is offset by an almost 0.9 percent increase in the short-term real interest rate in the short term.
  - MAS continues to loosen over 2017–2018; markets anticipate this, and the trough of real GDP is less long-lived—ending in 2017Q1 at 0.4 percent and rising above zero by mid-2018 (instead of lingering below 0.2 until end-2018).
  - Bilateral U.S.$ exchange rate movements force MAS to rely on its bilateral U.S.$ exchange rate to achieve target NEER; short-term interest rate is about 50 basis points higher than under the baseline policy case.
  - By mid-2017, NEER effects dominate interest rate effects: inflation recovers and real GDP rises.
  - Forward-looking behavior of households and firms means inflation troughs at –0.2 percent instead of –0.5 percent, in anticipation of MAS defending its inflation objective.
- Conclusion:
  - Monetary policy can do little to prevent the real GDP trough in late 2016 but can contribute to a speedier recovery.
  - Near-term global turbulence in exchange rate markets exacerbates negative effects due to Singapore’s transmission mechanism and reliance on UIP.
  - Safe-haven effects introduce considerable short-term uncertainty for Singapore as a financial center; the scenario here is relatively benign and further volatility could arise later (late 2017 or 2018).

### Appendix: Measuring the Fiscal Impulse (FI) — staff methodology and estimates
- Overview:
  - FI methodology accounts for Singapore’s four pillars in public finances (budgetary sector; CPF; government investment agencies; various special funds not consolidated into the budget) and large accumulated reserves.
  - Staff uses a multiplier of 0.5 in line with the FAD Guidance Note.
  - Fiscal tables are constructed following GFSM 2001 using official statistics; comparisons with authorities’ budget presentation are reported.
- Authorities’ FI methodology (summary):
  - Revenue includes: Operating Revenue.
  - Revenue excludes: Investment Income; Government land sales.
  - Expenditure includes: Operating Expenditure; Development Expenditure; Other Expenditure (including special transfers; spending from endowment and trust funds; investment expenses and agency fees on land sales; land related expenditure (e.g., land reclamation)).
  - Expenditure excludes: Top-ups to endowment and trust funds.
- Staff adjustments:
  - Revenue side: adjust for business cycle effects on revenues.
  - Expenditure side: adjust to adhere to GFSM2001.
  - Modified cyclically adjusted balance = adjusted revenue minus expenditure excluding top ups.
  - Fiscal impulse = change in the modified cyclically adjusted balance.
- Operationalization details:
  - Start from Table 04 (Government Revenue 2016) and Table 05 (Government Expenditure 2016).
  - Operating revenue excludes investment and interest income and MAS contribution (account L00) and capital receipts (account M00).
  - Cyclically adjusted revenue uses staff’s estimate of the output gap and a unitary elasticity.
  - Total expenditure starts with “total outlays” and subtracts “transfers from the consolidated revenue account” and “loans” (account 5600), treated as financing items in GFSM2001.
  - Staff includes “land related expenditure”, “expenses on land sales” and “expenses on investment” in total expenditure.
- Staff estimates of FI (selected figures from Appendix Table VII.2):
  - Operating revenue: 60.8, 64.3, 64.2, 66.9 (in SGD billion for 2014, 2014/2015B, 2015/2016B, 2016/2017B respectively as presented).
  - Output Gap, FY (in percent of potential GDP): 0.5, (0.2), (0.2), (0.5).
  - Potential GDP: 391.2, 403.4, 403.4, 412.9.
  - Revenue at Potential GDP: 60.5, 64.4, 64.3, 67.3.
  - Operating expenditure: 46.5, 54.4, 53.3, 57.1.
  - Net acquisition of nonfinancial assets: 16.8, 23.2, 23.2, 23.3.
  - Cyclically adjusted operational balance: (2.8), (13.1), (12.1), (13.1).
  - Top ups to endowment and trust funds: 8.5, 6.0, 6.0, 3.6.
  - Modified Cyclically adj. balance: 5.8, (7.1), (6.1), (9.5).
  - Fiscal impulse (change in modified cyclically adjusted balance): (0.5), 12.9, 11.9, 3.4.
  - Fiscal Impulse (in percent of potential GDP): (0.1), 3.2, 3.0, 0.8.
- Comparison of FI 2016 estimates:
  - Staff FI for FY 2016/17 is about 0.8 percent of GDP, some 0.3 percentage points less than the authorities’ 1.1 percent of GDP.
  - Most of the difference comes from the revenue side; the cyclical adjustment contributes about a third and the rest possibly from different assumptions about nominal GDP.

*Source: IMF staff calculations and text from the IMF country report excerpt provided.*

### Appendix Table VII.3. Singapore— Fiscal Impulse: Comparison of Staff’s and

### _cr16263 - Appendix Table VII.3. Singapore— Fiscal Impulse: Comparison of Staff’s and Authorities’ Estimates, FY2016

### Staff vs. Authorities — FY2016 fiscal impulse (in percent of GDP)
- Revenues: FY 2015 = 16.2; FY 2016 = 16.6; Impulse FY 2016 = (0.4)
- Operating and development expenditure: FY 2015 = 16.2; FY 2016 = 18.1; Impulse FY 2016 = 1.9
- Other expenditures: FY 2015 = 3.3; FY 2016 = 3.0; Impulse FY 2016 = (0.3)
- Total: 1.1

### Staff’s cyclical adjustment and potential-GDP basis (FY2016, in percent of GDP)
- Revenue at Potential GDP: FY 2015 = 15.6; FY 2016 = 16.3; Impulse FY 2016 = (0.7)
- Operating expenditure: FY 2015 = 12.9; FY 2016 = 13.8; Impulse FY 2016 = 0.9
- Net acquisition of nonfinancial assets: FY 2015 = 5.6; FY 2016 = 5.7; Impulse FY 2016 = 0.0
- Top ups to endowment and trust funds: FY 2015 = 1.5; FY 2016 = 0.9; Impulse FY 2016 = 0.6
- Potential GDP (SGD billion): 412.9
- Total: 0.8

### Authorities’ presentation (FY2016)
- Revenue: FY 2015 = 15.5; FY 2016 = 16.2; Impulse FY 2016 = (0.7)
- Operating expenditure: FY 2015 = 12.9; FY 2016 = 13.8; Impulse FY 2016 = 0.9
- Net acquisition of nonfinancial assets: FY 2015 = 5.6; FY 2016 = 5.7; Impulse FY 2016 = 0.0
- Top ups to endowment and trust funds: FY 2015 = 1.5; FY 2016 = 0.9; Impulse FY 2016 = 0.6
- Potential GDP (SGD billion): 412.9
- Total: 0.9

### Comparison and interpretation (staff discussion)
- Staff’s methodology produces a very large fiscal impulse of 3 percent of GDP in FY2015.
- Consequently, the fiscal impulse (FI) for CY2016 ends up at 1.4 percent, significantly larger than the 0.8 percentage points estimated by the authorities.
- For FY2015, the difference of 1.2 percentage points relative to the authorities’ impulse of 1.8 percent of GDP comes from a larger increase in expenditure as recorded by staff.
- There is some offsetting impact in revenue, as staff measures a larger negative impulse, mostly explained by the cyclical adjustment.

### Appendix Table VII.4. FY2015 (staff estimates vs. authorities) — summary (in percent of GDP)
- Revenues: FY 2014 = 15.5; FY 2015 = 16.6; Impulse FY 2015 = (0.7)
- Operating and development expenditure: FY 2014 = 14.4; FY 2015 = 18.1; Impulse FY 2015 = 1.8
- Other expenditures: FY 2014 = 2.6; FY 2015 = 3.0; Impulse FY 2015 = 0.7
- Total: 1.8

- Revenue at Potential GDP: FY 2014 = 15.5; FY 2015 = 16.4; Impulse FY 2015 = (1.0)
- Operating expenditure: FY 2014 = 11.9; FY 2015 = 13.6; Impulse FY 2015 = 1.7
- Net acquisition of nonfinancial assets: FY 2014 = 4.3; FY 2015 = 5.9; Impulse FY 2015 = 1.6
- Top ups to endowment and trust funds: FY 2014 = 2.2; FY 2015 = 1.5; Impulse FY 2015 = 0.6
- Potential GDP (SGD billion): 403.4
- Total: 3.0

- Authorities’ unadjusted revenue and staff totals reported: Total = 3.2

*Source: IMF staff estimates as presented in Appendix Table VII.3 and Appendix Table VII.4 of the provided document.*

### Appendix Figure IX.2. Singapore: Vulnerability Indicators

### Appendix Figure IX.2. Singapore: Vulnerability Indicators

### Sectoral view: balance-sheet indicators by sector
- The market-capitalization weighted debt-to-equity ratio has been on a rising trend since the global financial crisis (GFC).
- Leverage in the transport, communications, and electric gas sector peaked in 2011, followed by deleveraging in recent years.
- Between 2013 and 2014, uptick in leverage was predominantly seen in trade (wholesale and retail), manufacturing, and mining sectors—sectors directly hit by end of the commodity super cycle and softening of global demand; therefore, leverage is expected to fall going forward.
- The market-capitalization weighted ICRs in manufacturing and mining industries have seen biggest decline in recent years against a backdrop of falling commodity prices and slowdown in global trade.
  - The ICRs in mining industry became negative in 2014.
  - The ICR in the manufacturing sector was still healthy in 2014, but would further decline if interest rates were to rise or the earnings outlook were to deteriorate.
- There has been a broad-based decline in ROE in most sectors in Singapore.
  - Prospects in retail trade, which saw tremendous growth in profitability after the GFC, have fallen significantly.
  - In trade-related sectors, notably manufacturing, ROEs have also dipped in light of slow global growth.

### Assessment of NFC balance sheet: stress test — key definitions and metrics
- Debt-at-risk: the share of total corporate debt associated with firms classified as distressed.
- Firms-at-risk criterion: firms with an interest coverage ratio (ICR) below 1.5 are classified as distressed and called “firms-at-risk”.
- Sample: publicly-listed NFCs in the Thomson Reuters Worldscope database for the period 2007–2014.
  - The number of active listed firms in the sample over 2007–14 ranges from 558 to 612.
- Net debt definition: total debt minus cash and equivalents (short term liquid investments).

### Cross-firm distribution of leverage (composition and size effects)
- Debt-to-equity distribution:
  - Majority of firms have debt-to-equity ratio greater than 20.
  - Very high levels of leverage (debt-to-equity of above 100) have become more common since 2010.
- Net debt-to-EBIT is more reasonable, suggesting ample cash reserves and short-term investments for NFCs in Singapore.
- Firm-size differences:
  - ‘Large firms’ = top 25th percentile of total assets; remainder = ‘small firms’.
  - Small firms tend to have lower leverage: more than 50 percent of small firms have a debt-to-equity ratio of less than 20.
  - All firms with negative equity are small firms; negative EBIT is more common among smaller firms.
  - Larger firms hold most NFC debt and are more leveraged, concentrating systemic implications.
  - Debt shares by firm size in 2014: Small firms (debt 5.8%), Big firms (debt 94.2%).

### Approach to stress testing (shocks applied)
- Objective: quantify sensitivity of debt-at-risk to earnings and interest-rate shocks using firm-level data.
- Baseline interest rate: interest expense relative to total debt in the current year.
- Interest-rate shock scenarios:
  - Scenario 1: interest costs increase by 25 percent.
  - Scenario 2: interest rates increase by 200 basis points (tail-risk).
  - Scenario 3: interest rates increase by 300 basis points (tail-risk).
  - Interest expenses in shock scenarios 2 and 3 are computed by applying the tail-risk shock to the baseline rate (formula as specified in source).
- Profit shock:
  - Operating income (EBIT) shocked by assuming a 25 percent decline: EBIT_shock = EBIT * (1 − 0.25).
- ICR under shock: ICR_shock = EBIT_shock / interest_expense_shock (notation and structure preserved from source).

### Stress-test results (debt-at-risk and firms-at-risk outcomes)
- Historical trend: debt-at-risk and firm-at-risk have risen in recent years.
- Combined moderate shock (25 percent increase in interest costs and 25 percent decline in EBIT):
  - Firms-at-risk increase from 31 to 36 percent of all corporates.
  - Share of debt-at-risk increases from 20 to 35 percent.
  - Taking cash reserves into account, total debt-at-risk would fall to 27 percent and most listed firms would still be able to service their debts.
- Tail-risk shocks (more severe interest-rate increases):
  - Debt-at-risk and firms-at-risk rise substantially in the face of tail-risk shocks, increasing from 20 percent (affecting 31 percent of firms) to 61 percent of total debt and 43 percent of firms in the most extreme scenario.

*Sources: Worldscope; and IMF, Corporate Vulnerability Utility database; IMF staff calculations.*

### Appendix XI. External Sector Report

### Appendix XI. External Sector Report

### Foreign asset and liability position and trajectory
- NIIP stood at 210 percent of GDP at the end of 2015, about 13 percent higher than in 2014.
- NIIP level in 2015 is at the level of 2010 but significantly lower than the pre-GFC peak of 256 percent of GDP in 2006.
- Projections: Current account and growth projections imply that the NIIP to GDP ratio is likely to rise substantially over the medium term.
- Gross non-FDI liabilities were 438 percent of GDP at the end of 2015—predominantly cross-border deposit taking by foreign bank branches.
- Mitigants: banks’ large short-term external assets; authorities’ close monitoring of banks’ liquidity risk profiles; large official reserves and other official liquid assets.

### Overall assessment and potential policy responses
- Overall Assessment: The external position in 2015 was substantially stronger than what is consistent with medium-term fundamentals and desirable policies.
- Drivers in 2015: decline in energy prices and lower regional trade had an important impact on the current account.
- Uncertainty: Assessment for 2015 and the size of the imbalance are subject to a wide range of uncertainty reflecting Singapore’s very open economy and position as a global trading and financial center.
- Since end 2015 the NEER has remained broadly unchanged; assessment of the external position is unlikely to have changed.
- Potential policy responses:
  - Increased public spending, a stronger social safety net, a more-even distribution of consumption across generations, and a slower absorption of foreign workers would contribute to moderating the current account over the medium term.
  - Fiscal policy in recent years has increased social spending.

### Current account
- Background:
  - CA surplus of 19.8 percent of GDP in 2015, up by 2.3 percent of GDP relative to 2014.
  - Large goods balance partially offset by remittance outflows and a negative income balance.
  - Oil price decline narrowed the oil trade deficit by 3.7 percentage points of GDP, to 1.7 percent of GDP in 2015.
  - Amid regional trade slowdown, weaker external demand and buoyant private and public consumption partially offset CA improvement.
  - Monetary policy easing via a slightly lower trend appreciation of the NEER band likely had a limited positive effect on the current account.
  - Structural drivers of high saving: financial center status, limited social safety nets, high income inequality, rapid aging, and a defined-contribution pension scheme.
  - Fiscal policy increases in social spending should contribute to a lower CA surplus.
- Assessment:
  - Singapore is a small, very open economy with a large positive NIIP, very high per capita income and rapid aging—non-standard factors that make CA assessment uncertain.
  - Staff assesses the 2015 CA as substantially stronger than the level consistent with medium-term fundamentals and desirable policies, by 3 to 9 percent of GDP.

### Real exchange rate
- Background:
  - Average REER depreciated by 2 percent in 2015 with respect to 2014.
  - This followed a 29 percent appreciation in REER terms between 2004 and 2013.
  - Since end 2015 the NEER has depreciated by 2 percent.
- Assessment:
  - Staff assesses the real exchange rate is around 6 to 18 percent weaker than warranted by medium-term fundamentals and desirable policies.
  - This estimate is drawn from the CA assessment and relies on a semi-elasticity of the CA with respect to the REER of about 0.5, consistent with Singapore’s high level of openness.
  - The assessment is subject to wide uncertainty reflecting uncertainty in the underlying CA assessment and the semi-elasticity.

### Capital and financial accounts: flows and policy measures
- Background:
  - Singapore has a fully open capital account.
  - The financial account deficit tends to co-move with the global financial cycle and reflects reinvestment abroad of income from foreign assets of the official sector.
  - Financial flows include sizable net inward FDI and smaller but more volatile net bank-related flows.
  - Inflows under “Other Investment, liabilities,” which averaged US$50 billion per annum during the first five years after the global financial crisis, turned negative in 2015 (– US$4 billion).
  - The capital and financial accounts in 2015 recorded the largest net outflow in at least 30 years, both in absolute terms and relative to Singapore’s GDP.
  - As a trade and financial center in Asia, negative sentiment in emerging and low income countries in the region can affect Singapore significantly.
- Assessment:
  - The financial account is likely to remain in deficit as long as the trade surplus remains large.

### FX intervention and reserves level
- Background:
  - NEER is the intermediate monetary policy target; intervention is undertaken to achieve inflation and output targets.
  - Official reserves declined by 9 percent (25 billion USD) in 2014 and 2015, reflecting also valuation changes.
  - As a financial center, prudential motives call for a large NIIP buffer, also in the form of reserves.
- Assessment:
  - At end 2015, official reserves covered about 26 percent of non FDI short-term external debt.
  - Reserves are far in excess of thresholds for other adequacy metrics.
  - While non-standard factors warrant generous reserve buffers, current levels appear adequate and there is no case for further accumulation for precautionary purposes.

### Technical background notes and key figures
- Valuation changes have been an important driver of changes in the NIIP, given the large gross assets and liabilities.
- Singapore’s official reserves amounted to about 87 percent of GDP in 2015.
- Singapore has a negative income balance despite its large and positive NIIP because the rate of return on its foreign assets is lower than the return paid on its foreign liabilities.
- Singapore is a net oil importer, with a net oil trade deficit of 1.7 percent of GDP in 2015; the oil trade deficit would be smaller if high imported petroleum product content in exports and services like water transportation are taken into account.
- Monetary policy easing in 2015 involved two slight declines in the trend appreciation of the NEER band from an estimated 2 percent to less than 1 percent per annum.
- EBA-based estimates:
  - The EBA-estimated CA gap is about 6.4 percent of GDP (relative to a cyclically-adjusted level of the CA of about 22 percent of GDP in 2015 and a norm of 15.6).
  - Of that, about 0.75 percentage points of GDP is identified as policy gaps (driven by the fiscal balance and public spending on health care) and the remaining 5.7 percentage points of GDP are the residual.
  - The CA gap increased by 1 percentage point with respect to last year’s assessment.
  - The norm increased by 3 percentage points driven mostly by the contribution of terms of trade (1.5 percentage points) and domestic credit (0.6).
  - The EBA-Lite model gives a very similar assessment.
- Other notes:
  - The latter large gross inflows and outflows explain volatility in bank-related flows.
  - The reserves-to-GDP ratio is larger than in most other financial centers, which may reflect that most other financial centers are located in reserve-currency countries or currency unions.

*Appendix XI. External Sector Report*

### Appendix XII. Public Debt Sustainability Analysis

### Appendix XII. Public Debt Sustainability Analysis

### Framework and background
- The debt sustainability analysis (DSA) framework for market access countries is used to assess Singapore’s debt sustainability and other risks related to its funding and debt structure.
- Choice of framework: the basic framework is used given Singapore’s high level of government assets.
- Data coverage: fiscal assumptions are based on the general government debt, consistent with authorities’ reported government debt.

### Macro-fiscal assumptions and fiscal path
- Real GDP growth projections:
  - 2016: 1.7 percent
  - 2017: 2.2 percent
  - Medium term: 2.6 percent
- Central government surplus (staff baseline): decreases from 2.7 percent of GDP in 2015 to 1.5 percent in 2021.
- Projected fiscal path is consistent with the authorities’ targets and supported by policy reforms announced in recent budgets.

### Debt levels, projections, and financing needs
- Historical and projected nominal gross public debt (in percent of GDP, 2014–2021): 97.7, 99.8, 104.7, 100.7, 98.8, 95.5, 92.3, 89.6, 87.3.
- Under the baseline, the debt-to-GDP ratio is projected to decrease to below 90 percent by 2021.
- Gross financing needs (GFN) are expected to remain at about 10 percent in the medium term.

### Government assets and mitigating factors
- Gross government debt is about 100 percent of GDP and includes about 65 percent of GDP of debt to the Central Provident Fund (CPF).
- CPF is a defined contribution fully funded pension scheme requiring Singaporeans to contribute to individual accounts; CPF invests mostly in public bonds, 95 percent.
- The government invests proceeds through Temasek and the Government Investment Corporation (GIC); most of the investments are held abroad.
- Temasek has assets of about 70 percent of GDP.
- Gross financial assets of the government are about 200 percent of GDP.
- Note: GIC does not report assets; government assets held abroad are not fully published or provided to the Fund.

### Historical dynamics and identified debt-creating flows (selected figures)
- Change in gross public sector debt (cumulative, 2005–2021 row summary): 0.8, -4.1, 4.9, 0.5, -1.9, -3.3, -3.2, -2.8, -2.2, -12.9.
- Identified debt-creating flows (selected components, percent of GDP):
  - Primary deficit: -5.7, -4.3, -0.3, 0.4, 0.5, 0.3, 0.2, 0.1, -0.1, 1.4.
  - Primary (noninterest) revenue and grants (levels): 20.3, 20.4, 20.1, 20.7, 20.0, 20.3, 20.5, 20.8, 21.1, 123.3 (cumulative).
  - Primary (noninterest) expenditure (levels): 14.6, 16.1, 19.8, 21.0, 20.6, 20.6, 20.8, 20.8, 20.9, 124.7 (cumulative).
  - Automatic debt dynamics (contribution): -6.8, -3.3, -3.5, 1.1, -0.6, -1.1, -0.8, -0.4, 0.0, -1.8.
  - Real interest rate contribution (of which): -1.3, 0.0, -1.6, 2.9, 1.7, 1.3, 1.7, 2.1, 2.4, 12.0.
  - Real GDP growth contribution (of which): -5.6, -3.3, -1.9, -1.8, -2.2, -2.4, -2.5, -2.5, -2.4, -13.8.
  - Other identified debt-creating flows / other change in financial assets: 1.1, 1.6, 1.5, 1.4, 0.7, 0.0, 0.0, 0.0, 0.0, 2.1.
  - Residual, including asset changes: 12.2, 1.9, 7.3, -1.4, -1.5, -1.5, -1.4, -1.4, -1.4, -8.7.
- Effective interest rate (defined as interest payments divided by debt stock at the end of previous year), selected projections:
  - 2016: 3.1
  - 2017: 3.4
  - 2018: 3.9
  - 2019: 4.4
  - 2020: 4.9
  - 2021: 5.4

### Baseline and alternative scenario assumptions (selected)
- Baseline scenario (real GDP growth, inflation, primary balance, effective interest rate):
  - Real GDP growth: 2016: 1.7, 2017: 2.2, 2018: 2.5, 2019: 2.6, 2020: 2.6, 2021: 2.6.
  - Inflation (GDP deflator): 2016: -0.3, 2017: 0.4, 2018: 1.3, 2019: 1.3, 2020: 1.3, 2021: 1.3.
  - Primary Balance: 2016: -0.4, 2017: -0.5, 2018: -0.3, 2019: -0.2, 2020: -0.1, 2021: 0.1.
  - Effective interest rate: 2016: 3.1, 2017: 3.4, 2018: 3.9, 2019: 4.4, 2020: 4.9, 2021: 5.4.
- Historical scenario (selected):
  - Real GDP growth: 2016: 1.7, 2017–2021: 5.4 (each year).
  - Primary Balance: 2016: -0.4, 2017–2021: 5.0 (each year).
  - Effective interest rate: 2016: 3.1, 2017: 3.4, 2018: 3.6, 2019: 3.9, 2020: 4.1, 2021: 4.4.
- Constant Primary Balance scenario (selected):
  - Primary Balance: -0.4 for 2016–2021.
  - Other variables follow baseline (Real GDP growth and Inflation as baseline; Effective interest rate same as baseline).

### Composition of public debt and maturity/currency features (high-level)
- Composition highlights (as shown in charts):
  - Gross nominal public debt rising through 2016 then projected to decline through 2021.
  - Public gross financing needs spike around 2018–2020 then moderate.
  - By maturity: both medium-and long-term and short-term components shown across 2005–2021 with projections.
  - By currency: local currency-denominated and foreign currency-denominated shares shown across 2005–2021 with projections.

### Key analytic conclusions
- Debt is projected to fall, reaching pre-global financial crisis levels by 2021 under staff projections.
- A high level of financial assets (about 200 percent of GDP) mitigates risks associated with gross public debt of about 100 percent of GDP.
- CPF-related internal debt (about 65 percent of GDP) and large sovereign asset holdings (Temasek about 70 percent of GDP; GIC assets not published) are central to the assessment of net public sector fiscal strength.

*Source: IMF staff.*

### 3.1 Against  this  challenging  cyclical  backdrop  and  ongoing  structural  changes,  an optimal

### _cr16263 - 3.1 Against  this  challenging  cyclical  backdrop  and  ongoing  structural  changes,  an optimal

### Monetary Policy
- Singapore’s monetary policy had been eased in a calibrated manner since January 2015.
- In April 2016, MAS set the S$NEER policy band to a zero percent rate of appreciation.
- The April 2016 move was described as not a policy to depreciate the domestic currency, but only to remove the modest and gradual appreciation path of the S$NEER policy band.
- MAS assessed that Singapore’s GDP growth would be more modest than previously envisaged, and hence MAS Core Inflation would pick up more gradually over the course of 2016 than earlier anticipated, and likely keep to just below two percent on average over the medium term.
- The sequence of measured monetary policy shifts over the past 18 months has been validated by growing evidence of benign underlying inflation pressures for longer.
- These policy calibrations aim to help keep the level of real GDP close to its potential in 2016–17 and ensure price stability over the medium term.
- MAS’ current policy stance was judged appropriate by Staff, and the exchange rate policy framework is sufficiently flexible to accommodate heightened financial market volatility arising from Brexit.
- MAS will continue to communicate implications of shocks for inflation and the policy stance through Monetary Policy Statements, the Macroeconomic Review, and other timely pronouncements, as needed.
- MAS commits to enhancing monetary policy transparency initiatives over time, including information on the evolving path of key macroeconomic variables.

### Fiscal Policy
- Budget 2016 was expansionary, providing a fiscal impulse of slightly over one percent of GDP for the current financial year.
- The fiscal impulse in Budget 2016 is in addition to the impulse carried over from the past three years’ Budget measures, including cost-saving measures for firms and transfers to households.
- Budget 2016 provided targeted near-term relief to households and small and medium enterprises (SMEs).
- Household relief included one-off GST vouchers and Service and Conservancy Charges (S&CC) rebates.
- SME support measures included:
  - corporate income tax rebate raised from 30% of tax payable to 50%, for Years of Assessment (YA) 2016 and 2017, capped at $20,000 per YA;
  - deferral by another year of the scheduled hike in the foreign worker levy for the Marine and Process sectors;
  - introduction of the new SME Working Capital Loan to ensure continued access to funding for viable SMEs.
- The government does not follow a pre-committed fiscal (impulse) rule based on a static output gap projection; instead, it takes an approach contingent on developments and stands ready to inject further fiscal support as necessary.
- Authorities note that decisions to invest in healthcare and transport infrastructure should be anchored to the need and viability of maintaining and operating these infrastructures in the future.
- Singapore’s fiscal rules effectively require the budget to be balanced over a term of government, introducing fiscal discipline while not precluding counter-cyclical action when needed.
- Overall, the expansionary fiscal policy stance in 2016, together with a more accommodative monetary policy setting, constitute a complementary macroeconomic mix to ensure medium-term price stability and sustainable growth.

### Addressing Medium-term Challenges
- Since 2010, Budget measures have kept in step with phases of economic restructuring; Budget 2016 shifted focus towards a sector-based approach to build firms’ capabilities.
- The $4.5 billion Industry Transformation Programme (ITP) was designed to help firms and industries move into the next phase of restructuring.
- ITP measures include the Automation Support Package and the National Robotics Programme to help companies scale up automation and support development and deployment of robots.
- ITP financing and tax incentives aim to encourage SMEs to increase scale through mergers and acquisitions, and to internationalise.
- The Committee on the Future Economy (CFE) was set up in October 2015 to develop economic strategies, building on the Report of the Economic Strategies Committee of 2010, and addressing slower labour force growth.
- Under RIE2020 (Research, Innovation and Enterprise plan over 2016 to 2020):
  - Singapore will set aside $19 billion to support research, innovation and enterprise activities.
  - This is an 18% increase in budget as compared to RIE2015, the preceding 5-year plan.
  - 45% of the RIE2020 budget will be committed to support four strategic domains: Advanced Manufacturing and Engineering (AME), Health and Biomedical Sciences (HBMS), Urban Solutions and Sustainability (USS), and Services and Digital Economy (SDE).
  - Cross-cutting efforts will support excellent science, a strong pipeline of skilled power, translation of research into products and services, and nurturing of high-tech start-ups.

### Financial Sector Developments
- Authorities welcome Staff’s acknowledgement of Singapore’s high regulatory and supervisory standards.
- Despite a recent rise in credit risks, Singapore’s banking system remains well capitalized with adequate provisions.
- Macro-prudential policies have contributed to a modest correction in property prices and signs of a soft landing.
- Recent moderation of credit growth—partly aided by macroprudential measures—has helped contain household and corporate indebtedness.
- Household and corporate balance sheets remain resilient and stress tests indicate debt servicing remains manageable in the event of adverse shocks.
- Authorities will continue to monitor credit and asset market developments and adjust macro-prudential tools to maintain financial stability.

### Final Remarks
- The external economic environment is fraught with uncertainty and downside risks as recognised in the IMF’s July 2016 WEO Update.
- Authorities will continue to carefully monitor developments and their impact on the Singapore economy.
- In the event of a negative shock, authorities have the wherewithal to respond in a timely and appropriate manner to provide necessary support and ensure macroeconomic and financial stability.
- The Singapore authorities are agreeable to the publication of the Staff Report associated with the 2016 Article IV Consultation and will be releasing the Buff Statement at the same time.

*Source: Authorities' statement for the 2016 Article IV Consultation.*

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