Press Release No. 15/214

Press Release: IMF Staff Completes 2015 Article IV Mission to Singapore

May 12, 2015

An International Monetary Fund (IMF) team led by Alex Mourmouras visited Singapore during April 29-May 12 to hold discussions in the context of the country’s 2015 Article IV Consultation. At the end of the visit, Mr. Mourmouras issued the following statement:

“Singapore’s economy continues to perform well but activity has been impacted by the slow global recovery, the transitory effects of the shift to a growth model that relies less on new inflows of foreign workers, and the turning of credit and housing cycles. Growth moderated to 2.9 percent in 2014, from 4.4 percent in 2013. Net exports accounted for two thirds of the growth, while private consumption contributed the remaining third. A rising trade surplus pushed up the current account surplus to 19 percent of GDP in 2014, from 18 percent of GDP in 2013. Headline inflation fell to -0.3 percent (y/y) in the first quarter of 2015, down from an average of 1 percent in 2014, on the back of the steep decline in international oil prices and downward trends in housing and car permit prices. Core inflation also eased, to 1.1 percent (y/y) in the first quarter of 2015.

“Bank lending growth has slowed as macroprudential measures have contributed to the welcome cooling of property markets and helped contain financial sector stability risks. The Monetary Authority of Singapore (MAS) has further strengthened its prudential framework with new limits on unsecured consumer lending. Singapore banks continue to boast high capital ratios and profitability and low nonperforming loans.

“Looking ahead, growth is expected to average about 2.5-3 percent in 2015. The uncertain outlook could continue to weigh on private consumption and investment. However, several factors point at the likelihood of a broad-based recovery in domestic demand, including the gradual recovery in external demand, the expansionary budget, a less restrictive monetary policy stance, and lower energy prices. These factors are expected to offset the drag from the continued moderate downward trend in real estate prices and rising interest rates. Headline and core inflation are expected to average 0 and 1 percent in 2015, respectively, before both rising to 1.7 percent in 2016 on gradually recovering energy and commodity prices.

“Risks to the outlook are tilted to the downside. As a city state with a very open economy, Singapore is exposed to external volatility and risks. A protracted period of slower growth in advanced and emerging economies is the most important short-term risk. Side effects from global financial conditions, such as a surge in financial volatility and persistent U.S. dollar strength, and a growth slowdown and financial risks in China, could also have an important impact. These external risks could be exacerbated by the elevated indebtedness of the household and corporate sectors since the Global Financial Crisis. Strong macroeconomic fundamentals—a very strong external position, adequate level of foreign reserves, large fiscal buffers and strong bank balance sheets—could help absorb shocks and facilitate an effective countercyclical policy response.

“The economic restructuring and shift to a growth model that relies less on foreign workers is well under way. The mission welcomes the increase in the labor force participation rate of women and older workers. In the mission’s view, the restructuring has led to a permanent increase in real wages relative to the cost of capital. Together with the incentives provided by government programs, this has raised firms’ long-term desired capital to labor ratio, which will translate into increased investment as the restructuring matures.

“The MAS’s current monetary policy setting is appropriate. A lower nominal effective exchange rate (NEER) appreciation bias than maintained during the past two years is warranted by the benign near- and medium-term inflation outlook, moderate economic growth, and continued uncertainties in the external outlook. Inflation risks are circumscribed by the large and sustained oil price decline and its second-round effects and the continued moderation in house prices. Global financial volatility could increase as the U.S. Federal Reserve normalizes its policy rate. Monetary policy vigilance and flexibility will continue to be in order in many countries, including Singapore.

“The fiscal year (FY) 2015/16 (year ending in March) budget reaffirms the government’s medium term fiscal policy orientation and objectives while providing short-term support in the face of weak external conditions and ongoing transitional costs arising from structural reforms. The targeted cash transfers (“Silver Support”) will augment last year’s Pioneer Generation Package with assistance to the neediest seniors. The mission also welcomes the government’s plans to raise spending on healthcare over the next five years to meet increased demand from an aging population. Planned higher outlays on education and training and infrastructure should support higher productivity and worker skill levels. In this context, the modest increases in the highest marginal personal income tax rate and fuel taxes should provide additional revenues to fund these increased outlays, along with increased use of investment returns from government assets.

“The mission would like to acknowledge the leading role Singapore plays in international economic and financial cooperation through its active participation in global and regional organizations, as well as its support for capacity building in the region. The mission expresses its gratitude to the authorities for their openness, cooperation, and hospitality.”