Information about Asia and the Pacific Asia y el Pacífico
Journal Issue

Singapore: Staff Report for the 2004 Article IV Consultation

International Monetary Fund
Published Date:
April 2005
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Information about Asia and the Pacific Asia y el Pacífico
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I. Introduction

1. In last few years, Singapore’s economy has been hard hit by a series of external shocks. These shocks—the Asian crisis, the bursting of the technology bubble, and the SARS outbreak in 2003—have disrupted an economic expansion largely uninterrupted since the 1970s. In the latest downturn, output contracted at an average (annualized) quarterly rate of 3¾ percent between Q3 2002–Q2 2003. Over the next four quarters, the economy recovered rapidly, buoyed by strong global demand, supportive monetary and fiscal policies, and structural reforms.

2. Ongoing structural changes have complicated adjustment to these shocks. Competitive pressures from regional low-cost economies have pushed Singapore’s manufacturing sector to restructure and diversify. The services industry is also undergoing changes. Partly reflecting this restructuring, the unemployment rate has remained above its historical average, despite the recovery.

A series of external shocks has slowed growth in recent years.

3. To facilitate an orderly adjustment to these changes, a wide range of structural reforms has been undertaken in the past few years. These reforms include changing the tax system to reduce business costs; increasing wage and labor market flexibility; liberalizing the banking, telecom, and utility sectors; enhancing the financial regulatory and supervisory framework; and negotiating free-trade agreements with major trading partners.

4. Amidst these economic changes, last August the country witnessed its second leadership transition since independence. Lee Hsien Loong, son of independence leader Lee Kuan Yew, became the new Prime Minister. He retained the finance portfolio, but was replaced by former Prime Minister Goh Chok Tong as the head of the Monetary Authority of Singapore (MAS). The new cabinet contains few changes, signaling policy continuity. The ruling People’s Action Party, in power since independence, remains firmly in control with an overwhelming majority in Parliament.

5. In recent years, the Executive Board has broadly endorsed the government’s macroeconomic policies and structural reforms. The authorities’ pragmatic use of countercyclical policies over the past few years has been supported by the Board. The MAS has implemented many of the recommendations of the FSSA that was concluded last April, and has taken steps to enhance the transparency of the monetary policy framework. While endorsing the government’s structural reform agenda, the Board noted that the divestment of the government-linked companies (GLCs) has been somewhat gradual. On certain other issues, the authorities’ views have diverged from those of the staff and the Board. For example, on fiscal policy, the authorities have proceeded more cautiously to expand the social safety net despite large reserves. This partly reflects their concerns over the vulnerability of the economy to a dilution of investor confidence, if such measures were viewed as large liabilities constraining the government’s ability to strengthen Singapore’s competitiveness in the future.

II. Recent Developments

6. The frenetic pace of the recent recovery has now begun to slow. The recovery—mainly driven by exports, reflecting strong global electronics demand, and since early 2004 supported by domestic investment—delivered an unprecedented four straight quarters of double-digit growth from Q3 2003 to Q2 2004. In Q3 and Q4 2004, the pace slackened markedly as electronics exports and consumption slowed. For the year, growth is expected to reach around 8 percent in 2004, recovering from 1.1 percent in 2003.

The current rapid recovery is now moderating.

7. Over the recovery, employment growth increasingly gathered strength. The unemployment rate has fallen from its 17-year high of 5½ percent in Q3 2003 to 3½ percent in Q3 2004, but still remains above its historical average of around 2 percent. Construction job losses have continued as the sector has remained on a declining trend that began in 1999. Long-term unemployment among the unskilled has also emerged. Rapid productivity growth has so far outstripped real wage increases, resulting in a substantial decline in labor cost. The National Wages Council, made up of representatives from employers, the unions, and the government, has recommended moderate wage increases for 2004/05, the first proposed rise in three years.

Job growth has accelerated, but unemployment remains above its historical average.

8. Inflation has crept up, but remains low. The CPI rose by 1.7 percent in the first ten months of 2004, led by rising education, health, and food costs. The rise in global oil prices has had only a modest effect as retailers cut back on profit margins and because of the relatively low weight of oil-dependent goods and services in the consumption basket. An increase in the goods and services tax (GST) rate from 4 percent to 5 percent in 2004 was an added one-off factor, contributing an estimated 0.4 percentage points to the CPI.

The current recovery has been stronger, with higher export and investment demand, than in the post-Asian crisis period

Source: CEIC, Singaporean authorities, and Fund staff estimates.

9. Despite strong exports, the current account surplus narrowed in the first three quarters of 2004, reflecting higher imports as investment picked up. Although outward investment remained strong, official reserves rose by US$14 billion (US$110 billion at end-November covering 6 months of imports).

Inflation has edged up, driven by food, health, and education costs.

10. The corporate and financial sectors remain strong. The corporate sector is profitable with low debt-to-equity ratios. Domestic banks are well capitalized with rising non-interest earnings and low nonperforming loans. With ample liquidity, bank lending has risen since mid-2003 mainly due to growing household credit. However, growth in corporate credit has been anemic, with firms relying on internal savings and bond issues to finance investments. Stock prices have risen in line with regional trends and new issuance of equity has increased. The property price deflation appears to be bottoming out.

Nonperforming loans are low by regional standards

Household credit has driven bank loan growth

11. On the policy front, the MAS announced a modest and gradual tightening of its monetary stance in April, and maintained this position in last October’s policy review. Operationally, the MAS shifted the “zero appreciation” path of the nominal effective exchange rate (NEER) adopted in mid-2001 to a modest and gradual appreciation, citing a firming up of inflationary pressures.1 After having depreciated by 6½ percent since 2001, the NEER (as calculated by IMF) appreciated modestly in Q3 2004, but reverted to its pre-April announcement level toward end-2004. The yield curve has flattened and the SGD-USD SIBOR discount has widened.

The monetary stance has been tightened recently…

…which has lead to a flattening of the yield curve.

12. The current fiscal stance is broadly neutral.2 Last year, the fiscal surplus was over 6 percent of GDP, higher than expected due to lower-than-budgeted capital spending. This year’s budget also plans on large capital spending, which combined with an increase in the GST rate, aims at keeping the fiscal stance neutral.

III. Economic Prospects and Risks

13. Looking ahead, staff expects activity to moderate to more sustainable levels in the near term. The softening in global demand, particularly the cresting of the world electronic cycle, could slow GDP growth to about 4 percent in 2005. Leading indicators such as purchasing managers’ index (PMI) also point in this direction. Domestic demand will play a larger contributory role, including through a restocking of inventories, which were depleted in the recovery. Despite the moderation in activity, there is likely to be very little slack in the economy going forward, reflecting the recent rapid growth. With the labor market tightening, real wages are also set to rise to catch up with the productivity gains. These factors, along with high energy prices, will raise inflationary pressures. Under the present monetary stance, however, inflation should remain within 2 percent. As export growth slows and investment increases, the current account surplus should narrow.

Leading indicators portend a slowdown …

… with output remaining near potential.

14. This outlook is subject to some uncertainty, especially on the external front. Much will depend on how world demand reacts to the volatility in oil prices, on the extent of the downturn in the global electronics cycle, and on the level of activity in China.3 Geopolitical tensions and security threats also pose risks. If these risk factors materialize, growth could be lower. Nevertheless, given Singapore’s strong external and fiscal positions and resilient financial system the risk of a crisis is low (Table 5).4 On the domestic front, recent employment gains and sizeable cyclical increases in corporate profits could portend stronger consumption and investment growth.

Table 1.Singapore: Selected Economic and Financial Indicators, 1999–2005
Nominal GDP (2003): US$91.3 billionGDP per capita (2003): US$21,825
Population (2003): 4.19 millionQuota: SDR 862.5 million
Growth (percentage change)
Real GDP6.99.7-
Total domestic demand7.016.2-6.3-1.7-9.611.54.6
Final domestic demand2.512.70.4-2.1-
Gross fixed investment-4.98.7-4.5-9.9-
Change in inventories (contribution to GDP growth)3.52.6-5.70.4-
Net exports (contribution to GDP growth)1.5-
Exports of goods and services7.914.7-
Imports of goods and services8.018.3-
Saving and investment (percent of GDP)
Gross national savings50.646.343.642.544.245.140.3
Gross capital formation32.032.024.921.213.416.317.0
Inflation and unemployment (period average, percent)
CPI inflation0.01.31.0-
Unemployment rate3.
Central government budget (percent of GDP) 1/
Overall balance5.
Primary operating balance 2/3.41.1-3.5-2.7-3.0-2.9-3.1
Money and credit (end of period, percentage change)
Broad money (M3) 3/7.3-1.84.0- 7/
Credit to private sector-3.05.916.3- 7/
Interest rate (three-month interbank, in percent) 7/
Merchandise trade (percentage change)
Export volume5.416.8-8.64.412.219.35.9
Import volume9.514.8-
Terms of trade-0.8-2.5-1.8-0.80.3-1.0-1.2
Balance of payments (US$ billion)
Current account balance15.313.216.118.928.229.826.2
(Percent of GDP)(18.6)(14.3)(18.7)(21.4)(30.9)(28.8)(23.3)
Balance on goods12.412.715.719.929.331.626.9
Exports, f.o.b.124.4149.3133.7137.3157.8195.5207.1
Imports, f.o.b.-111.9-136.6-118.0-117.4-128.5-163.9-180.2
Overall balance4.36.9-
International reserves and external debt
Gross official reserves (US$ billion)77.280.475.882.396.3110.1 8/
(Months of imports) 4/(5.6)(6.6)(6.2)(6.1)(5.8)(6.0)
Gross external debt (US$ billion) 5/ 9/
(Percent of GDP)(41.5)(34.8)(39.4)(38.1)(39.7)(37.5)
Exchange rate
S$/US$ (end of period)1.6661.7321.8511.7371.7011.642 8/
Nominal effective exchange rate 6/119.2119.5121.2120.2115.7114.0 10/
Real effective exchange rate 6/107.2107.4108.2105.7101.098.4 10/
Sources: Data provided by the Singapore authorities; and Fund staff estimates and projections.

Fiscal year beginning on April 1.

Overall balance excluding capital revenue, investment income, net lending, debt service, and fund transfers.

Adjusted for the acquisition of POSBank by the Development Bank of Singapore in November 1998.

In months of following year’s imports of goods and services.

Based on BIS data; corporate bonds outstanding and the external bank claims by the BIS reporting countries.

IMF Information Notice System monthly index (1990 = 100); period average.

As of end-October 2004.

As of end-November 2004.

As of end-March 2004.

As of end-September 2004.

Sources: Data provided by the Singapore authorities; and Fund staff estimates and projections.

Fiscal year beginning on April 1.

Overall balance excluding capital revenue, investment income, net lending, debt service, and fund transfers.

Adjusted for the acquisition of POSBank by the Development Bank of Singapore in November 1998.

In months of following year’s imports of goods and services.

Based on BIS data; corporate bonds outstanding and the external bank claims by the BIS reporting countries.

IMF Information Notice System monthly index (1990 = 100); period average.

As of end-October 2004.

As of end-November 2004.

As of end-March 2004.

As of end-September 2004.

Table 2.Singapore: Balance of Payments, 1999–2005 1/(In billions of U.S. dollars)
Current account balance15.313.216.118.928.229.826.2
Trade balance12.412.715.719.929.331.626.9
Exports, f.o.b.124.4149.3133.7137.3157.8195.5207.1
Of which : electronics exports62.977. 3/
Imports, f.o.b.-111.9-136.6-118.0-117.4-128.5-163.9-180.2
Services balance2.
Income balance1.8-0.30.8-0.1-1.1-1.70.5
Transfer payments (net)-1.0-1.1-1.1-1.1-1.1-1.1-1.3
Net capital flows 2/-11.0-6.4-17.0-17.6-21.4-14.2-24.5
Capital and financial account balance-14.4-5.9-14.4-13.6-25.3-14.2-24.5
Capital account (net)-0.2-0.2-0.2-0.2-0.2-0.2-0.2
Financial account (net)-14.2-5.8-14.3-13.5-25.1-14.0-24.3
Direct investment (net)8.611.9-
Portfolio investment (net)-8.9-15.0-10.0-11.1-10.9-7.0-13.6
Other investment (net)-13.9-2.7-2.3-4.4-20.1-13.3-17.5
Net errors and omissions3.4-0.5-2.6-
Overall balance4.36.9-
Memorandum item :
Current account as percent of GDP18.614.318.721.430.928.823.3
Trade balance as percent of GDP15.113.718.322.532.130.523.9
Net international investment postion
(In billions of U.S. dollars)54.667.976.0
(In percent of GDP)63.576.983.2
Sources: Monetary Authority of Singapore, Economic Survey of Singapore; and staff estimates and projections.

Data for the current account balance, the capital and financial account balance, and net errors and omissions are converted to U.S. dollars from the official presentation in Singapore dollars using period-average exchange rate.

Including net errors and omissions.

For the first three quarters.

Sources: Monetary Authority of Singapore, Economic Survey of Singapore; and staff estimates and projections.

Data for the current account balance, the capital and financial account balance, and net errors and omissions are converted to U.S. dollars from the official presentation in Singapore dollars using period-average exchange rate.

Including net errors and omissions.

For the first three quarters.

Table 3.Singapore: Monetary Survey, 1999–2004



(In billions of Singapore dollars at end-period)
Net foreign assets131.0126.3132.9133.2150.0153.6164.0163.9
Monetary authorities127.1137.8138.6141.5161.9170.7173.7171.4
Deposit money banks 1/3.8-11.5-5.7-8.3-11.9-17.1-9.7-7.5
Domestic credit (net)121.8126.6144.6121.3134.0145.4142.8137.2
Claims on private sector150.2159.1185.1169.1178.3181.0183.8184.5
Claims on government (net)-28.4-32.5-40.4-47.7-44.3-35.6-41.0-47.3
Other items (net)-78.3-82.1-96.6-74.2-89.2-97.3-102.4-100.4
(Annual percentage change)
Domestic credit-
Claims on private sector-3.05.916.3-
Source: IMF, International Financial Statistics.

Commercial banks.

Source: IMF, International Financial Statistics.

Commercial banks.

Table 4.Singapore: Summary of Government Operations, 1998/99–2004/05(In percent of GDP)
Budget 1/ActBudget 1/Proj. 2/
Total revenue30.729.529.
Current revenue24.325.825.
Tax revenue16.015.715.815.713.613.513.113.613.8
Investment income 3/
Other nontax revenue4.
Capital revenue 4/
Total expenditure29.024.020.423.718.720.514.417.717.6
Current expenditure11.811.312.715.513.613.613.112.912.8
Operating expenditure10.910.311.312.112.212.512.211.711.7
Debt servicing0.
Agency fees on land sales0.
Investment expenses0.
Transfer payments0.
Development expenditure and net lending17.
Development expenditure 5/
Net lending8.
Fund transfers 6/
Overall balance1.
Primary operating balance 7/
Memorandum items :
Budget balance (the government’s definition)
Government saving12.414.
Structural primary operating balance 8/
Fiscal impulse based on operating balance 9/2.2-
Gross government domestic debt 10/
of which: Central Provident Fund43.544.938.058.059.863.3
Sources: Data provided by the Singapore authorities; and staff estimates and projections.

Original budget, excluding supplementary budgets. Fiscal year runs from April 1 through March 31.

Includes the effect of automatic stabilizers.

Includes all investment income from government assets and interest earnings on development loans from 2000/01.

Sale of government property.

Includes the land reclamation expenditure.

Includes transfers to the Edusave Endowment Fund, the Medical Endowment Fund, the Lifelong Learning Endowment Fund and the ElderCare Fund.

Overall balance excluding investment income, capital revenue, debt service, net lending, and fund transfers.

Calculated with the elasticity of revenue with respect to output equal to 1.1, and a zero elasticity of expenditure with respect to output.

Calculated as an increase in the structural primary operating deficit.

Data for end of calendar year.

Sources: Data provided by the Singapore authorities; and staff estimates and projections.

Original budget, excluding supplementary budgets. Fiscal year runs from April 1 through March 31.

Includes the effect of automatic stabilizers.

Includes all investment income from government assets and interest earnings on development loans from 2000/01.

Sale of government property.

Includes the land reclamation expenditure.

Includes transfers to the Edusave Endowment Fund, the Medical Endowment Fund, the Lifelong Learning Endowment Fund and the ElderCare Fund.

Overall balance excluding investment income, capital revenue, debt service, net lending, and fund transfers.

Calculated with the elasticity of revenue with respect to output equal to 1.1, and a zero elasticity of expenditure with respect to output.

Calculated as an increase in the structural primary operating deficit.

Data for end of calendar year.

Table 5.Singapore: Indicators of Vulnerability, 1999–2004
199920002001200220032004Month for

2004 data
Financial sector indicators
Broad money (M3, percent change, y/y)7.3-1.84.0-
Private sector credit (percent change, y/y)-3.05.916.3-
Credit to the property sector (percent change, y/y)
Share of property-sector credit in total non-bank credit (percent)39.841.741.942.344.645.6Oct.
Credit rating of local banks (S&P) 1/AA+/AA+/AA+/AA+/AA+Sep.
Three-month Interbank rate (percent, end-year)
NPL ratio (local banks, percent) 2/
Capital adequacy ratio of local banks (percent)20.619.618.116.917.915.5June
Asset market indicators
Stock prices (percent change, y/y)78.0-22.3-15.7-17.431.618.3Nov.
P/E ratio99.220.916.821.224.916.4Oct.
Stock prices of the finance sector (percent change, y/y)120.6-23.2-1.9-13.523.810.3Nov.
Real estate prices (1998Q4=100, 4-quarter moving average) 3/
Office space93.3116.6107.888.376.572.5Q3
External Indicators
Current account balance (US$ billion)15.313.216.118.928.222.1Q1-Q3
(In percent of GDP)18.614.318.721.430.928.6Q1-Q3
Gross official reserves (US$ billion)77.280.475.882.396.3110.1Nov.
(In month of next year’s imports of goods and services)
Real exchange rate (end of period, 1990=100)106.4109.6106.1104.998.898.8Sep.
Sovereign yield spread (in percent) 4/
External debt (US$ billion) 5/
(In percent of GDP)41.534.839.438.139.737.5Mar.
(In percent of exports of goods and services)22.718.020.820.119.316.7Mar.
Of which: Public sector external debt0.
Source: Data provided by the Singapore authorities and IMF, Information Notice System.

Ratings of the three major local banks.

In percent of total loans.

The price indices are computed based on the Laspeyres method before 1998Q4 and based on the moving average method from 1998Q4.

Spread of 10-year US$-denominated bond issued by DBS over the U.S. government bond.

Based on BIS data; corporate bonds outstanding and the external bank claims by the BIS reporting countries.

Source: Data provided by the Singapore authorities and IMF, Information Notice System.

Ratings of the three major local banks.

In percent of total loans.

The price indices are computed based on the Laspeyres method before 1998Q4 and based on the moving average method from 1998Q4.

Spread of 10-year US$-denominated bond issued by DBS over the U.S. government bond.

Based on BIS data; corporate bonds outstanding and the external bank claims by the BIS reporting countries.

GDP growth has tracked the global IT cycle.

15. The medium-term outlook hinges on how effective recent reforms will be in establishing new areas of growth. In response to increasing competition from low-cost regional economies, the authorities have undertaken a wide range of reforms to diversify the economy and make it more competitive. The manufacturing sector is moving up the quality ladder, market share of electronics exports has increased, and new industries, such as pharmaceuticals, are expanding rapidly (Box 1). Singapore’s role as an international hub for goods and services is also expanding, with both financial and trading sectors diversifying into new businesses. Competition with Hong Kong SAR remains strong, but Singapore has continued to strengthen traditional business ties with countries in its neighborhood (Indonesia and Malaysia), while venturing into new markets like Australia, China, and India, and specializing in niche financial fields, such as Asian dollar transactions. Accordingly, the staff expects growth over the medium term to average 4-5 percent, while the current account surplus should narrow as investment recovers from its recent low levels.

Singapore’s market share of semi-conductors has increased.

Pharmaceuticals are expanding.

International hub business is also increasing.

IV. Policy Discussions

16. Policy discussions took place against the backdrop of improved economic conditions and substantial progress on structural reforms. The authorities agreed with the staff’s assessment of near-term uncertainties, and added disorderly adjustment to the global current-account imbalance to the list of risk factors. Discussions, thus, centered on the appropriate policy stance in this uncertain environment to support growth while keeping inflationary pressures under check. On the structural front, the discussions focused on assessing progress on planned reforms and their early impact, and the direction of new initiatives to further enhance Singapore’s competitiveness.

Box 1.Is Singapore Moving Up the Quality Ladder?1

With increased competition from low wage countries in the region, Singapore is searching for different ways to stay competitive. It is more difficult for advanced economies like Singapore to compete on wages, and since they are probably already close to the technology frontier in many products, large productivity improvements are likely to be infrequent. One avenue, which Singapore has successfully followed, is to diversify its production into technologically advanced industries, like bio-chemicals and pharmaceuticals. Another way, which is a little harder to identify, is to upgrade the quality of products in existing industries. Although less attention has been directed at quality upgrading, it remains an important means of maintaining competitive edge.

Measuring quality differences in products is generally difficult. One approach is to use differences in prices as an indicator of quality differences. This approach is feasible provided data is sufficiently disaggregated such that one is comparing like with like. If this is the case, then price differences indeed pick up quality differences rather than simply compositional differences. The U.S. provides highly disaggregated bilateral trade data, which for some countries includes more than 10,000 products for any given year. We assume that given its competitive product markets the U.S. would not be willing to pay a higher price for a product from Singapore than the same product from, say, China unless it was of higher quality. Using data between 1989 and 2003 a number of interesting results emerge from the exercise:

Singapore’s quality gap relative to trading partners

  • Singapore produces higher quality manufacturing goods, on average, compared to its low-wage competitors. However, Singapore’s average quality is lower than more technologically advanced countries like Japan and the U.K.

  • The quality gap has increased relative to its low-wage competitors. Relative to China, this has increased from 70 percent in 1989 to 110 percent in 2003.

  • Although the average quality of Singapore’s products is still lower than that of Japan and the U.K., the size of the quality gap has narrowed.

Thus, these results suggest that Singapore is successfully moving up the quality ladder. This is a very encouraging sign for its future growth prospect. By differentiating its products from its low-wage competitors, exports can continue to be a key driver of high growth rates in the period ahead.

1 For details see Chapter I of the accompanying Selected Issues paper, prepared by Mary Amiti.

A. Near-Term Policies: Treading a Cautious Path

17. With little slack in the economy going forward, the staff supported MAS’s announced monetary policy tightening. Although inflationary pressures were likely to be moderate, the announced tightening would pave the way for an orderly and gradual withdrawal of the stimulus provided in recent years to support growth. That said, in the staff’s view, monetary policy needed to become more supportive, perhaps even ahead of the scheduled policy review in April 2005, if the downside risks to the outlook became ominous. The authorities responded that if the need arose they would change policy between the bi-annual reviews, as was done after September 11, 2001. They also noted that the band around the target NEER path provided some room to accommodate unexpected developments in the economy.5 The authorities did not consider a possible increase in exchange rate flexibility in regional currencies, particularly in the renminbi, as complicating their monetary policy given that they already use a trade-weighted exchange rate as an intermediate target.

18. The mission welcomed MAS’s ongoing efforts to increase the transparency of its monetary policy framework. These efforts have been well received by market participants and have helped strengthen policy credibility. In recent years, MAS has published its Monetary Policy Statement, and disseminated operational information and data on money market transactions. Nevertheless, the trade-weighted exchange rate index and the policy band, together with its central rate, are not published. The MAS has contended that this deliberate “translucence” prevents the market from testing the trading band and allows them to correct policy mistakes without severely disrupting the economy. This practice does not appear to have impaired credibility, as evidenced by the low and stable inflation rate over almost ten years, despite several large shocks to the economy during the period.

19. The authorities and the mission discussed factors behind the surge in current account surpluses in recent years, including the possibility of real exchange rate misalignment. The current account surplus has more than doubled from around 14 percent of GDP in 2000 to nearly 31 percent of GDP in 2003, although it is expected to moderate somewhat this year. Despite the relatively small size of the Singapore economy, the absolute level of these surpluses is significant. Over this period, the real exchange rate depreciated by about 8 percent.

Singapore’s current account surplus has risen…

…but the REER has depreciated mildly.

20. The MAS considered both the surge in the current account surplus and the current level of the real exchange rate to be in line with fundamentals. They noted that the spike in the current account surplus reflected households’ and the corporate sector’s market-based response to the increased uncertainty in recent years. In response to adverse external shocks to the Singapore economy, investment had been reduced domestically (by over 18 percentage points of GDP) and increased abroad to take advantage of the relatively better opportunities and higher returns overseas.6 Going forward, the authorities and the mission agreed that the current account surplus was likely to decline as economic prospects stabilized, but would remain fairly high given Singapore’s demographics.7 On the issue of real exchange rate misalignment, the authorities pointed to the study published in its most recent Macroeconomic Review, which found the REER to be broadly in line with its equilibrium level.8

21. The staff cautioned that the large current account surpluses was not fully explained by private sector behavior. The government and GLCs are major contributors to domestic savings, and how they allocate resources between domestic and foreign investment is an important factor in the determination of the exchange rate. Their active investment abroad may have alleviated upward pressures on the real exchange rate despite the high current account surpluses. However, the staff noted that there were no perceptible signs of a major real exchange rate misalignment in commodity or asset prices at present—inflation was stable and low, while neither the equity nor the real estate market showed signs of overheating. In addition, the present intended tightening of monetary policy would keep the NEER on an appreciating path, helping to reduce Singapore’s current account surplus and contribute to the orderly adjustment of the global current account imbalance.

Equity prices have risen, but the P/E ratio has been stable.

Property prices have declined.

22. The mission commended the authorities for the judicious use of fiscal policy to support the economy. After providing substantial support in the early 2000s, fiscal policy has remained broadly neutral. This year’s budget also contained several measures to support private enterprise and to attract investment, particularly in the wealth management industry.

The fiscal position has been in surplus over the years.

23. The FY2005/06 budget process is still in its early stages. Staff projections indicate that this year’s fiscal outturn could be better-than-budgeted by ⅓ percent of GDP due to the cyclical improvement in revenue. This would provide room to cut the top personal income tax rate to 20 percent from 22 percent to restore parity with the corporate tax rate and further strengthen the existing social safety net (such as by increasing medical benefits to the elderly) in the FY2005/06 budget, without straining the medium-term balanced budget objective. The authorities noted that several measures, including strengthening social assistance, were under consideration.

24. The authorities are seeking ways to fortify the automatic stabilizers to reduce reliance on discretionary measures as a countercyclical tool. To this end, they are considering changing the basis of tax assessment to current-year income from the existing practice of previous-year income. The mission supported this change, but the authorities noted that the reaction from corporates had not been positive in view of the perceived increase in compliance costs. The authorities are also considering treating ex ante spending limits on certain categories of spending and transfers more flexibly to improve their response to cyclical changes.

25. The government considers its high level of fiscal reserves to be a crucial factor underlying the strong investor confidence in Singapore. If faced with competitive pressures in the future, these reserves assure investors that the government has sufficient funds to finance tax cuts and infrastructure spending. The reserves also provide a buffer against rising health costs as the population ages. The mission observed that without compromising this insurance need, the government could leverage its fiscal strength to provide some additional assistance to the long-term unemployed and retirement benefits targeted to low-income earners. The authorities, however, were unwilling to introduce any entitlement program at this juncture and considered retraining and job-matching schemes that improved employment opportunities to be better suited to provide social insurance. For the medium term, the authorities intended to continue formulating policy within the existing budgetary framework.9 The staff noted the merits of this rules-based system and suggested that the present 50-percent limit on the use of yearly investment income, which appeared somewhat arbitrary, could be reviewed against Singapore’s future revenue and spending profiles. The authorities responded that while they were always seeking ways to improve the fiscal framework, this limit was important to safeguard the reserves.

26. The staff welcomed the first public review of Temasek’s operations—the government holding company in charge of all SOEs (Box 2). The review indicates that Temasek’s portfolio is well diversified across sectors and countries. Following Temasek’s example, the staff suggested that the government could also consider publishing, without disclosing sensitive details, the aggregate assets of Government of Singapore Investment Corporation (GIC), the broad elements of its portfolio, and its overall returns. The authorities, however, argued that GIC operations remained strategic and there was sufficient internal oversight to ensure its proper functioning. They did not see any benefit of disclosing the market value of GIC’s assets, since they were not burdened with debt and thus did not need to build investor confidence on this front. They were also reluctant to compile consolidated public sector accounts on the grounds that individual entities were audited under Singapore law and their accounts were available publicly. The authorities agreed, in principle, to participate in the fiscal ROSC exercise, but needed to better understand the resource costs before committing to a timetable.

Box 2.Temasek

The government of Singapore owns interests in various enterprises, both locally and abroad. These investments have been managed by the government’s holding company Temasek, incorporated in 1974. It manages a portfolio of about US$53 billion (55 percent of GDP) roughly equally divided between domestic and foreign investments and spread across a wide range of industries, including holdings in local industry leaders such as Singapore Airlines, Singtel, and DBS. Temasek companies (TCs) account for some 13 percent of Singapore’s GDP. The holding company’s performance has been respectable with a total shareholder’s return of 18 percent per annum over the past 30 years, although, partly due to the Asian crisis, returns have been lower, 3 percent to 6 percent, in the last 5–10 years.

Temasek’s success stands out in contrast to the generally held view that state-controlled enterprises are unprofitable and inefficient. Temasek attributes this success to its corporate governance framework which allows its management and board of directors to run the company without extensive interference from the government. Temasek’s board is directly accountable to the President of the Republic, who is elected separately from the Prime Minister, the head of the government. The President approves the appointment and removal of board members and the CEO.

Temasek’s holdings cut across sectors and countries.

Source: Temasek Review 2004

Notwithstanding this success, concerns have been raised that the presence of TCs in certain sectors may be hindering private participation. This is recognized in the recently published Temasek’s charter which directs it to divest its non-strategic holdings without, however, setting a time frame. Several Temasek’s holdings are also a legacy of state-led development policies of the past. Nevertheless, a stronger commitment to exit from sectors where the private sector can be an effective alternative will help to dissipate concerns that TCs crowd-out private entrepreneurship.1

While listed TCs are subject to the rules of disclosure imposed by the Singapore Exchange, Temasek itself is not listed and is not required to publish or disclose its financial accounts. Thus, the recent publication of the company’s charter and review represents a welcome move toward greater transparency. In the coming years, transparency will assume even greater importance as Temasek expands its operations overseas.

1 For example, there is evidence that TCs are rewarded in financial markets with a positive premium relative to private companies (see C. Ramirez and L. Tan, Singapore Inc. versus the Private Sector: Are Government-linked Companies Different? IMF Staff Papers Vol. 51 No. 3, 2004)

B. Medium-Term Issues: Searching for New Engines of Growth

27. The authorities underscored that economic prospects over the medium term depended on the strength of new engines of growth. Regional economies, particularly China and India, had been eroding Singapore’s traditional advantages by their increased openness and low-cost structure. Thus, to “remake Singapore” in response to these challenges, the government adopted the recommendations of the Economic Review Committee (ERC) in 2003. The ERC recommended measures to enhance competitiveness, promote private entrepreneurship, and facilitate economic diversification (Table 7.). The authorities explained that significant progress had been made to increase wage flexibility, reduce business costs, and promote the outward expansion of domestic firms and Singapore as a business hub.10 The mission noted that it would be important to evaluate the impact of these reforms and review the need for new ones.

Table 6.Singapore: Illustrative Medium-Term Scenario, 2000–2009
Real growth (percent change)
Total domestic demand16.2-6.31.7-9.611.
Final domestic demand12.70.4-2.1-
Gross fixed investment8.7-4.5-9.9-
Change in inventories 1/2.6-5.70.4-
Exports of goods and services14.7-
Imports of goods and services18.3-
Saving and investment (percent of GDP)
Gross national savings46.343.642.544.245.140.340.640.841.141.4
Central government12.
Private and other33.934.835.137.838.433.533.834.034.334.6
Gross capital formation32.024.921.213.416.317.018.218.919.319.6
Gross fixed capital formation29.829.625.824.924.724.
Inflation and unemployment (period average, percent)
CPI inflation1.31.0-
Unemployment rate3.
Central government (percent of GDP) 2/
Overall balance8.
Budget balance (the government’s definition)2.7-0.7-0.3-0.8-0.6-
Merchandise trade (percent change)
Export volume16.8-8.64.412.
Import volume14.8-
Terms of trade 3/-2.5-1.8-0.80.3-1.0-
Balance of payments (in percent of GDP)
Current account balance14.318.721.430.928.823.322.521.921.821.8
Balance on goods and services15.919.122.833.331.424.022.321.721.521.3
Balance on income and transfers-1.6-0.4-1.4-2.5-2.7-
Overall balance7.4-
Gross official reserves (US$ billions)80.475.882.396.3112.0113.6125.3138.6152.5161.8
(In months of imports) 4/(6.6)(6.2)(6.1)(5.8)(6.1)(5.7)(5.7)(5.7)(5.7)(5.7)
Sources: Data provided by the Singapore authorities; and staff estimates and projections.

Contribution to GDP growth.

On a calendar year basis.

Based on changes in export and import unit values.

In months of next year’s imports of goods and services.

Sources: Data provided by the Singapore authorities; and staff estimates and projections.

Contribution to GDP growth.

On a calendar year basis.

Based on changes in export and import unit values.

In months of next year’s imports of goods and services.

Table 7.Key Recommendations of the Economic Review Committee
  • Reduce corporate and personal income tax rates to 20 percent by year of assessment (YA) 2005.

  • Raise GST from 3 percent to 5 percent.

  • Create GST offset package to help Singaporeans adjust to GST increase.

  • The government cut corporate and top personal tax rates from 24.5 percent and 26 percent respectively to 22 percent in YA2003. The corporate tax rate will be lowered to 20 percent from YA2005.

  • The GST rate was raised from 3 percent to 4 percent on January 1, 2003, and to 5 percent on January 1, 2004.

  • Implemented in 2003–04 offset packages that include income transfers (Economic Restructuring Shares (ERS)); additional ERS will be distributed in 2005.

Central Provident Fund (CPF)
  • Refocus CPF on providing basic retirement savings, home ownership and medical needs, and on addressing labor market flexibility.

  • Defer returning CPF contribution rate to 40 percent from 36 percent (20 percent employee; 16 percent employer) for two years.

  • In August 2003, the government made further changes to earlier ERC recommendations.

  • A lower long-term variable contribution rate of 30 percent to 36 percent (with employer rate between 10 percent and 16 percent) was set to maintain competitiveness. For older workers, CPF rate will be reduced to 27 percent by 2006.

  • From October 1, 2003, cut employer contribution rate from 16 percent to 13 percent. Employees continue to contribute 20 percent.

  • Increased CPF and Medisave Minimum Sums; revised Special and Medisave Accounts contribution rates; tightened withdrawal rules at age 55; and further reduced CPF salary ceiling.

  • The tax relief ceiling for voluntary top-up of individuals’ contributions will be raised by 17 percent from 2005.

  • Pursue policies that ensure the adequate supply of land at competitive, stable prices.

  • Lowered rentals and prices for industrial properties.

  • Extended rental rebates for industrial tenants and lessees until June 2004.

  • Expanded eligibility for tax deductions for upfront land premium payments for industrial land to 60-year leases from 30 years previously.

Labor Market
  • Enhance labor market flexibility by raising variable wage component and drop seniority-based wage system.

  • Made several changes to CPF to address labor market flexibility (see above).

  • FY2003/04 budget introduced portable medical benefits.

  • In January 2004, Tripartite Taskforce on Wage Restructuring encouraged companies to adopt a more flexible wage model that would increase the variable component of wages, linked to the performance of the employee and company. As of end-June 2004 more than 60 percent of the private sector workforce were under some form of flexible wages.

  • A new category of work pass introduced from July 2004 to help businesses recruit skilled workers.

Entrepreneurship and Internationalization
  • GLCs should be commercially run and operate globally. They should be reviewed for divestiture.

  • To create pro-enterprise environment, have sunset rule on all licenses, outsource licensing and other government functions, allow enterprises to retain intellectual property from government projects, and enact generic competition law.

  • Improve availability of capital for entrepreneurs.

  • Review of GLCs for possible divestment every three years. Companies to be divested are Ascendas, PSB Corp, HDBay, and Cleantech Services.

  • Review of administrative rules and licensing procedures on a rolling five-year cycle.

  • Allow companies to defer income taxes for two years if their overseas investment incurs operating losses.

  • Tax exemptions for start-up companies for up to 3 years. The withholding tax on royalty payments will also be reduced from 15% to 10% from January 2005.

  • Provision of financing for start-up companies.

  • Competition law will come into force in 2005.

Manufacturing and Services Sectors
  • Continue to attract multinational companies in electronics, chemicals, biomedical sciences and engineering sectors. Develop new engines of growth such as industrial IT, micro-electromechanical systems, nanotechnology and photonics.

  • Continue to develop areas with strong expertise, like trading and logistics, ICT, financial services and tourism. In addition, launch into new sectors such as healthcare, education and creative industries.

  • Promote private wealth management. All foreign-sourced income remitted by resident individuals will be exempt from tax from YA2005. Singapore-sourced investment income derived by individuals from financial instruments will also be exempt from tax from YA 2005.

  • Extend overseas trade linkages and develop target markets through the active pursuit of FTAs.

  • Promote Singapore as a business hub. The maximum duration for the pioneer incentive was extended from 10 to 15 years in 2004. The regional HQ incentive was also extended from 3 to 5 years.

  • Allow approved companies to claim capital allowances on equipment used by subsidiaries outside Singapore from FY2003.

  • A Ministerial Committee on Services has been set up to oversee the development of the service industries and to resolve trade-offs between economic goals and social objectives.

Human Capital
  • Develop the full potential of individuals through a more flexible school curriculum.

  • Assist unemployed through comprehensive re-employment approach with job counseling, training, job search assistance and subsidized job attachments.

  • A new statutory board (the Singapore Workforce Development Agency) was established in September 2003 to promote continuing education and training.

  • To encourage Singaporeans to upgrade their skills in preparation for career switches, tax relief for course fees is increased from S$2,500 to S$3,500 and extended to courses that eventually result in a career switch.

  • The salary ceiling for the Skills Development Levy was raised by 20 percent from July 2004.

28. The mission encouraged the authorities to accelerate their planned divestment of GLCs. The government has been a major player in Singapore’s development, delivering a remarkable economic transformation since the mid-1960s. Nevertheless, looking ahead, the ERC envisioned a greater economic role for the private sector and recommended divesting GLCs to provide room for entrepreneurship. In this regard, the authorities felt comfortable with the present measured pace of divesting GLCs on a case-by-case basis. On a related issue, some private sector observers expressed concern that competition may be stifled by the extensive presence of GLCs in certain sectors of the economy. The authorities acknowledged the presence of such an impression in some quarters, but stressed that effective firewalls separated the legislative, regulatory, and participatory roles of the government. The staff hoped that the newly legislated Competition Law would help allay to some of these concerns, but urged the government to review sector-specific competitive conditions.

29. Singapore has sought out new markets through bilateral free trade agreements (FTAs) in recent years.11 The authorities explained that their bilateral FTAs (which they considered to be consistent with WTO principles) were accelerating the momentum of trade and investment liberalization, thereby strengthening the multilateral trade system. They also ensured that their bilateral FTAs were not in conflict with multilateral and ASEAN-based agreements.

30. The authorities are refocusing the mandatory savings scheme (CPF) as a core retirement scheme, rather than use it as a discretionary countercyclical instrument. They noted that the increasing use of flexible wage contracts had reduced the need for discretionary changes in employer contribution rates for countercyclical purposes. The authorities also added that recent measures had raised the minimum savings for retirement, and that CPF members with insufficient resources were being aided through budgetary transfers. Retirees were also encouraged to monetize their residential properties by downgrading, subletting or using reverse mortgages to benefit from capital gains from their housing investments.12 The mission agreed that with the last round of cuts in contribution rates there was little room for further reductions without compromising wage replacement rates. CPF officials also agreed with the staff that the CPF Investment Scheme, which was aimed at infusing greater investment flexibility, would be more extensively used if its high transaction costs were reduced by pooling funds under a small number of asset managers with simpler choices of risk-return portfolios. The government plans to align CPF rates of return with long-term government security yields, which should improve the returns on members’ balances over time.

Net CPF contribution has grown recently.

31. The authorities are concerned about the emergence of structural unemployment. They noted that continued loss of low-end manufacturing jobs and the ongoing restructuring toward capital intensive industries have increased long-term unemployment.13 With the economy moving toward more knowledge-based activities, there is a growing danger that the less-educated and less-skilled workers may find themselves permanently unemployed. The authorities were addressing this problem through a wide range of retraining and skills upgrading programs. A new government statutory board, the Workforce Development Agency, was formed in 2003 to coordinate and strengthen these programs.

32. The mission held extensive discussions on the regulatory challenges arising from banks’ overseas expansion and the increase in asset management firms in Singapore. The authorities noted that bank profitability and capitalization remained strong and that local banks have responded to increased domestic competition with the expansion of foreign banks by consolidating at home and expanding abroad (Box 3.). The mission observed that the expansion abroad could pose new risks and regulatory challenges. The authorities said that they monitored risks arising from these developments and maintained regular contact with regulators in host countries. While client accountability was stressed in regulating asset managers and hedge funds, financial exposure of banks to these firms was closely monitored.

Box 3.Singapore: Overseas Expansion of Domestic Banks1

In recent years, bank activities in many emerging market economies have been progressively liberalized. Financial reforms have eased legal barriers to entry, liberalized deposit and loan rates, relaxed restrictions on bank portfolios and ownership, and reduced reserve requirements.

In Singapore, there has been a continuous process of financial reform and liberalization since the 1970s, and a major five-year program was launched in 1999 to liberalize access by foreign banks to Singapore’s domestic market. This liberalization, together with the less benign post-Asian-crisis macroeconomic environment, has challenged the traditionally highly profitable Singaporean banks. Foreign banks have played an important role in compressing intermediation margins, especially in certain segments, for example, mortgage lending. However, the banking sector remains concentrated. The three local Singapore banks control about 60 percent of deposits, and their net interest rate margin is the lowest in the region. The concentrated market structure may have contributed to the low interest margin by reducing costs through scale effects.

In the region, Singapore has the lowest interest margin despite one of the highest concentration ratios.

Source: Fitch Research, Capital Intelligence

These competitive pressures have led domestic banks to consolidate and expand abroad to maintain profitability. Market concentration and scale have contributed to the relative efficiency of Singapore’s banks, which have the second lowest cost-to-income ratio in the region. Other advantages for the Singapore’s banks in their expansion abroad have been a sound regulatory environment, high capitalization, and low NPLs. Since 1999, Singapore banks have acquired interest in Malaysia, Hong Kong SAR, Thailand, the Philippines and Indonesia. (Temasek, which is a major shareholder of Singapore’s largest domestic bank, DBS, has separately also acquired shares in Indian, Malaysian, and Indonesian banks.) The performance of the overseas acquisitions so far has been mixed: with successes in Hong Kong and Malaysia, and problems in Thailand and the Philippines. This pattern has largely reflected local conditions rather than the efficiency of Singaporean banks.

The opening of Singapore’s domestic market to foreign competition and the expansion of Singapore’s banks abroad pose new challenges for bank regulators. The growing presence of foreign banks raises new supervisory issues—the objectives of the parent bank and the local institution may differ and local regulators may lack important information about the parent bank’s financial stability. The expansion of local banks into foreign countries with different market, legal, and regulatory infrastructures also brings new risks—problems in their foreign ventures may threaten the stability of the parent banks.

MAS is well aware of these risks and has been actively seeking cooperation with bank regulators in countries hosting Singapore’s banks subsidiaries and in the home countries of the major foreign banks active in Singapore

1 For details see Chapter II of the accompanying Selected Issues paper, prepared by Giovanni Dell’Ariccia.
Local banks’ balance sheets remain healthy.Key Financial Indicators for Local Banks(In percent)

1st half
Capital adequacy
Regulatory capital to risk-weighted assets18.120.619.618.116.917.915.5
Asset quality
Nonperforming loans to total loans5.
Classified loans to total loans7.
After-tax return on assets0.
After-tax return on equity4.210.712.

33. The MAS has set up a unit to coordinate implementation of the FSSA recommendations. Progress has been made, including in lowering the minimum capital requirement for local banks from 12 percent to 10 percent, a step endorsed by the FSSA (Table 8.). The mission welcomed the advances and encouraged the authorities to clarify the roles of the monetary authority and its accountability in the planned amendments to the MAS Act. It also supported the introduction of a deposit insurance scheme, scheduled for 2005, and encouraged the authorities to regularly update and publish financial soundness indicators.14 Earlier this year, the MAS published the Financial Stability Review, a new bi-annual publication, which reiterated the overall soundness of Singapore’s financial sector. The authorities intend to implement the Basel II standards in tandem with the G10 countries, by end-2007. The FSSA had concluded that regulatory and supervisory practices were close to international standards and codes, including in accounting standards, and that the authorities had taken initiatives to improve corporate governance and strengthen the framework of disclosure practices. Despite these efforts, the recent incident related to speculative oil trading by a Singapore-listed subsidiary of an overseas company indicates that there is room for further improvement in these areas.15

Table 8.Singapore: FSSA Recommendations
Key Policy RecommendationsStatus
Macro-prudential monitoring: Further strengthen MAS’ monitoring of: (i) risks arising from new financial products; (ii) cross-border financial flows (including flows in the ADM and particularly transactions between branches and head offices) to detect potential strains in the offshore banking market; (iii) household and corporate sector balance sheets to assess the resilience of the private sector; and (iv) market and counter-party risks of derivatives activities by financial institutions.Some progress:

In January 2005, MAS published a new bi-annual publication—Financial Stability Review—which assesses the overall stability of the financial system.
Regulatory systems and supervisory practices: Further enhance the MAS’ legal and regulatory framework through the completion of the review of the regulatory minimum capital requirements for local banks and the implementation of its new risk-based capital framework for the insurance industry, planned for introduction in late 2004; and complete the ongoing review of the MAS Act.Implemented:

Review of capital requirements completed.

Insurers to comply with the new risk-based capital framework from January 1, 2005.
The MAS’ accountability, independence, and oversight capabilities: Reduce the potential for conflicts of interest arising from the multiple official responsibilities of the Chairman of the MAS.In progress:

A working group will propose amendments to the MAS act addressing i) specification of MAS’ objectives, and ii) MAS accountability framework (targeted for 2005)
Monetary and financial policy transparency: Provide more information on how supervisory actions are taken in line with the risk-based supervisory framework and disclose more information to improve the public’s ability to assess supervisory performance.Under review:

2 monographs published on:

“Objectives and Principles of Financial Supervision in Singapore,” April 2004.

“MAS’ Roles and Responsibilities in Relation to the Securities Clearing and Settlement Systems in Singapore,” May 2004.
Anti-money laundering and combating the financing of terrorism: Improve the effectiveness Of cross-border mutual legal assistance.In progress:

Singapore has a continuing program of Mutual Legal Assistance Treaty (MLAT) negotiations with several countries. A few are near completion. In November 2004, Singapore also signed a regional MLAT with seven ASEAN countries.
Capital market development: Review and address factors that may constrain the further development of the corporate bond market, including the limited use of credit ratings, guaranteed interest rates of the central Provident Fund (CPF), and the CPF investment policy.Under review

34. The mission welcomed the authorities’ continued efforts to enhance data quality and its timeliness. The authorities have published net international investment position (IIP) data for 2001–2003. The mission welcomed this data release, but noted that the levels appeared understated in light of Singapore’s large current account surpluses since the 1990s. Officials remarked that this could reflect different market values of the portfolios of foreign and resident investors. Singapore remains a destination, since the 1970s, of large foreign investment, and only in the 1990s has outward foreign investment become substantial. In addition, as the IIP surveys had been started recently, the sample may not be fully representative. As the coverage of the surveys was widened the quality of the data would also improve. Indeed, the IIP positions have been revised upward recently. The officials responded positively to staff suggestion of conducting a comprehensive review of the statistical bases by participating in a data ROSC. The authorities are reviewing the modalities and resource cost of the ROSC, before making a final decision.

V. Staff Appraisal

35. Singapore’s economy has recovered rapidly since mid-2003, having weathered a series of adverse shocks since the Asian crisis. Lately, job creation has also gathered strength following large productivity gains in the earlier part of the recovery. This turnaround owes much to a favorable external environment, including strong global electronics demand. It was also helped by supportive macroeconomic policies as well as continued structural reforms to improve competitiveness.

36. Looking ahead, economic activity is expected to moderate to more sustainable levels in the near term. Taking into account the softening in global demand, particularly the cresting of the global electronic cycle, output growth could slow to about 4 percent in 2005. The outlook is shrouded in considerable uncertainty, especially on the external front. Despite the expected moderation in activity, however, there is likely to be little slack in the economy, reflecting the recent rapid growth. The tightening in the labor market and high energy prices could raise inflationary pressures.

37. In this environment, the current tightening stance of monetary policy is appropriate. This will also pave the way for an orderly and gradual withdrawal of the stimulus provided in recent years to support the economy. However, if the slowdown appears to be more than expected, monetary policy may need to become more supportive. MAS’s monetary policy framework centered on the management of the trade-weighted exchange rate has worked well to keep inflation low and stable. MAS’s ongoing efforts to increase the transparency of the framework are commendable.

38. There are no apparent signs of a real exchange rate misalignment, but the rise in recent current account surpluses is not fully explained by private sector behavior. Foreign investment by the government and GLCs could have played a part in warding off upward pressures on the real exchange rate despite the rise in current account surpluses. However, with the expected increase in domestic investment and the authorities’ intended appreciation of the nominal effective exchange rate, current account surpluses should narrow in the near term. This will also aid in the orderly adjustment of the global current account imbalances.

39. Fiscal policy has been judiciously used in recent years to support the economy. With the higher-than-expected growth, the fiscal position this year is likely to be better than budgeted. Such an outturn would provide room for the authorities to cut the top personal income tax rate in the next budget, and strengthen the existing social safety net. Singapore’s fiscal-policy framework of maintaining a balanced budget over the medium term remains appropriate, although the framework could be improved further by setting the limit on the use of the annual investment income within the context of Singapore’s future revenue potential and spending needs.

40. The recent public review of Temasek’s operations is a significant milestone in increasing fiscal transparency. Following Temasek’s example, the government could also consider publishing, without disclosing strategic and sensitive details, GIC’s aggregate assets, broad elements of its portfolio, and its overall returns. Such a move could further enhance investor confidence by testifying to the strength of the government’s financial position. More generally, publishing the consolidated public sector accounts, in line with international accounting standards, would greatly help in this regard. The staff welcomes the authorities’ interest in undertaking a fiscal ROSC in the near future.

41. In response to rising competition from low-cost regional economies, the authorities have implemented an array of reforms to enhance competitiveness. As a result, significant progress has been made in increasing labor market and wage flexibility, reducing business taxes and costs, and promoting the outward expansion of Singapore firms. Moreover, quality upgrading and diversification in the manufacturing sector and Singapore’s expansion into a hub for regional asset management, health, and education services are also taking place. These developments will provide a new basis for sustained growth over the medium term. Nevertheless, to promote entrepreneurship and increase the role of the private sector, the staff encourages the authorities to step up the GLC divestment process. The newly legislated Competition Law should help to strengthen the separation of the roles of the government as a referee and a player in the economy.

42. The authorities have rightly focused attention on the regulatory challenges arising from banks’ overseas expansion. The financial system remains robust and benefits from an efficient legal system, good accounting standards, and ongoing initiatives to promote corporate governance, as noted in the FSSA. The authorities are encouraged to implement the remaining FSSA recommendations, including clarifying the roles of the monetary authority and its accountability in the planned amendments to the MAS Act. Recent events, related to speculative trading by a listed company, suggest the need for increased regulatory vigilance of companies trading in the Singapore exchange.

43. Given the aging population, a key challenge is to ensure that the retired are adequately provided for. Thus, the measures taken to refocus the CPF as a core retirement scheme are welcome. Moreover, the increasing use of flexible wage contracts has reduced the need for discretionary changes in contribution rates for countercyclical purposes. The CPF investment scheme’s high transaction costs could be reduced by pooling funds under a single or a small number of asset managers with simpler choices of risk-return portfolios, which could allow a more extensive use of this scheme.

44. Singapore is in observance of the SDDS and generally publishes economic and financial data on a timely basis. The authorities’ continued efforts to improve data quality are welcome. The staff encourages the authorities to consider a comprehensive review of the statistical base by participating in a data ROSC.

45. The staff recommends that the next Article IV consultation with Singapore be held on the standard 12-month cycle.

ANNEX I Singapore—Fund Relations

(As of November 30, 2004)

I. Membership Status: Joined August 3, 1966; Article VIII

II. General Resources Account:

SDR millionQuota

(In percent)
Fund holdings of currency572.9866.43
Reserve position in Fund289.5633.57

III. SDR Department:

SDR millionAllocation

(In percent)
Net cumulative allocation16.48100.00

IV. Outstanding Purchases and Loans: None

V. Financial Arrangements: None

VI. Projected Payments to Fund: None

VII. Exchange Arrangement:

Singapore’s exchange rate regime is a managed floating system. The Monetary Authority of Singapore (MAS) monitors its value against an undisclosed basket of currencies and intervenes in the market to maintain this value within an undisclosed target band. The U.S. dollar is the intervention currency. As of November 30, 2004, US$1=S$1.6417.

Singapore has accepted the obligations of Article VIII, Sections 2, 3, and 4 and maintains an exchange rate system that is free of restrictions on the making of payments and transfers for current international transactions.

Singapore maintains restrictions on Singapore-dollar credit facilities, and bond and equity issuance. Singapore-dollar proceeds obtained by nonresident financial entities (such as banks, merchant banks, finance companies, and hedge funds) from loans, equity listings or bond issuance to finance activities outside Singapore have to be swapped or converted into foreign currency upon draw-down. Financial institutions are prohibited from extending Singapore-dollar credit facilities in excess of S$5 million to nonresident financial entities if there is reason to believe that the Singapore-dollar proceeds may be used for Singapore-dollar currency speculation.

VIII. Article IV Consultation:

The 2003 Article IV consultation discussions were held in Singapore during December 3-15, 2003, and the consultation was concluded by the Executive Board on March 15, 2004.

IX. FSAP Participation:

The FSAP was undertaken in conjunction with the 2003 Article IV consultation. FSAP missions took place in November 2002, July-August 2003, and September 2003.

X. Technical Assistance: None

XI. Resident Representative: None

ANNEX II Singapore—Statistical Issues

Singapore provides data to the Fund generally on a timely basis and meets the SDDS specifications for the coverage, periodicity, and timeliness of the data, and for the dissemination of advance release calendars. The authorities have continued to improve the quality of data, including publishing more disaggregated data, but there are a number of deficiencies in statistical practice, particularly in the external and fiscal areas.

  • In early 2003, the Singapore Department of Statistics (DOS) completed a rebasing of the Singapore System of National Accounts to reference year 1995 from 1990. The DOS also made improvements in data sources and methodology. One issue addressed in this exercise was the treatment of a value-added tax, namely the Goods and Services Tax (GST), introduced in April 1994. Also, a reconciliation of various national accounts estimates was conducted, resulting in lower statistical discrepancies, and work on further improvements, particularly with respect to changes in inventories, is ongoing.

  • Merchandise trade statistics do not fully include trade with Indonesia, although trade transactions with Indonesia are captured elsewhere in the current account of the balance of payments. In January 2004, the authorities released some trade data with Indonesia covering 2003. The authorities plan to publish additional information on trade with Indonesia as part of their plans to accede to the Harmonized System Convention of the World Customs Organization (WCO).

  • In December 2003, the DOS introduced a new reporting format for the BOP’s services account that includes the standard services components (except communication services), in line with the fifth edition of the Balance of Payments Manual (BPM5). Other goods and services receipts and payments, which are substantial, used to be not disaggregated. The DOS used data from the Survey on International Trade in Services (launched in 1996) as an additional source for the compilation of more detailed services statistics.

  • Information on government assets held abroad is not published nor provided to the Fund. Interest on these assets and debt service payments on domestic debt made from the extrabudgetary Government Securities Fund are published on an annual basis, but are not fully reflected in the fiscal position. More generally, data on the financial position of the consolidated public sector are not published. Singapore has nevertheless complied with the expanded SDDS requirements to include data on the international investment position.

Annual balance of payments data are reported to STA each year. Since September 2004, data on quarterly gross direct and portfolio investment inflows have been provided to STA following the dissemination of such data from the Q1 2004 issue of the Quarterly Economic Survey of Singapore.

Singapore—Core Statistical Indicators(As of December 13, 2004)
Exchange RatesInternational ReservesReserve/Base MoneyCentral Bank Balance SheetBroad MoneyInterest RatesConsumer Price IndexExports/ImportsCurrent AccountCentral Government OperationsGDPExternal Debt/Debt Service 1/
Date of latest observation12/13/0411/0410/0410/0410/0412/13/0410/0410/04Q3/0410/04Q3/04
Date received12/13/0412/0411/0411/0411/0412/13/0411/0411/0411/0411/0411/04
Frequency of data 2/DMMMMDMMQMQ
Frequency of Reporting 2/DMMMMDMMQMQ
Source of data 3/NNNNNNNNNNN
Mode of reporting 4/EEEEEEEEEEE
Frequency of publication 2/DMMMMDMMQMQ

Official external debt is zero; data from official sources on private external debt are not available, although a survey to improve reporting in this area has recently been launched.

D-daily; M-monthly; Q-quarterly.

A-direct reporting by authorities; N-official publications and websites.

E-electronic data transfer.

Official external debt is zero; data from official sources on private external debt are not available, although a survey to improve reporting in this area has recently been launched.

D-daily; M-monthly; Q-quarterly.

A-direct reporting by authorities; N-official publications and websites.

E-electronic data transfer.

Singapore’s monetary policy is based on the management of a trade-weighted exchange rate within an undisclosed band, with the primary objective of maintaining price stability.

This is based on staff calculation of the fiscal impulse. Singapore’s fiscal year runs from April–March.

On current forecast, global semiconductor sales are expected to remain flat in 2005 after growing by nearly 30 percent in 2004. GDP growth in US, the Euro area, and China are also expected to fall. Estimates suggest that a 10 percent decline in the semi-conductor sales growth can reduce GDP growth by 1 percentage point. Exposure to U.S. demand is large. Direct exposure to China has grown in recent years, but is still relatively modest. However, the combined exposure to Indonesia, Malaysia, and Hong Kong SAR—economies that are in turn affected by activity in China—is significant.

Public finances have been in surplus for the last two decades, and the government has accumulated a substantial net asset position, estimated at about 120 percent of GDP at end-March 2004. Singapore does not have any external public debt. The outlook for the fiscal and external current account position remains favorable.

The MAS does not make explicit either its inflation or NEER targets, but past behavior suggests that monetary policy is well approximated by a Taylor rule that puts 80 percent weight on the deviation of the 9-12 month ahead expected inflation from a “target” inflation rate of 2 percent, and 20 percent weight on the output gap. The appropriate level of the NEER is then set based on estimates of direct and indirect pass-through effects of changes in the NEER on inflation and growth. Based on this analysis and the current outlook, staff estimates that another 1-1½ percent appreciation of the NEER is needed to keep the 9-12 month ahead inflation under 2 percent. This appreciation will likely be spread over the next 3-6 months.

Much of Singapore’s high saving is undertaken by corporations (including those by GLCs) at around 25-30 percent of GDP, partly reflecting the large share of profits in national income Central government saving has averaged around 9 percent of GDP during this period. Household saving rate is comparable to international levels at around 8-10 percent of GDP, of which net saving through the mandatory saving program (CPF) accounts for only around 2½ percent of GDP.

See Chapter V, Singapore: Selected Issues, IMF Staff Country Report No. 00/83 on the close relation between Singapore’s saving rate and population dynamics.

According to this study, the 10-12 percent lower REER compared to its pre-1998 level largely reflects the decline in real estate prices and worsening terms-of-trade, partially offset by the rise in net foreign assets.

This framework (made up of both formal rules and established practice) calls for the government to maintain a balanced budget over the election cycle. Any surplus over the cycle is transferred to the reserves, while deficits can be financed by the reserves only with the consent of the President, who is elected independently of the government. Within each year, the government can use only up to 50 percent of the investment income.

A recent survey indicates that over 60 percent of the private sector has introduced wage flexibility by linking 30 percent of monthly salaries to performance and profit indicators.

Singapore already has FTAs with several countries, including Japan and the United States. Negotiations are completed with Korea and near completion with India, while those with Canada, China, and Mexico are at advanced stages.

Given the large share of wealth held in residential properties (over 90 percent of households are homeowners with a total net wealth of over 150 percent of GDP), retirees in Singapore often face the dilemma of being “asset rich, but cash poor.” Net household wealth held as equity in pension funds (including CPF) is around 65 percent of GDP. Overall, net wealth of households is around 350 percent of GDP, comparable to that in the U.S. but less than that in Japan or in the U.K.

According to the authorities’ estimates, the natural rate of unemployment has been creeping up to around 3–3½ percent in recent years from around 2 percent before the Asian crisis.

The proposed scheme would cover up to S$20,000 per depositor and per institution, while banks would pay a risk-weighted insurance premium.

After the return of the mission from Singapore, in late November, a Singapore-listed Chinese state-owned company sought bankruptcy protection after losing $550 million in speculative oil trading. With the loss more than the company’s market value, trading of its shares was suspended on the stock exchange (SGX). An SGX inquiry is underway.

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