1.1 The Singapore authorities would like to thank the IMF mission team for a constructive and engaging 2018 Article IV consultation. The authorities welcome the useful analytical studies prepared for this year’s consultation.
2 Recent Economic Developments and Outlook
2.1 Global GDP growth in 2017 was at its strongest since 2011. This momentum has carried into the first half of this year, anchored on three mutually reinforcing upturns—in manufacturing, trade and investment. Against this backdrop, the Singapore economy expanded by a firm 4.1% in the first half of 2018. Although the pace of growth was similar to that in H2 2017 (4.5% y-o-y growth), the growth profile was more evenly distributed across industry clusters, compared to the IT-led growth in the preceding period. While the trade-related cluster remained a key pillar of growth, the contribution of modern services increased discernibly in H1 2018. Meanwhile, latest indicators suggest that the weakness in domestic-oriented industries could have receded.
2.2 Since the Article IV mission in May, prospects for the global economy have become more uncertain. Notably, the announcements of tariff impositions by the US and the subsequent retaliatory measures by a few major economies present new downside risks to global growth. While the estimated impact from first-round trade linkages is fairly limited, any escalation in tariff actions could significantly impair the trade and investment climate worldwide. Barring the materialisation of tail risks, Singapore’s GDP growth is expected to come in at 2.5–3.5% in 2018, in line with potential. Growth in the manufacturing sector is likely to moderate further, reflecting the attenuated though still-firm global demand for electronics and precision engineering products. At the same time, support from resilient regional demand, ongoing efforts at digital transformation of the Singapore economy, as well as stronger labour market outcomes will provide support to the modern and domestic-oriented services clusters.
2.3 Underlying inflation has continued on its gradual ascent since 2016. MAS Core Inflation, which excludes the costs of accommodation and private road transport, averaged 1.5% in 2017 and in Jan–May 2018, compared to a low of 0.5% in 2015. CPI-All Items inflation has also turned positive since late 2016, but was still subdued at an average of 0.5% over 2017 to May this year.
2.4 The continued improvement in labour market conditions should boost consumer sentiment and support domestic demand, contributing to a projected rise in core inflation over the second half of 2018. At the same time, external inflationary pressures have picked up, with the recent rally in global oil prices already filtering through to domestic oil-related components, such as electricity tariffs. There are also some upside risks to food inflation, emanating from the ongoing trade disputes and potential weather-related disruptions. Overall, inflationary pressures are expected to broaden across the main categories of the core CPI basket in the quarters ahead. The authorities expect core and headline inflation to average in the upper half of the 1–2% and 0–1% ranges, respectively for 2018.
3 Macroeconomic and Financial Stability
The authorities are committed to a macro-policy mix that keeps the economy on an even keel as GDP growth continues apace and core inflation rises mildly. They continue to be vigilant over internal balance, encompassing both macroeconomic and financial stability.
3.1 Against the backdrop of a mild ascent in core inflation and continued economic expansion since H2 2016, MAS undertook a gradual normalisation of monetary policy in April 2018, after keeping to a neutral policy stance for two years. The slope of the S$ Nominal Effective Exchange Rate (S$NEER) policy band was increased slightly, consistent with a modest and gradual appreciation path.
3.2 This policy response is predicated on baseline projections of rising core inflation, underpinned by steady economic growth, and does not aim to pre-empt tail risk scenarios. MAS’ approach is to commence with policy normalisation but to do so in an incremental fashion in view of still-benign inflation, particularly as there are growing risks to the immediate outlook. In the short term, the policy band provides sufficient room for fluctuations in the S$NEER to accommodate modest shocks. MAS will continue to closely monitor economic developments including global risk factors. Further adjustments to policy will depend on how the economy evolves, and the latest assessments of inflation and growth prospects.
Property Market Measures
3.3 The authorities announced, on 5 Jul 2018, adjustments to the Additional Buyer’s Stamp Duty (ABSD) rates and Loan-to-Value (LTV) limits on private residential property purchases, to cool the market and keep price increases in line with economic fundamentals. The measures were carefully calibrated to dampen the current upswing of the property price cycle, which had taken on a strong and broad-based momentum since late-2017, and address risks of a destabilising correction. As the strength in demand was evident across a range of buyer profiles, a comprehensive package of both tax and credit-based measures was implemented. The authorities gave due consideration to the strong pipeline of private housing supply which will progressively come on-stream over the medium-term. The measures, alongside the government’s medium-term land supply policies, were assessed to be appropriate to promote sustainable conditions in the private residential property market.
3.4 The authorities welcome staff’s acknowledgement of Singapore’s high financial regulatory and supervisory standards. MAS’ stress tests also indicate that Singapore’s financial system remains resilient under severe macroeconomic and financial stresses due to its financial institutions’ strong capital and liquidity buffers. The authorities also appreciate staff’s acknowledgement of Singapore’s developmental efforts at the forefront of financial technology (FinTech) while adapting regulations to the changing financial landscape.
4 Medium-term Issues
4.1 Beyond cyclical issues, the authorities are also focused on the medium term structural issues facing Singapore, including the opportunities and challenges posed by a rising Asia, changing global value chains, rapid technological advancements and population ageing. The Committee on the Future Economy (CFE) envisages a globally and regionally integrated Singapore economy with strong digital capabilities and innovative firms, and a labour force that has deep skills.
4.2 The CFE recommendations aim to create a pro-growth, pro-business environment that encourages private business to invest in physical and human capital, and increase their adoption of digital technologies. The Industry Transformation Maps (ITM) support both incumbents and new firms in each industry, through a suite of programmes that encompass capability development and technology adoption. For instance, the financial services ITM aims to create an ecosystem where established financial institutions and FinTech startups compete as well as collaborate to build a thriving FinTech hub. There is government support to connect incumbents and new firms to mutual advantage – for example, the National Research Foundation’s Early Stage Venture Fund matches investments by large local enterprises to local technology start-ups. The Partnerships for Capability Transformation (PACT) programme also provides funding support for firms to collaborate and develop new capabilities.
4.3 Singapore takes a more upstream and broad-based approach towards providing support to the workforce in an era of rapid technological change. First, substantial support is provided to help all Singaporeans to acquire new skills and stay relevant through the SkillsFuture initiative, and this minimises the risk of unemployment for workers. Second, the Adapt and Grow (A&G) initiative helps displaced workers to plug skills gaps and take up new jobs or new careers. This includes the provision of career matching services at career centres as well as the recently launched MyCareersFuture, a national jobs portal, to facilitate job matching. Such an approach minimises unemployment hysteresis, and helps workers better cope with technological disruption. Third, those who require more support may also receive direct wage support, training subsidies and allowances, conditional on workers making the effort to participate in training or accepting a job placement. Additionally, these labour market interventions are complemented by means-tested social support, such as GST Vouchers and ComCare, which provide income security to displaced jobseekers, while medical insurance schemes such as MediShield Life provide lifelong assurance for citizens and their families.
4.4 The authorities view this combination of carefully targeted measures to be more effective in addressing ongoing structural challenges, compared with a universal social support scheme like unemployment insurance. Singapore’s approach is well suited for an era of rapid technological change, where workers should remain agile and adaptable. Active labour market interventions have meant that a significant number of workers, including older workers, are placed in new jobs, for example through the A&G initiative.
4.5 The pro-growth agenda described above, and other structural challenges will have implications on the government’s finances. There will be significant increases in broad-based, recurrent expenditure, such as in healthcare and security, as well as in long-lived infrastructure investments. Combined with the budget’s already significant reliance on the Net Investment Returns Contribution framework, the government will be considering other revenue sources, including changes to the GST, for financing higher recurrent expenditure arising from ageing-related spending pressures, for example. The government will ensure that the overall tax and transfers system remains equitable and progressive. Meanwhile, major infrastructure investments that will yield future economic benefits will be financed through a mix of government grants, user fees and borrowing.
4.6 Singapore’s public sector net savings has fallen as a share of GDP over the past decade. A further acceleration of the fall is expected, reflecting to a large part the dynamics of demographic transition. At the same time, net savings by households, the largest contributor to the national savings-investment gap, is also expected to decline given the current trends in population ageing. As noted in Figure 9 of the Staff Report, Singapore’s ageing speed is among the highest in the region and advanced economies across the world. When these trends accelerate in the next ten years, there will be a drawdown of the current account surpluses.
5 Final Remarks
5.1 The current expansion in the global economy is likely to be sustained this year. However, tail risks to growth in the external front have grown significantly over the past six months. The authorities will continue to carefully monitor developments and their impact on the Singapore economy. In the event of a negative shock, the authorities have the wherewithal to respond in a timely and appropriate manner to provide the necessary support to the economy and ensure macroeconomic and financial stability.