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Singapore

Author(s):
International Monetary Fund
Published Date:
August 2008
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I. Introduction

1. Singapore is an economic success story. Policies to fully exploit the opportunities afforded by the world economy have laid the groundwork. Pragmatic macroeconomic management has underpinned resilience to external shocks; proactive structural reforms have allowed the economy to cope with rising regional competition and the challenges of globalization; and a business-friendly environment has been a pull-factor for foreign investment. As a result, Singapore’s real GDP per capita has increased five-fold in a generation—from developing to advanced country level.

GDP Per Capita

(Constant 2000 US$)

Source: World Bank; World Development Indicators.

2. The 2008 Article IV discussions focused on spillovers from the global economy and attendant policies. Singapore’s outward orientation has served it well but poses challenges when, as now, the world economy sputters. The exchange of views centered on policies to safeguard domestic, external, and financial stability. Sovereign wealth fund issues (which are being addressed through an IMF-facilitated multilateral initiative) and structural issues (which were covered in depth in last year’s consultation) featured less prominently in the discussions.

II. Recent Economic Developments

3. Global spillovers have been propagated mostly through trade channels; the transmission of shocks through international financial linkages has so far been limited.

  • Growth: GDP grew by about 7¾ percent last year, but flagging exports, particularly to the United States and Europe, have weighed on the pace of activity since late 2007.
  • Inflation: Increases in food and energy prices have added to inflation pressures from a hike in indirect taxes, a housing boom, and tighter labor markets. Inflation reached close to 7 percent (year-on-year) during January–April this year and average monthly earnings grew by around 11 percent (year-on-year) during the first quarter.1
  • Balance of payments: After reaching about 24 percent of GDP in 2007, the current account surplus dropped to around 14 percent of seasonally adjusted GDP in the first quarter of this year as the trade balance shrunk.2 With lingering concerns about asset quality in major advanced economies, Singapore has continued to experience a surge in capital inflows and official reserves have kept on rising (¶13).
  • Financial system: The global market turmoil has had only minor reverberations. While profitability of Singapore’s local banks dipped in the first quarter of 2008 (as trading-related activities slowed), earnings still beat market expectations. Liquidity management at banks and other financial institutions was not seriously challenged when strains appeared in mature markets.
  • Capital and money markets: As elsewhere in the region, stock prices have been sliding and volatility has risen, although conditions have improved in recent months. Credit spreads for financial institutions and corporates have narrowed, but remain wide by historical standards. Despite some tightening in lending conditions, credit growth is buoyant and there are no signs of a credit squeeze.
  • Property market: Following a protracted stagnation, property prices soared last year, but the market has started to cool. This partly reflects greater caution among foreign investors as well as measures taken by the authorities (e.g., larger land sales, delayed construction projects, and efforts to limit speculative buying). Although indices of prices and rents are below earlier peaks, there may be some froth in the high-end market.

GDP by Expenditure

(Contribution to y/y growth)

Source: CEIC and staff calculations.

CPI and Contribution

(Year-on-year percent change)

Source: CEIC and staff calculations.

Current Account Balance

(In percent of GDP)

Source: CEIC and staff calculations.

Stock Market Indices

(2000M1=100)

Source: CEIC and staff calculations.

Banks: Credit Default Swap Spreads

Source: Bloomberg.

Property Market Indices

(2000Q1=100)

Source: CEIC and staff calculations.

Housing Market Indices—Selected Asian Countries

(2000Q1=100)

Source: CEIC and staff calculations.

III. Outlook and Risks

Staff’s Assessment

4. The global economic slowdown is expected to take its toll on Singapore, and near-term risks may still be tilted to the downside (Box 1).

Box 1.How Exposed is Singapore to a U.S. Slowdown?

Singapore’s economy is very open and vulnerable to a global slowdown. Export and GDP growth are highly correlated (with a correlation coefficient of around 0.8). In fact, past slowdowns have been preceded, or accompanied, by weaker external demand.

Singapore’s trade and financial linkages to the United States are significant. While direct exposure to the United States has declined, total exposure, accounting for trade via third countries, has remained stable at about 30 percent of GDP during the last decade. Moreover, U.S. holdings of Singaporean securities have risen to about 35 percent of GDP—suggesting a channel for adverse balance sheet and wealth effects in the case of portfolio rebalancing.

Empirical analysis confirms the sizeable linkages to the United States. A 1 percentage point decline in U.S. growth could lower growth in Singapore by about 0.9 percentage point (directly and through other trading partners), about twice the impact of ten years ago.

More broadly, the extent of spillovers from advanced economies appears to have increased over time—in part the result of Singapore’s successful climb up the value chain in production, which has made it more dependent on advanced economies as final export destinations.

Impact of 1 Percentage Point Decline in U.S. Growth 1/
Singapore0.9
NIEs0.6
Korea0.1
Hong Kong, SAR0.8
Taiwan, POC0.9
ASEAN 40.5
Indonesia0.4
Malaysia0.7
Philippines0.4
Thailand0.5
Source: Asia and Pacific Regional Economic Outlook, April 2008.

In percentage points. Results based on a vector autoregression model, accounting for global financial linkages.

Source: Asia and Pacific Regional Economic Outlook, April 2008.

In percentage points. Results based on a vector autoregression model, accounting for global financial linkages.

  • Baseline: Softer external demand is projected to reduce GDP growth by around 3 percentage points to 4½ percent in 2008 and 2009 and significantly lower the current account surplus. Inflation is expected to approach 7 percent in 2008, before declining to around 3½ percent next year. Barring a sharp deterioration of the conjuncture, the financial sector is expected to weather the slowdown without difficulties.
  • Risks to the baseline: Trading partners’ demand may slow more than anticipated, and global financial disruptions could flair up again. Singapore’s banks are sound, but a severe international slowdown could put pressure on earnings and asset quality. Moreover, inflation could remain elevated on the back of both external (food and oil) and domestic (housing and wages) price pressures. In fact, upside risks to inflation are arguably the main policy challenge at present. Although concerns have receded, it is too early to tell whether “tail risks” (low-probability but high-cost events related to heightened financial distress or a global recession) are out of the picture.

5. Beyond the near term, the outlook remains favorable. GDP growth is anticipated to strengthen on the back of recovering external and domestic demand, and inflation is projected to decline, in part thanks to plateauing commodity prices (Table 1). The current account balance as a share of GDP is projected to fall by about 7 percentage points over the medium term as growth of net exports moderates after recovering slightly in 2010. From a savings-investment perspective, population aging and the unwinding of strong cyclical corporate profits would depress savings.3,4 Moreover, the (secular) recovery of the property market and large capital investment projects underway would boost the investment share. The main medium- and longer-term challenges relate to rising regional competition, a rapidly graying society, and the risk of a disorderly adjustment of global imbalances.

Table 1.Singapore: Summary of Medium-Term Macroeconomic Framework, 2005–13
Proj.
200520062007200820092010201120122013
Real sector (percent change)
Real GDP growth7.38.27.74.54.55.75.75.55.5
Inflation (period average)0.51.02.16.73.51.91.91.71.7
Saving and investment (in percent of GDP)
Gross national savings38.541.846.843.843.844.044.144.244.1
Gross capital formation19.920.022.625.626.226.226.226.526.8
Current account (in percent of GDP)18.621.824.318.217.617.917.917.717.3

The Authorities’ Views

6. The authorities broadly concurred with the staff’s assessment.

  • Growth: They expected growth in 2008 to be slightly stronger (in the middle of a 4 to 6 percent projection range) thanks to a more upbeat assessment of the outlook for the world economy, resilience in the region, and the strength of domestic demand. From the supply side, the authorities identify a core grouping of sectors whose momentum renders them less sensitive to short-term external developments.5 However, in their view, the outlook for 2009 is more uncertain.
  • Inflation: Notwithstanding upside risks, inflation is projected to remain within 5 to 6 percent in 2008, partly supported by the monetary tightening in the pipeline. Initiatives afoot to diversify import sources promise to limit the impact of global food shortages.

IV. Report on Discussions

The staff’s policy recommendations aim at safeguarding domestic, external, and financial stability in the presence of slowing growth and rising price pressures. A further rebalancing of macroeconomic policies would be desirable from both a domestic and international perspective: it would fend off potential risks to inflation, facilitate external adjustment, and strengthen medium-term growth prospects. Regarding financial policies, a proactive supervisory stance remains key to preserving soundness and Singapore’s role as a regional finance center.

A. Safeguarding Domestic Stability

Background

7. Aptly, the policy mix has shifted toward tighter monetary conditions and a looser fiscal stance.

  • Monetary policy: Following a slight increase in the slope of its policy band for the nominal effective exchange rate (NEER) last October, in April 2008 the Monetary Authority of Singapore (MAS) shifted the band up by an estimated 2 percentage points in response to inflation concerns and pressures on the exchange rate (which had hovered in the upper half of the target zone).6
  • Fiscal policy: After a sizeable revenue overperformance last fiscal year (ending in March), the FY 2008–09 budget is slightly expansionary.7 It focuses on improving competitiveness and supporting household disposable income through tax measures (including a one-off personal income tax rebate) and targeted cash transfers.

Nominal Effective Exchange Rate

(2005=100)

Source: IMF and staff estimates.

Fiscal Performance

(In percent of GDP)

Source: Ministry of Finance and staff calculations.

Policy Issues and Staff’s Views

8. The key policy challenge for the near term is to ensure that inflation expectations remain well anchored. The MAS’ recent steps to tighten monetary policy go a long way in this direction. But, more could be done to forestall second-round effects, given that headline inflation is at a 26-year high, core inflation is rising rapidly, and slack in labor markets has largely been taken up (the unemployment rate is currently around 2 percent).

Consumer Price Inflation

(Annual, in percent)

Source: CEIC and staff calculations.

9. Policy recommendations revolve around a somewhat faster pace of appreciation of the exchange rate complemented by further fiscal loosening. A stronger Singapore dollar over the near term would support disinflation and anchor inflation expectations at a lower level. It would also make room for more fiscal loosening, including additional targeted measures to cushion the impact of the rising cost of living. Once inflation pressures abate, the rebalancing of the policy mix could be pursued further by expanding public expenditure on physical and social infrastructures, a medium-term policy priority for the authorities. Higher spending can be afforded by ample fiscal reserves which, under current policies, would continue to rise.8

10. In the event of a severe global slowdown accompanied by a deep financial shock—a “tail-risk” event—bolder policy adjustments would be required. As the balance of downside risks shifts toward growth, more aggressive fiscal easing would be warranted and looser monetary conditions may be needed.9 The shift in the policy mix may delay external adjustment but domestic stability would come first. Financial sector policies should aim at maintaining liquidity, rebuilding counterparty confidence, and reinforcing the soundness of domestic financial institutions.

The Authorities’ Views

11. Officials shared the staff’s view that policies should be geared to limiting inflation risks, but did not see a need for rebalancing the policy mix at present. In their judgment:

  • Singapore’s macroeconomic policies are framed by a medium-term orientation, which should remain paramount in the pursuit of sustained growth and price stability. Furthermore, the current policy mix strikes the appropriate balance between risks to inflation and growth, if the lagged impact of the recent monetary tightening is taken into account.
  • A faster pace of appreciation of the Singapore dollar could amplify downside risks in the context of weakening external demand—and could trigger speculative capital inflows.
  • Inflation dynamics at present—driven by a variety of demand and supply factors—require a multi-pronged approach, not just a monetary policy response. From this angle, administrative steps and microeconomic interventions to ease supply-side bottlenecks have been brought to bear to facilitate an orderly adjustment in relative prices.
  • Finally, as regards fiscal policy, the measures implemented with the latest budget appropriately support the purchasing power of low-income families eroded by rising prices.

12. There was agreement that macroeconomic policies should remain flexible and pragmatic. In particular, ample fiscal reserves would permit further targeted assistance to prop up disposable incomes in the short term, if needed, and a structural increase in public spending ahead of demographic shifts over the medium term. Regarding the flexibility of monetary conduct, the authorities commented that markets had at times been surprised by the MAS’ decisiveness in adjusting the monetary settings.

B. Safeguarding External Stability

Background

13. The exchange rate has appreciated in recent years—and official reserves have grown.

  • In real effective terms, the Singapore dollar appreciated by about 3 percent in 2007 and an additional 2 percent through May 2008. Since the beginning of the monetary tightening cycle in April 2004, the Singapore dollar has appreciated by more than 20 percent vis-à-vis the U.S. dollar and by 11 percent in real effective terms. Market participants expect a further appreciation of the exchange rate as judged from risk reversals and the distribution of consensus forecasts.10
  • Since end-2006, official reserves and the forward book have increased by a combined US$73 billion to US$268 billion (or about 140 percent of GDP). The MAS has continued to rely on sterilized intervention to safeguard domestic stability. From a domestic perspective, this policy has worked well since sterilization has not entailed noxious side effects (so far). 11

Exchange Rates

(For REER, 2000=100)

Source: IMF, INS.

Distribution of Expected Changes in S$ vs. US$

(Based on May 2008 Consensus Forecast) (Negative values (on x-axis) imply an appreciation)

Source: Consensus Forecast and staff estimates.

Official Reserves and Forward Position

(Monthly change, in US$ billion)

Source: Monetary Authority of Singapore.

Sterilization Coefficient Estimates 1/

(From 40-Quarter Rolling Regressions)

Source: staff estimates.

1/ Coefficient estimate from regression of net foreign asset contribution to money growth on net domestic asset contribution to money growth.

Policy Issues and Staff’s Views

14. The Singapore dollar remains weaker than the level implied by longer-term fundamentals. This judgment rests on several observations:

  • Singapore’s current account surpluses and reserve accumulation have been significant and protracted;12
  • Current account balances projected at a constant real effective exchange rate imply a large additional build-up of net foreign assets; and
  • Quantitative analysis suggests the Singapore dollar in real effective terms is between 5 percent and 15 percent below its medium-term (estimated) equilibrium level (Box 2)—most likely, in the upper half of this range.

Emerging upward pressures on prices of nontradables could also suggest that the exchange rate is weaker than the level implied by medium-term fundamentals.

15. If sustained, current policies would support a balance of payments adjustment over the medium term. To a first approximation, the current targeted rate of nominal effective appreciation could eliminate the bulk of the estimated real undervaluation. Nonetheless, front-loading the nominal appreciation (e.g., a steeper target band) would have the added benefit of curbing inflation risks in the near term.13 Furthermore, a strong currency could, in time, discourage speculative capital inflows and lessen the need for intervention, which—although not costly so far—could pose challenges in the future. This said, in light of Singapore’s exceptional trade and financial openness, any external adjustment should be carefully managed to avoid a disruptive impact on the economy.

The Authorities’ View

16. The authorities’ disagree with the staff’s exchange rate assessment. They regard the Singapore dollar as fairly valued and have reservations about views to the contrary because:

  • The current account surplus reflects inter alia a strategy of building up fiscal reserves as insurance against adverse shocks and the prospective demands on the budget from an aging society;

Box 2.Exchange Rate Assessment

Three approaches have been applied to assess the level of the Singapore dollar relative to its medium-term equilibrium level.* According to these approaches—and subject to significant statistical uncertainty—the Singapore dollar is estimated to be about 5–15 percent below its equilibrium level.

According to the macroeconomic balance approach, the Singapore dollar is undervalued by about 10 percent relative to the level implied by medium-term fundamentals. This assessment hinges on an estimated current account norm of about 12 percent of GDP. The large norm reflects Singapore’s significant fiscal surpluses and the rising share of the working-age population. Estimates of the norm are derived from a panel of 55 advanced and emerging economies over 1973–2006. Alternative specifications with fixed effects, or based on Singapore-specific time series regressions, yield higher estimates of the norm and, thus, a somewhat lower estimated undervaluation.

The external sustainability approach points to a larger undervaluation. Under the assumption that the net foreign asset position is stabilized at the 2006 officially reported level of about 100 percent of GDP, the estimated undervaluation is about 20 percent. This figure is likely to be an overestimation since officially reported data for the international investment position (IIP) are inaccurate. Specifically, they do not include the net foreign assets (NFA) of Singapore’s largest sovereign wealth fund, the GIC (¶23), whose flow transactions are, however, reflected in the balance of payments. Estimating Singapore’s NFA using cumulative current account balances (which includes GIC’s dividend and interest income) gives an IIP of around 200 percent of GDP—and an undervaluation of the Singapore dollar of around 15 percent.

More broadly, these estimates hinge critically on the value and composition of Singapore’s NFA. On the one hand, the capital gains on Singapore’s large positive net portfolio equity position (including GIC assets) are not included in the current account balance (in line with current practices on balance of payments compilation), which therefore understates the net accumulation of foreign assets. Accounting for these capital gains would imply a larger gap between the underlying current account and the norm and the NFA-stabilizing current account, thus increasing the undervaluation according to the macroeconomic balance and external sustainability methodologies. On the other hand, including GIC assets increases the estimated NFA position substantially—thus raising the NFA-stabilizing current account and lowering the undervaluation according to the external sustainability approach. On balance, the estimated undervaluation would be larger under the macroeconomic balance approach, and lower under the external sustainability approach.**

The equilibrium exchange rate approach suggests a 5 percent undervaluation. Reduced form estimates of the (CPI-based) equilibrium real effective exchange rate point to net foreign assets and terms of trade as the main determinants of the equilibrium exchange rate. The smaller estimated undervaluation results primarily from a secular deterioration in the terms of trade, which offsets an increase in the net foreign asset position (estimated from the current account). Measures of the REER based on relative unit labor costs (ULCs) imply a larger undervaluation (about 10 percent), though. This estimate is probably biased upward since the ULC-based REER leaves out data on important trading partners like China and Malaysia.

* For details on these methodologies, see IMF Occasional Paper 261 (2008).* As an illustrative calculation, adding market estimates of the GIC’s assets to the reported IIP would put Singapore’s NFA at about 300 percent of GDP. Using the MSCI-World index as a proxy for GIC’s equity portfolio, estimated annual capital gains would average about 4 percent of GDP during 2001–06. This gives an estimated undervaluation of about 18 percent under the macroeconomic balance approach. Higher NFA and GIC’s estimated capital gains would put the undervaluation of the Singapore dollar at less than 10 percent under the external sustainability approach.
  • A real undervaluation is unlikely to be sustained in a small open economy free of market distortions and fully integrated in global capital markets, such as Singapore; and,
  • Model-based estimates are generally unreliable, in part owing to structural changes in the economy and the difficulty of pinning down the appropriate longer-term level of the fundamental determinants of the real exchange rate.

More broadly, the authorities emphasized that the reporting of the Fund’s assessment of the Singapore dollar is highly sensitive and needs to be nuanced.

17. There was consensus, however, that the Singapore dollar would appreciate in real effective terms over time. A secular appreciation would be supported by the strong underpinnings of Singapore’s economy, which benefit from ongoing structural reforms aimed at safeguarding competitiveness in trade and finance.

C. Preserving the Soundness of the Financial Sector

Background

18. Singapore’s financial system remains sound and the balance sheets of corporates and households are strong. Local banks and insurance companies have benefited from robust profitability and balance sheets. Corporates’ estimated default probabilities are low, and revenue and funding bases have broadened. Household balance sheets have been supported by strong property and equity prices, falling indebtedness, and favorable labor market conditions.

Bank Regulatory Capital to Risk-Weighted Assets

(In percent)

Source: IMF, Global Financial Stability Report.

Bank Nonperforming Loans to Total Loans

(In percent)

Source: IMF, Global Financial Stability Report.

19. The impact of the global turmoil on the financial sector has been limited, so far. Ripple effects have been felt through wider credit spreads, higher equity market volatility, and some losses related to securities and structured products. Yet, none of these developments have had systemic implications. For example, funding costs have not risen significantly and disclosed bank exposures to subprime-related assets have been small relative to bank capital (Box 3). Overall, the impact of global financial dislocations to date has been largely an “earnings event” more modest, in fact, than elsewhere in Asia.

Box 3.The Subprime Exposures of Singapore’s Banks

The reported subprime-related exposure and estimated losses of Singaporean banks appear manageable. Estimates of the aggregate exposure to subprime and related assets (CDOs and SIVs) in Singapore are around US$2.7 billion (about 5 percent of equity). This compares to exposures of US$11 billion in Asia (exJapan) and US$15 billion in Japan (about 4 and 3 percent of total equity, respectively).*

It is unlikely that subprime-related losses could trigger any systemic instability in Singapore. Based on market estimates, total losses at three Singaporean banks may amount to US$0.3 billion (about 3 percent of aggregate bank capital), compared to US$144 billion in the United States and US$123 billion in Europe (about 15 and 9 percent of aggregate bank capital, respectively). According to Fitch Ratings, banks in Singapore have made adequate provisions for potential losses on their exposures to U.S. subprime mortgage assets.

Exposure and losses of the financial institutions at end-FY07(In billions of US dollars)
Total Financial System
Banks
CDO1.67
Of which: ABS0.43
Exposure in % of Total equity5.0
Asset management subsidiaries
CDO11.45
Of which: ABS3.12
Insurance subsidiaries
CDO0.87
Of which: ABS0.80
Total impairment losses, end-20070.27
Total estimated losses, end-20070.49
Total estimated losses in % of Total equity1.2
Sources: FitchRatings, “The Singaporean Banking System”, April 2, 2008; Moody’s, “Singapore: Banking System Outlook,” May 2008; various banks’ reports; and staff estimates.
Sources: FitchRatings, “The Singaporean Banking System”, April 2, 2008; Moody’s, “Singapore: Banking System Outlook,” May 2008; various banks’ reports; and staff estimates.
* While asset management subsidiaries of banks have large exposures to CDOs, their clients are primarily sophisticated institutional investors who bear the risk.

Policy Issues and Staff’s Views

20. In a period of global financial tremors, the MAS has risen to the challenge. The adoption of Basel II on January 1, 2008 has boosted banks’ risk management practices, including for liquidity management and stress testing; a conservative supervisory stance and early disclosure of bank exposures to structured products have helped preserve confidence in the banking system; concerns about a possible liquidity squeeze have been allayed through timely announcements of policy intentions; and, even closer ties with regulators in other jurisdictions have been established. All together, these actions have largely shielded the financial system against the spillovers from market turbulence abroad. 14

21. However, the turning cycle and a still-unsettled global environment suggest a number of areas that should remain on the MAS’ radar screen. On the domestic front, banks may be vulnerable to a correction in the property markets, which are facing downside risks to valuations.15 Global spillovers can also occur to the extent that: (i) export-oriented corporates buckle as the world economy slows; (ii) bank’s funding costs increase as global liquidity conditions harden; (iii) additional losses on securities and other market instruments are incurred; and (iv) fee-based income in the asset-management industry decline further if, for example, heightened risk aversion reduces securities trading. Finally, Singapore’s local banks could be open to regional contagion due to their expansion across Asia, although risks through this channel appear to be limited in a baseline scenario.

The Authorities’ Views

22. The authorities agreed with the basic contours of the staff’s assessment. They shared the view that the main risks stem from bank exposures to the property market and a further deterioration in the global environment, with attendant (mostly trade-intermediated) aftershocks. However, they noted a number of risk-mitigating circumstances: (i) despite strong lending to the property sector, the overall banking system is still far from the relevant statutory lending limit and nonperforming loans for the sector remain low;16 (ii) heavy reliance on funding through deposits and low exposures to risky financial instruments provides some protection to local banks from global financial spillovers; (iii) the regional expansion of banks’ operations has been disciplined and cautious; and (iv) strong balance sheets of financial institutions, corporates, and households provide for a buffer against adverse financial shocks. Moreover, the MAS is taking steps to further strengthen its crisis management and stress testing frameworks for credit, market, and liquidity risks.

V. Other Issues

Singapore’s sovereign wealth funds (SWFs) do not appear to pose challenges for the conduct of macroeconomic policies. Singapore is an active participant in the international community’s efforts to identify best practices for SWFs.

Background

23. Two SWFs manage Singapore’s large public savings. Temasek is a holding company for government-linked enterprises, although in recent years it has expanded its foreign direct investments. It manages assets worth around US$100 billion. The Government of Singapore Investment Corporation (GIC) invests abroad fiscal surpluses, some of the foreign exchange reserves, and proceeds from government bond sales. Markets estimate the assets under GIC control at upward of US$300 billion.

24. Singapore is participating in the multilateral dialog on SWFs under way in several fora. In particular, it is a member of the International Working Group (facilitated by the Fund) to identify best practices and has agreed with the United States and Abu Dhabi to abide by a broad set of principles regarding transparency, governance, and investment decisions.

Policy Issues and Staff’s Views

25. The operations of Singapore’s SWFs do not appear to undercut the formulation and conduct of domestic policies. As noted in market commentaries, the SWFs are long-term investors with a commercial orientation. They are well integrated in Singapore’s fiscal management framework, essentially with a strategic role. In particular, the SWFs have been the conduits for saving fiscal resources for long-term purposes (including in preparation for population aging); have supported Singapore’s early development phase; and—through prudent management—have limited or eliminated the opportunity costs of reserve holdings.17 Long horizons and the depth of the local foreign exchange market are also supportive of the view that Singapore’s SWFs have not complicated the conduct of monetary and exchange rate policies.18 Despite some data issues, the staff’s exchange rate assessment reflects the role of SWFs as drivers of Singapore’s net foreign assets (Box 2).

VI. Staff Appraisal

26. Singapore is an economic success story. Key to sustained per capita growth and overall macroeconomic stability have been policies that leverage Singapore’s outward orientation. Pragmatic macroeconomic management has underpinned resilience to external shocks, while far-reaching structural reforms and a business-friendly environment have allowed the economy to exploit the opportunities afforded by the world economy—and cope with rising regional competition.

27. The turning of the global cycle, lingering dislocations in the international financial markets, and growing inflation pressures pose challenges, nonetheless. The unsettled external environment points to potentially large spillover effects in light of Singapore’s exceptional openness—and gives center stage in policy discussions to the requirements for domestic, external, and financial stability.

28. Singapore faces at present downside risks to growth and upside risks to inflation. Whereas the global slowdown is likely to lower GDP growth to a more sustainable pace, the key near-term policy challenge is to ensure that inflation expectations remain well anchored. Recent steps by the Monetary Authority of Singapore (MAS) to further tighten monetary policy are welcome, but more could be done to forestall second-round effects as inflation reaches its highest level in nearly three decades. Although administrative measures to ease supply-side bottlenecks may play a role in curbing localized price pressures, a careful reorientation of the policy mix should be considered.

29. A somewhat faster appreciation of the exchange rate complemented by further fiscal loosening would be desirable from both a domestic and an international perspective. A stronger Singapore dollar would fend off upside risks to inflation, facilitate external adjustment, and make room for additional targeted fiscal transfers to cushion the impact of the rising cost of living. From the perspective of a risk management approach to policymaking, the width of the MAS’ exchange rate band would still provide insurance against downside risks to growth—if they materialize and have a disproportionate impact on Singapore.

30. Once inflation pressures abate, the rebalancing of the policy mix could be pursued further. Ample fiscal reserves create significant room for expanding public spending on physical and social infrastructures, a commendable policy priority of the Singaporean authorities for the medium run.

31. The Singapore dollar remains weaker than the level implied by longer-term fundamentals. If sustained, current policies would support a balance of payments adjustment over the medium term. To a first approximation, the current targeted rate of nominal effective appreciation could eliminate the bulk of the estimated real undervaluation. Nonetheless, a faster pace of appreciation in the near term would have the additional benefit of curbing inflation risks. Furthermore, a stronger currency could, in time, discourage speculative capital inflows and lessen the need for intervention. This said, in light of Singapore’s exceptional trade and financial openness, any external adjustment should be managed to avoid a disruptive impact on the economy.

32. Singapore’s financial sector has so far been resilient to the global financial crisis. The MAS is to be commended for continued efforts to bolster the already strong regulatory and supervisory frameworks, as well as for enhancing stress-testing and crisis-management structures. The MAS’s proactive supervisory approach has for the most part shielded domestic institutions against the fallout of the global financial turmoil. A number of areas should nonetheless be monitored closely, in particular risks related to high-end segments of the property market and the possibility of contagion through trade and financial channels.

33. It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

Table 2.Singapore: Selected Economic and Financial Indicators, 2002–09
Nominal GDP (2007): US$161.3 billion
Main exports (percent of total domestic exports): Electronic products (30 percent) and chemical products (19 percent)
GDP per capita (2007): US$35,163
Population (2007): 4.6 million
Unemployment rate (2007): 2.1 percent
Net FDI (2007): US$ 11.8 billion
Public debt (2007): 96 percent of GDP
Foreign government debt (2007): none
Quota: SDR 862.5 million
Proj.
20022003200420052006200720082009
Growth (percentage change)
Real GDP4.23.59.07.38.27.74.54.5
Total domestic demand1.8-8.414.02.97.79.28.95.3
Consumption5.20.94.24.44.84.14.44.2
Private consumption4.90.95.23.93.34.64.04.3
Gross capital formation-5.8-30.748.1-1.015.221.418.27.4
Net exports20.655.6-2.021.28.35.4-6.91.8
Contribution to GDP growth3.410.7-0.65.52.51.6-2.00.5
Saving and investment (percent of GDP)
Gross national savings36.339.238.438.541.846.843.843.8
Gross capital formation23.716.021.719.920.022.625.626.2
Inflation and unemployment (period average, percent)
CPI inflation-0.40.51.70.51.02.16.73.5
Unemployment rate3.64.03.43.12.72.12.12.2
Central government budget (percent of GDP) 1/
Revenue22.920.320.121.121.624.323.223.4
Expenditure18.614.114.313.014.414.717.516.8
Overall balance4.26.25.88.27.29.55.76.6
Primary operating balance-2.7-2.9-1.9-1.2-1.80.4-1.6-1.2
Money and credit (end of period, percentage change)
Broad money (M3) 2/-0.85.96.16.419.114.112.4
Lending to non-banking sector 2/-1.06.34.52.26.320.024.4
Interest rate (three-month interbank, in percent) 2/0.80.81.43.33.42.41.4
Balance of payments (US$ billion)
Current account balance11.121.618.222.329.839.234.536.2
(percent of GDP)(12.6)(23.2)(16.7)(18.6)(21.8)(24.3)(18.2)(17.6)
Trade balance18.829.431.037.143.449.248.849.4
Overall balance1.36.812.112.317.019.417.710.8
Gross official reserves (US$ billion)82.296.2112.6116.2136.3163.0180.7191.5
(months of imports) 3/(5.7)(5.3)(5.4)(4.7)(5.0)(5.0)(5.1)(4.9)
Exchange rate (end of period)
S$/US$ 4/1.7371.7011.6341.6641.5341.4411.366
Nominal effective exchange rate 5/101.097.097.9100.3104.0106.0109.5
Real effective exchange rate 5/97.592.892.493.295.198.0102.6
Sources: Data provided by the Singapore authorities; and Fund staff estimates and projections.

Fiscal year beginning April 1.

Latest observations as of April 2008.

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

Latest observations as of May 2008

IMF Information Notice System monthly index (2000 full-year average = 100). Latest observations as of May 2008.

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

Fiscal year beginning April 1.

Latest observations as of April 2008.

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

Latest observations as of May 2008

IMF Information Notice System monthly index (2000 full-year average = 100). Latest observations as of May 2008.

Table 3.Singapore: Balance of Payments, 2002–09 1/(In billions of U.S. dollars)
Proj.
20022003200420052006200720082009
Current account balance11.121.618.222.329.839.234.536.2
Trade balance18.829.431.037.143.449.248.849.4
Exports, f.o.b.140.6161.7199.3232.7275.1302.8357.8383.6
Imports, f.o.b.-121.9-132.2-168.3-195.6-231.7-253.7-309.0-334.2
Services balance-3.9-3.8-3.3-2.7-2.6-2.6-3.5-3.6
Exports29.536.346.853.061.169.781.190.1
Imports-33.4-40.1-50.1-55.7-63.7-72.3-84.6-93.7
Income balance-2.3-2.6-8.1-10.9-9.6-5.7-8.8-7.3
Receipts14.217.421.527.232.243.047.253.6
Payments-16.4-20.1-29.7-38.1-41.8-48.7-56.0-60.9
Transfer payments (net)-1.5-1.4-1.3-1.3-1.4-1.7-2.1-2.3
Net capital flows-9.8-14.8-6.1-10.0-12.8-19.7-16.7-25.3
Capital and financial account balance-10.5-18.0-8.7-12.9-14.3-18.6-16.7-25.3
Capital account (net)-0.2-0.2-0.2-0.2-0.2-0.3-0.3-0.3
Financial account (net)-10.3-17.8-8.5-12.7-14.1-18.4-16.4-25.0
Direct investment4.99.09.07.012.511.813.214.0
Assets-2.3-2.7-10.8-6.9-12.2-12.3-14.4-16.1
Liabilities7.211.719.813.924.724.127.630.1
Portfolio investment-13.1-10.0-5.5-3.3-8.9-16.6-15.0-22.9
Assets-13.4-14.3-7.0-8.3-17.8-22.6-20.4-31.1
Liabilities0.24.31.65.08.96.05.48.3
Other investment-2.0-16.7-12.1-16.4-17.7-13.6-14.6-16.2
Assets-8.5-21.1-28.3-32.2-53.4-67.7-72.6-80.3
Liabilities6.54.316.215.935.754.158.064.1
Net errors and omissions0.63.22.62.91.6-1.10.00.0
Overall balance1.36.812.112.317.019.417.710.8
Memorandum items:
Current account as percent of GDP12.623.216.718.621.824.318.217.6
Trade balance as percent of GDP21.231.628.431.031.830.525.724.0
Net international investment position
(In billions of U.S. dollars)81.798.2112.6143.2160.8154.7
GDP in US$ billion88.393.2109.2119.8136.6161.3189.7206.1
(In percent of GDP)92.6105.4103.1119.6117.795.9
MAS forward position (in billions of US$) 2/0.05.413.921.358.863.591.7
Net capital and financial flows 3/-9.8-9.52.4-2.724.7-15.0
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 exchanget

Latest observation as of April 2008.

Including net errors and omissions and excluding capital flows associated with changes in the MAS’ forward position.

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 exchanget

Latest observation as of April 2008.

Including net errors and omissions and excluding capital flows associated with changes in the MAS’ forward position.

Table 4.Singapore: Monetary Survey, 2005–08
2005200620072008
Mar.Jun.Sep.Dec.Mar.Jun.Sep.Dec.Mar.
(In billions of Singapore dollars, end of period)
Net foreign assets193.7204.1210.5219.7224.8238.5238.6237.5237.2251.1
Monetary authorities191.8195.6201.3204.0207.9208.0219.6225.5233.8244.2
Deposit money banks 1/1.98.59.215.716.930.519.011.93.47.0
Domestic credit240.6240.2249.4255.8256.4266.5276.5290.6299.2316.0
Claims on private sector189.8189.1193.4197.4199.1205.0212.3220.1232.8245.1
Nonbank lending183.1182.6189.6194.0194.6201.4209.1218.7233.4249.5
Claims on central government50.851.155.958.457.361.564.270.566.470.9
Other items (net) 2/-208.6-210.7-216.2-224.1-212.5-218.2-213.8-225.4-229.6-244.4
M3225.7233.6243.7251.4268.7286.8301.3302.7306.8322.7
(Annual percentage change)
Domestic credit1.00.63.14.76.611.010.913.616.718.6
Claims on private sector2.01.93.45.04.98.49.711.516.919.6
Non-bank lending2.22.85.77.56.310.310.312.820.023.9
M36.48.311.212.719.122.823.620.414.112.5
(Contribution to M3 growth, in percent)
Net foreign assets9.910.211.612.013.814.711.57.14.64.4
Domestic credit (net)1.10.63.35.17.011.311.113.915.917.3
Claims on private sector1.71.62.94.24.16.87.79.012.514.0
Claims on central government-0.6-1.00.40.92.94.43.44.83.43.3
Other items (net) 2/-4.6-2.5-3.7-4.5-1.7-3.21.0-0.5-6.4-9.2
Source: Monetary Authority of Singapore and IMF, International Financial Statistics.

Commercial banks.

Including other non-bank financial institutions.

Source: Monetary Authority of Singapore and IMF, International Financial Statistics.

Commercial banks.

Including other non-bank financial institutions.

Table 5.Singapore: Summary of Government Operations, 2004/05–2008/09 1/(In percent of GDP)
2004/052005/062006/072007/082008/09
BudgetPrel.BudgetProj.
Total revenue20.121.121.617.324.321.923.2
Current revenue18.717.917.816.019.418.219.2
Tax revenue12.712.613.012.014.413.213.9
Investment income 2/4.04.13.73.13.63.53.8
Other nontax revenue2.01.21.10.91.41.51.5
Capital revenue 3/1.53.33.81.34.93.74.0
Total expenditure14.313.014.414.514.717.517.5
Current expenditure11.911.313.011.712.213.113.1
Operating expenditure10.910.510.810.310.510.710.7
Debt servicing0.20.10.10.00.00.00.0
Agency fees on land sales0.00.00.00.00.00.00.0
Investment expenses0.40.40.70.60.90.90.9
Transfer payments0.50.31.40.70.81.41.4
Development expenditure and net lending2.01.51.22.72.53.93.9
Development expenditure 4/4.93.72.93.53.33.93.9
Net lending-2.8-2.2-1.7-0.8-0.80.00.0
Fund transfers 5/0.40.10.20.10.10.60.6
Overall balance5.88.27.22.89.54.45.7
Primary balance 6/-1.9-1.2-1.8-2.20.4-2.2-1.6
Memorandum items:
Budget balance (the government’s definition)-0.10.70.0-0.32.6-0.30.7
Government saving6.46.44.64.27.14.65.5
Structural primary balance 7/-1.8-1.2-1.9-2.50.1-2.3-1.7
Fiscal impulse 8/-0.6-0.60.80.6-2.02.41.7
Gross government domestic debt 9/101.1100.395.196.396.3
Sources: Data provided by the Singapore authorities; and staff estimates and projections.

Fiscal year runs from April 1 through March 31.

Includes investment income from government assets (interest and dividends), including interest earnings on development loans from 2000/01.

Sale of government property.

Includes the land reclamation expenditure.

Includes transfers to the Endowment Funds: Edusave, Medical, Lifelong Learning, Community Care, and ElderCare.

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

Primary balance adjusted for cyclical impact on revenues associated with deviation between actual and potential economic output.

Change in the structural primary balance.

Data for end of calendar year. The table reports gross debt and does not reflect large net asset position of the government. Gross debt is (for a large part) issued to the Central Provident Fund (CPF) and as part of the Singapore Government Securities (SGS) program.

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

Fiscal year runs from April 1 through March 31.

Includes investment income from government assets (interest and dividends), including interest earnings on development loans from 2000/01.

Sale of government property.

Includes the land reclamation expenditure.

Includes transfers to the Endowment Funds: Edusave, Medical, Lifelong Learning, Community Care, and ElderCare.

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

Primary balance adjusted for cyclical impact on revenues associated with deviation between actual and potential economic output.

Change in the structural primary balance.

Data for end of calendar year. The table reports gross debt and does not reflect large net asset position of the government. Gross debt is (for a large part) issued to the Central Provident Fund (CPF) and as part of the Singapore Government Securities (SGS) program.

Table 6.Singapore: Financial Soundness Indicators: Local Banking Sector, 2002–07
200620072008
2002200320042005Mar.Jun.Sep.Dec.Mar.Jun.Sep.Dec.Mar.
(In percent)
Capital adequacy ratio
Regulatory capital to risk-weighted assets16.917.916.215.815.415.915.415.414.915.014.013.513.7
Regulatory tier I capital to risk-weighted assets11.312.011.511.411.211.311.011.210.910.610.19.810.3
Shareholders’ equity to assets10.710.79.69.69.69.59.49.69.69.39.39.28.7
Asset quality
NPLs to non-bank loans7.76.75.03.83.83.43.12.82.52.11.81.51.4
Total provisions to NPLs61.264.973.678.778.374.582.889.594.498.6105.9115.6118.9
Specific provisions to NPLs33.836.240.740.439.933.739.441.342.739.038.739.938.8
Loan concentrations (in percent of total loans)
Bank loans29.324.023.324.125.623.525.222.821.120.719.516.217.7
Non-bank loans70.776.076.775.974.476.574.877.278.979.380.583.882.3
Of which:
Manufacturing loans8.46.57.47.77.88.38.48.49.09.19.29.29.1
Building and construction loans14.19.48.48.89.09.29.29.59.510.110.211.412.1
Housing loans27.522.222.522.021.421.120.421.020.820.620.620.619.8
Loans to professionals and private individuals14.110.410.19.59.18.98.58.78.68.58.68.68.2
Loans to nonbank financial institutions13.410.29.89.69.610.410.310.511.711.111.312.311.8
Profitability
After-tax return on assets0.81.01.21.21.21.51.41.41.41.41.41.31.2
After-tax return on equity7.68.711.611.211.814.513.613.713.814.113.412.8912.2
Net interest margin2.12.02.01.92.12.12.12.12.12.12.12.12.2
Non-interest income to total income32.438.441.439.037.146.543.042.641.640.739.539.136.5
Liquidity
Liquid DBU assets to total DBU assets12.613.111.310.510.211.611.211.111.211.612.111.110.4
Liquid DBU assets to total DBU liabilities19.320.318.416.416.418.217.617.417.918.219.217.617.0
Source: Monetary Authority of Singapore.
Source: Monetary Authority of Singapore.
Table 7.Singapore: Indicators of Vulnerability, 2002–07
200220032004200520062007
Financial sector indicators
Broad money (M3, percent change, y/y)-0.85.96.16.419.114.1
Private sector credit (percent change, y/y)-8.65.44.42.04.916.9
Credit to the property sector (percent change, y/y)0.311.28.23.15.523.4
Share of property-sector credit in total non-bank credit (percent)42.544.446.046.446.147.4
Credit rating of local banks (S&P) 1/A/A+A/A+A+A+/AA−A+/AA−A+/AA−
Three-month Interbank rate (percent, end-year)0.80.81.43.33.42.4
NPL ratio (local banks, percent) 2/3/7.76.75.03.82.81.8
Capital adequacy ratio of local banks (percent) 3/16.917.916.215.815.414.0
Asset market indicators
Stock prices (percent change, y/y)-20.332.815.614.028.018.7
P/E ratio21.224.916.615.419.418.0
Stock prices of the finance sector (percent change, y/y)-13.523.89.85.929.339.7
Real estate prices (percent change, y/y) 4/
Residential-6.5-1.8-0.42.97.123.6
Office space-18.1-13.4-5.43.410.228.1
External Indicators
Current account balance (US$ billion)11.121.618.222.329.839.2
(In percent of GDP)12.623.216.718.621.824.3
Gross official reserves (US$ billion)82.296.2112.6116.2136.3163.0
(In month of next year’s imports of goods and services)5.75.35.44.75.05.0
Real exchange rate (end of period, 2000=100)97.592.892.493.295.198.0
Sources: Data provided by the Singapore authorities; and IMF, Information Notice System.

Ratings of the three major local banks.

In percent of global non-bank loans.

Latest observation as of September 2007.

The underlying price indices are computed based on the Laspeyres method and are 4-quarter moving averages.

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

Ratings of the three major local banks.

In percent of global non-bank loans.

Latest observation as of September 2007.

The underlying price indices are computed based on the Laspeyres method and are 4-quarter moving averages.

Table 8.Singapore: Medium-Term Scenario, 2004–13
Proj.
2004200520062007200820092010201120122013
Real growth (percent change)
GDP9.07.38.27.74.54.55.75.75.55.5
Total domestic demand14.02.97.79.28.95.34.55.15.85.9
Consumption4.24.44.84.14.44.24.65.05.35.4
Private5.23.93.34.64.04.34.75.05.35.5
Public0.36.510.72.35.83.74.34.85.35.4
Gross capital formation48.1-1.015.221.418.27.44.55.36.66.6
Private55.8-0.520.324.919.67.54.45.36.86.7
Public20.2-3.5-9.6-1.36.86.64.75.35.55.5
Net exports 1/-0.65.52.51.6-2.00.52.21.91.21.0
Saving and investment (percent of GDP)
Gross national savings38.438.541.846.843.843.844.044.144.244.1
Gross capital formation21.719.920.022.625.626.226.226.226.526.8
Inflation and unemployment
(period average, percent)
CPI inflation1.70.51.02.16.73.51.91.91.71.7
Unemployment rate3.43.12.72.12.12.22.32.42.52.5
Output gap-0.7-0.40.71.70.7-0.3-0.10.20.20.1
Central government (percent of GDP) 2/
Revenue20.220.921.523.623.423.323.523.724.024.2
Expenditure14.313.314.014.716.817.016.917.217.517.8
Overall balance5.97.67.59.06.66.36.66.66.56.4
Budget balance (the government’s definition)-0.30.10.21.90.90.70.60.40.1-0.2
Primary balance-2.2-1.4-1.6-0.2-1.1-1.3-1.3-1.5-1.8-2.2
Merchandise trade (percent change)
Export volume20.112.211.47.44.84.55.34.94.64.5
Import volume22.09.511.06.57.04.95.14.95.04.9
Terms of trade-1.0-2.1-1.1-0.9-0.9-0.5-0.3-0.20.00.0
Balance of payments
Current account balance16.718.621.824.318.217.617.917.917.717.3
Balance on goods and services25.428.729.828.923.922.222.021.721.220.8
Balance on income and transfers-8.7-10.1-8.0-4.6-5.7-4.6-4.1-3.8-3.5-3.5
Gross official reserves (US$ billions)112.6116.2136.3163.0180.7191.5202.7210.2217.8225.4
(In months of imports) 3/(5.4)(4.7)(5.0)(5.0)(5.1)(4.9)(4.8)(4.6)(4.5)(4.5)
Sources: Data provided by the Singapore authorities; and staff estimates and projections.

Contribution to GDP growth.

On a calendar year basis.

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.

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

1

About 2 percentage points of headline inflation can be accounted for by transitory factors, including the impact of last year’s hike in the goods and services tax and the effect of the January 2008 upward re-assessment of property values. Such re-assessments are infrequent.

2

Current account data were revised in early 2008, leading to a downward revision of around 6 percentage points of GDP in the 2007 current account balance. The adjustment mostly reflected revisions to the income balance, which, despite Singapore’s large net foreign asset position, is negative—because (according to Singapore’s Department of Statistics) interest, dividends and FDI retained earnings from foreign investment in Singapore are higher than income from residents’ investment abroad.

3

Corporate profits in Singapore, as in some other countries, are currently above historical levels. Cross-country econometric analysis indicates that profits are on average positively correlated with the REER and are mean-reverting. Taken as a whole, the evidence is consistent with the view that the exchange rate has not been the main driver of corporate profitability in Singapore and profits would be expected to fall over the medium term.

4

The old-age dependency ratio is expected to increase by 6 percentage points by 2015, faster than in Singapore’s main trading partners.

5

Only one-third of the economy—comprising the electronics sector and selected financial services—is seen as vulnerable to a global downturn in the near term.

6

The MAS’ monetary policy can empirically be characterized as a Taylor-like rule with the NEER rate of change as the operating target (see Parrado, WP/04/10). The NEER is targeted within an undisclosed band.

7

The fiscal impulse is estimated at around 2 percent of GDP but, given the temporary nature of the measures, the impact on the economy is likely to be much smaller. Simulations using the Oxford Economic Forecasting model suggest that the fiscal package would add around ¼ percentage point to 2008 GDP growth.

8

There are no official data on Singapore’s fiscal reserves at market prices, but a conservative estimate would put them at around 150 percent of GDP. Based on current policies and the macroeconomic assumptions embedded in our baseline scenario, these reserves could increase to around 200 percent of GDP over the next ten years.

9

Selected Issues papers prepared as background to this consultation analyze monetary and fiscal multipliers for Singapore using structural vector autoregressions.

10

Quotes for risk reversals (the difference between a call and a put out-of-the-money option premia) as of early June 2008 suggest market expectations are skewed towards a further appreciation of the exchange rate over the next 1–2 years.

11

For example, higher returns on the MAS’ foreign assets than its domestic liabilities have led to quasi-fiscal gains; use of market-based instruments has not stifled the development of domestic capital markets; and limited reliance on central bank paper to mop up liquidity has avoided segmentation of the public debt market. Details on the recourse to sterilization in the MAS operating framework are available at http://www.sgs.gov.sg/resource/pub_guide/guides/SGPMonetaryPolicyOperations.pdf.

12

Structural factors account in part for the large current account surpluses. These include high fiscal savings and sectoral shifts away from capital-intensive industries. For further details, see the 2005 Article IV staff report and Selected Issues, and the 2007 Article IV staff report.

13

An upward shift in the target band could also bring about a stronger exchange rate and facilitate disinflation. In the near term, the impact on inflation expectations and the export sector could be larger. On balance, this option should be used sparingly.

14

A Selected Issues paper analyzes intra-regional linkages by estimating joint probabilities of default for Singaporean and regional banks.

15

Domestic banks’ lending to the property sector grew by an average of 26 percent (year-on-year) during January–April 2008 and property loans currently constitute around 48 percent of total nonbank loans and around 26 percent of total loans.

16

The property sector exposure of Singaporean banks is subject to a ceiling of 35 percent of total eligible assets (the latter refer to nonbank loans and debt instruments, and property related contingent liabilities).

17

Constitutional provisions that cap transfers from fiscal reserves to the budget are under review at present. The rule allows a transfer of up to 50 percent of annual interest and dividends earned on fiscal reserves. The authorities are planning to allow for capital gains to be included.

18

Average daily turnover in Singapore’s foreign exchange market is about US$300 billion.

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