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


International Monetary Fund
Published Date:
August 2009
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Information about Asia and the Pacific Asia y el Pacífico
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I. Introduction

1. Context. While integration into the world economy continues to underpin Singapore’s economic success, its exposure to the global business cycle is posing considerable challenges at present. Indeed, Singapore was among the first countries in Asia to enter a recession and is now set for its worst economic contraction ever. Nonetheless, economic fundamentals remain strong and provide an important buffer against the external shocks. As a result, policymakers have ample room to maneuver.

2. Focus of the mission. The 2009 Article IV discussions focused on the appropriate policies to lessen the blow of the global recession, maintain financial stability, and ensure that Singapore is well positioned when the world economy begins to recover. Given Singapore’s importance as an international financial center, special emphasis was given to adverse macro-financial interactions and the possibility of outward spillovers.

II. Macroeconomic Developments

3. Context. As elsewhere in the region, Singapore’s financial markets have experienced substantial turbulence, but the main impact of the downturn is being felt through the trade channel.

4. Growth. The decline in GDP started in the second quarter of 2008 and accelerated in the second half of the year (Figure 1 and Table 1). Activity dropped by nearly 13 percent (q/q, saar) in the first quarter of 2009 as external demand collapsed. Export-oriented sectors (electronics, engineering, transport and storage) have been hit the hardest, but services, including in the financial sector, have also suffered. By contrast, with large projects underway, construction has held up well so far.

Figure 1.Singapore: Real Sector Developments

Source: CEIC Data Co. Ltd; and IMF staff estimates.

Table 1.Singapore: Selected Economic and Financial Indicators, 2003–10

Nominal GDP (2008): US$181.9 billion

Main exports (percent of total domestic exports): Electronic products (35 percent) and chemical products (17 percent)

GDP per capita (2008): US$37,597

Population (2008): 4.8 million

Unemployment rate (2008): 3.1 percent (resident)

NetFDI (2008): US$13.8 billion

Public debt (2008): 99 percent of GDP

Foreign government debt (2008): none

Quota: SDR 862.5 million

Growth (percentage change)
Real GDP3.
Total domestic demand-8.314.
Private consumption0.
Gross capital formation-30.649.80.612.412.342.8-11.1-1.8
Net exports56.2-1.921.310.511.9-33.8-23.82.9
Contribution to GDP growth10.8-
Saving and investment (percent of GDP)
Gross national savings39.739.943.045.544.245.740.437.9
Gross capital formation16.021.820.220.120.730.927.124.7
Inflation and unemployment (period average, percent)
CPI inflation0.
Unemployment rate4.
Central government budget (percent of GDP) 1/
Overall balance6.
Primary operating balance-2.9-1.9-1.2-1.50.9-3.6-6.4-6.2
Money and credit (end of period, percentage change)
Broad money (M3)
Lending to nonbanking sector6.
Interest rate (three-month interbank, in percent)
Balance of payments (US$ billion)
Current account balance22.119.927.535.439.227.020.822.1
(In percent of GDP)(23.7)(18.1)(22.7)(25.4)(23.5)(14.8)(13.3)(13.2)
Trade balance29.330.736.442.847.230.724.927.5
Exports, f.o.b.161.7199.3232.7274.7303.7343.3258.6287.9
Imports, f.o.b.-132.3-168.6-196.3-232.0-256.5-26-233.7-260.4
Net capital flows-15.3-7.8-15.2-18.4-19.8-13.9-11.0-12.0
Overall balance6.812.112.317.019.413.19.810.1
Gross official reserves (US$ billion)96.2112.6116.2136.3163.0174.2184.0194.1
(months of imports) 2/(4.9)(6.8)(5.0)(6.8)(5.0)(6.9)(6.8)(7.0)
Sources: Data provided by the Singapore authorities; and Fund staff estimates and projections.

Fiscal year beginning April 1.

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

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

Fiscal year beginning April 1.

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

Real GDP Growth and Contributions

(In percent)

5. Inflation. Headline inflation has continued to recede from a peak of 7½ percent (y/y) in mid-2008 to 1½ percent in March 2009. The drop in inflation was initially driven by lower food and commodity prices, but recently has become more broad-based, reflecting falling import prices and slack in demand.

6. Labor market. The unemployment rate of the resident workforce (seasonally adjusted) has risen from 2.8 percent in Q1 2008 to 4.8 percent in Q1 2009, and monthly earnings growth has decelerated sharply.1 However, employment of residents has fallen less than in previous downturns as the corporate sector entered the recession in a stronger position. In particular, employment in the construction and services is still expanding and is absorbing laid-off workers from the manufacturing sector. There is anecdotal evidence that foreign workers are bearing the brunt of adjustment. Government programs (discussed below) are also helping firms to reduce labor costs and retain employees.

7. Balance of payments. The current account surplus has shrunk markedly as a result of the slump in exports (Figure 3 and Table 2). It dropped from an average of 16.3 percent of GDP in the first three quarters of 2008 to 10.4 percent of GDP in Q4 2008. FDI and portfolio inflows have also fallen because of the deteriorating growth outlook and rising risk aversion. However, the decline has been more than offset by lower capital outflows owing to weaker corporate profits and concerns about asset quality in advanced economies. Outflows have also been mitigated by Singapore’s status as a safe haven. Official reserves have declined from the peak of US$177 billion at end-March 2008, but have begun to recover in recent months, reaching about US$172 billion as of end-May 2009.

Figure 2.Singapore: Asset Market Developments

Sources: CEIC Data Co. Ltd.; Bloomberg L.P.; and IMF staff estimates.

Figure 3.Singapore: External Developments

Source: CEIC Data Co. Ltd.; Singapore, Department of Statistics; and IMF staff estimates.

Table 2.Singapore: Balance of Payments, 2003–10 1/(In billions of U.S. dollars)
Current account balance22.119.927.535.439.227.020.822.1
Trade balance29.330.736.442.847.230.724.927.5
Exports, f.o.b.161.7199.3232.7274.7303.7343.3258.6287.9
Imports, f.o.b.-132.3-168.6-196.3-232.0-256.5-26-233.7-260.4
Services balance-3.7-2.9-1.8-
Income balance-2.3-6.5-5.6-5.0-11.5-5.0-2.9-2.1
Transfer payments (net)-1.4-1.4-1.4-1.7-2.1-2.7-3.0-3.2
Net capital flows-15.3-7.8-15.2-18.4-19.8-13.9-11.0-12.0
Capital and financial account balance-18.5-10.9-17.9-22.1-22.5-11.5-11.0-12.0
Capital account (net)-0.2-0.2-0.2-0.2-0.3-0.3-0.3-0.3
Financial account (net)-18.4-10.7-17.7-21.9-22.2-11.2-10.7-11.7
Direct investment9.
Portfolio investment-7.6-8.70.9-5.2-9.5-23.2-22.1-24.4
Other investment-19.9-11.3-21.7-31.0-19.8-
Net errors and omissions3.
Overall balance6.812.112.317.019.413.19.810.1
Memorandum items:
Current account as percent of GDP23.718.122.725.423.514.813.313.2
Trade balance as percent of GDP31.528.030.130.728.216.915.916.4
Net international investment position
(In billions of U.S. dollars)98.3108.2148.2201.5167.7191.4
GDP in billions of U.S. dollar93.2109.7120.9139.2166.9181.9156.3168.1
(In percent of GDP)105.598.7122.5144.8100.5105.2
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.

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.

III. Financial Developments

8. Context. Singapore is a major funding center for South-East Asia. Accordingly, financial market conditions are highly influenced by developments abroad. In particular, the global financial volatility that erupted in late September 2008 spilled into domestic asset prices (Box 1). Markets have been severely tested but, on the whole, have continued to operate in an orderly fashion. Financial institutions have nonetheless suffered from a drop in fees and commissions as well as from an increase in intermediation cost. The attendant contraction in financial activity has contributed 1 percentage point to the y/y fall of quarterly real GDP in Q4 2008 and Q1 2009 (of 4.2 percent and 10.1 percent, respectively).

9. Outward spillovers. Overall, financial developments in Singapore had only minor impact on the Asian Dollar Market. Domestic banks, which in late 2008 were net lenders in U.S. dollars in the interbank market, became more cautious in their lending. Some foreign banks seeking U.S. dollar liquidity faced much higher costs of borrowing. While banks that needed Singapore-dollar liquidity had ready access to the MAS standing facility, financial institutions that sought to borrow Singapore dollars to swap into U.S. dollars to meet funding needs elsewhere were unable to pledge foreign currency collateral at the MAS window. Rates for some transactions in the Asian dollar market exceeded the U.S. dollar SIBOR rate at times when borrowers were charged a spread depending on their perceived creditworthiness. Strains were largely over by end-2008.

Box 1.Global Crisis and Financial Contagion

The global financial crisis has propagated rapidly around the world. In most markets (including Asia) financial contagion was the direct result of the global sell-off caused by deleveraging.

What has been the impact of global financial turbulence on Singapore’s asset prices? Preliminary insights can be drawn from vector autoregressions (VAR) comprising of a measure of risk appetite and an asset price, as well as the associated impulse response functions.1/

Econometric analysis shows that shocks to global risk appetite have a large impact on the equity returns and exchange rates in Singapore. A one standard deviation increase in the VIX (a proxy for global risk aversion) leads to a 100 basis points decline in equity prices and an eight basis point depreciation of the exchange rate vis-à-vis the U.S. dollar. The impact on the stock market is comparable with that in the other countries included in the estimations (the average impact on the stock market is a decline of about 105 basis points). Although Singapore is highly integrated with the global economy, the effect of the risk appetite shock on the exchange rate (vis-à-vis the U.S. dollar) is one-and-half to five times smaller than in the other countries considered (table).2/ This likely reflects Singapore’s exchange-centered monetary policy framework, which limits the extent to which global volatility is transmitted to the exchange rate.

The impact of risk appetite shocks is instantaneous and long lasting. The shape of the impulse response functions show that in almost all cases considered, the five-day cumulative effect of the risk appetite shock is similar to the immediate (one-day) impact—which can also be inferred from the VAR. Moreover, after 10 trading days the effects of financial contagion are statistically significant, consistent with the notion that repricing of risk can have long lasting global effects on prices and volatility.

Cumulative Impact to One Standard Deviation Shock to VIX

(In basis points, over 5-day period) 1/

Exchange RateStock Market
Source: IMF staff estimates.

Increase in exchange rate corresponds to a depreciation.

Source: IMF staff estimates.

Increase in exchange rate corresponds to a depreciation.

1/ The VAR is estimated in first differences with daily data over the January 2004-May 2009 period. The VIX precedes the “domestic” asset price in each VAR, i.e., shocks to the latter do not affect the former contemporaneously.2/ In the case of the Japanese yen, the finding is consistent with the unwinding of carry trades, i.e. as risk appetite decreases financial home bias reasserts itself (causing the Japanese yen to appreciate).

10. Equity market. Following the collapse of Lehman Brothers, the equity market fell by almost 24 percent in October 2008, the biggest month-on-month decline in more than twenty years (Figure 2). The equity sell-off reflected global deleveraging, as well as investor concerns about Asia’s growth prospects. In recent months, concerns about the severity of the global downturn have eased and risk appetite has improved, lifting equity prices by 54 percent from the trough in March 2009.

11. Money markets. Money markets experienced considerable liquidity pressures in the fall of 2008. Interbank rates spiked with rising counterparty risk, but markets never seized up. Liquidity pressures eased by January 2009, following coordinated actions by central banks around the globe. The improved liquidity situation has been reflected in reduced volatility in interbank rates and lower TED and OIS spreads.2

12. Foreign exchange market. Turnover in the foreign exchange market—the fifth largest in the world—fell by about 40 percent between September and December of 2008 as financial institutions hoarded cash and U.S. dollar liquidity dried up. The Singapore dollar weakened by 3¼ percent against the U.S. dollar during this period, broadly in line with exchange rate movements elsewhere in the region. Turnover has improved with the global increase in U.S. dollar liquidity, but it remains below the levels recorded in the first half of 2008. The Singapore dollar has strengthened against the U.S. dollar since March 2009 along with other currencies in Asia as risk capital has begun to return to the region.

13. Credit and corporate debt financing. Credit conditions tightened significantly in October-November 2008. As banks became more conservative in their lending to protect their capital base, credit growth has declined from about 20 percent (y/y) in mid 2008 to 8¾ percent in March 2009 (Table 3). Singapore dollar loans to nonbank customers fell by 2 percent between October 2008 and March 2009, while foreign currency loans to nonbank customers outside Singapore dropped by 12 percent during that period. The relatively mild contraction in Singapore-dollar credit reflects in part the stronger balance sheets of the corporate sector than in previous downturns. Nevertheless, there appears to be considerable tiering as banks have maintained credit lines with their prime customers, while many SMEs have experienced difficulties accessing bank credit. As a result of rising counterparty risk, stress has been felt in the trade financing where banks need to settle letters of credit with overseas counterparties. Issuance of corporate debt securities, especially U.S. dollar-denominated, has also fallen sharply in tandem with global markets.

Table 3.Singapore: Monetary Survey, 2006–09
(In billions of Singapore dollars, end of period)
Net foreign assets204.1210.5219.7224.8240.3239.4239.4239.4253.6275.5258.0263.8275.5
Monetary authorities 1/194.8200.6203.3207.2207.0218.6224.4232.7243.0238.6240.4248.6251.4
Deposit money banks 2/9.39.916.417.633.321.815.06.710.616.917.515.224.2
Domestic credit240.2249.4255.8256.4266.5276.5290.6299.2316.0326.5332.2341.7346.8
Claims on private sector189.1193.4197.4199.1205.0212.3220.1232.8245.1254.4264.6268.1266.4
Nonbank lending182.6189.6194.0194.6201.4209.1218.7233.4249.3261.1272.9272.2270.7
Claims on central government51.155.958.457.361.564.270.566.470.972.167.673.680.4
Other items (net) 3/-216.8-222.4-230.3-218.8-227.0-223.2-235.8-227.0-256.4-266.3-265.5-272.0-272.9
(Annual percentage change)
Domestic credit0.
Claims on private sector1.
Nonbank lending2.
(Contribution to M3 growth, in percent)
Net foreign assets10.211.612.013.815.512.
Domestic credit0.
Claims on private sector1.
Claims on central government-
Other items (net) 3/-2.5-3.7-4.5-1.7-4.00.2-1.3-7.2-9.4-13.7-9.6-10.2-5.4
Source: IMF, International Financial Statistics; and CEIC Data Co., Ltd.

Total foreign reserves (international liquidity concept) minus foreign liabilities.

Commercial banks.

Including other nonbank financial institutions.

Source: IMF, International Financial Statistics; and CEIC Data Co., Ltd.

Total foreign reserves (international liquidity concept) minus foreign liabilities.

Commercial banks.

Including other nonbank financial institutions.

14. Property market. Financial turmoil has also spilled over to the property market, which, after two years of brisk growth, has cooled off. Private home prices slipped by almost 14 percent (q/q) in the first quarter of 2009 and are down 21 percent from their peak in 2008 (Table 4). Nevertheless, they are still some 20 percent higher than in 2005. The slowdown in the private market segment has begun to trickle down to the larger and more stable public housing (or HDB) market where resale prices were marginally lower in the first quarter. Lower prices have led to a pick up in transaction volumes for private properties in the first quarter of 2009.

Table 4.Singapore: Indicators of Vulnerability, 2003–08
Financial sector indicators
Broad money (M3, percent change, y/y)
Claims on private sector (percent change, y/y)
Credit to the property sector (percent change, y/y)
Share of property-sector credit in total nonbank credit (percent)44.446.046.0446.147.447.6
Credit rating of local banks (S&P) 1/A/A+A+A+/AA-A+/AA-A+/AA-A+/AA-
Three-month interbank rate (percent, end-year)
NPL ratio (local banks, percent) 2/3/
Capital adequacy ratio of local banks (percent) 3/
Asset market indicators
Stock prices (percent change, y/y)32.815.614.028.018.7-49.2
P/E ratio24.916.615.419.418.06.2
Stock prices of the finance sector (percent change, y/y)
Real estate prices (percent change, y/y) 4/
Office space-13.4-5.43.410.228.110.3
External indicators
Current account balance (US$ billion)22.119.927.535.439.227.0
(In percent of GDP)23.718.122.725.423.514.8
Gross official reserves (US$ billion)96.2112.6116.2136.3163.0174.2
(In month of next year’s imports of goods and services)
Real exchange rate (end of period, 2000=100)92.191.793.295.198.0101.9
Sources: Data provided by the Singapore authorities; and IMF, Information Notice System.

Ratings of the three major local banks.

In percent of global nonbank loans.

Latest observation as of September 2008.

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 nonbank loans.

Latest observation as of September 2008.

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

IV. Policy Developments

15. A swift response. The government tackled the unfolding crisis by deploying a broad range of instruments. The overarching strategy has been to lessen the impact of the external shocks, while ensuring that Singapore is well positioned to rebound once the global economy recovers.

16. Monetary policy. The Monetary Authority of Singapore (MAS) has loosened monetary conditions in two steps. The MAS (which targets the nominal effective exchange rate to safeguard price stability) started the easing cycle in October 2008. It first removed the appreciating trend from the (undisclosed) NEER policy band. Then, in April 2009, it re-centered the band around the prevailing level of the exchange rate, which had drifted down. The width of the band and the zero appreciation trend have been kept unchanged. The move validated a weaker currency and implied a slight “devaluation” of the trend NEER.

Nominal Effective Exchange Rate 1/


Sources: IMF, Information Notice System; and staff estimates.

1/ Mid-point, lower and upper bounds are staff estimates.

Overall Fiscal Balance

(In percent of GDP)

17. Fiscal policy. The fiscal response to the global crisis has involved a large stimulus package introduced in January 2009 (Box 2). The stimulus measures are estimated to provide a fiscal impulse of about 3 percent of GDP in 2009–10. The implementation began in FY 2008 (ending in March) and pushed the budget deficit (as defined by the authorities) to ¾ percent of GDP. Recent constitutional amendments enable the government to use more of the returns from the investment of its reserves to fund the budget. In FY 2009 the deficit is projected to increase to 3½ percent of GDP, the largest on record (Table 5). However, given ample fiscal reserves, no public borrowing will be required.

Table 5.Singapore: Summary of Government Operations, 2005/06-2009/10 1/(In percent of GDP)
Total revenue21.021.125.423.624.522.0
Current revenue17.717.419.719.721.017.9
Tax revenue12.512.714.
Investment income 2/
Other nontax revenue1.
Capital revenue 3/
Total expenditure12.913.913.018.920.324.3
Current expenditure11.212.511.714.115.117.1
Operating expenditure10.410.410.011.511.613.4
Debt servicing0.
Investment expenses0.
Transfer payments0.
Development expenditure and net lending1.
Development expenditure 4/
Net lending-2.2-1.7-1.80.0-0.21.5
Fund transfers 5/
Overall balance8.17.312.44.64.2-2.3
Primary operating balance 6/-1.2-1.50.9-2.4-3.6-8.8
Memorandum items:
Budget balance (the government’s definition)
Government saving6.
Structural primary balance 7/-1.4-2.4-0.4-2.7-3.9-2.7
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 rates 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, and ElderCare.

Overall balance excluding investment income, capital revenue, debt service, other items.

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

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 rates 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, and ElderCare.

Overall balance excluding investment income, capital revenue, debt service, other items.

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

Box 2.Resilience Package

The FY 2009 budget introduced the Resilience Package, aimed at blunting the effects of the downturn and strengthening the longer-term prospects for Singapore. The package amounts to S$20.5 billion (about 8 percent of GDP)—one of the largest stimulus packages among advanced economies.

Measures cover five broad areas, and are focused at saving jobs and helping viable companies to stay afloat as well as enhance their competitiveness (see table). Some measures took effect in the last quarter of FY 2008, but the bulk of the package will be implemented during FY 2009. A key element of the package is the Jobs Credit Scheme. It provides an incentive for companies to maintain or increase their workforce, by giving them grants of 12 percent of the wages of employees who contribute to the mandatory pension scheme, up to a specified maximum. This scheme is estimated to lower labor costs by 7–9 percent. Another element of the package is the Special Risk-Sharing Initiative in which, inter alia, the government assumes 80 percent of loan loss risk to encourage bank lending.

Resilience Package: The Key Components(In billions of Singapore dollars)
Preserve jobs5.1
- Jobs Credit Scheme4.5
Stimulate bank lending5.8
- Special Risk-Sharing Initiative5.8
Enhance business cashflow and competitiveness2.6
- Property tax rebate for commercial and industrial property0.8
- Rental rebate for selected industrial and commercial tenants0.3
Support families2.6
- Personal income tax rebates0.5
- Doubling GST credits and Senior Citizen Bonuses0.5
Build for the future4.4
- Expanded and accelerated infrastructure spending1.1
- Spending on security, health, education, transport1.7
Total package20.5
Source: Budget 2009; MAS, Macroeconomic Review (April 2009).
Source: Budget 2009; MAS, Macroeconomic Review (April 2009).

18. Financial policies. To support the stability of Singapore’s financial system, the authorities implemented a range of measures. In October, the MAS: (i) adopted a blanket guarantee on Singapore dollar and foreign currency nonbank deposits in domestic and foreign banks through 2010; (ii) entered into a precautionary US$30 billion currency swap agreement with the Fed; and (iii) intensified its surveillance of the financial sector. Furthermore, the MAS announced that it would inject additional liquidity through its standing facilities, if needed.3 In November, the government introduced measures to help SMEs maintain access to bank credit. The measures were adjusted and expanded in the following months to maximize their effectiveness.

V. Outlook and Risks

19. Near-term outlook. The economy is projected to contract by about 8 percent in 2009, with the trough in GDP occurring probably in 2009Q4 (Table 6). The slowdown would result primarily from a slump in external demand and private investment. The 2009 budget should mitigate the decline in aggregate demand and shore up private consumption by limiting the rise in unemployment and softening the impact of the crisis on firms’ cash flow and households’ disposable income. As the global economy recovers, activity is expected to pick up modestly in 2010, with GDP growth reaching 2½ percent. Inflation would fall to about zero in 2009, on the back of lower food and energy prices and a widening output gap. The authorities agreed with the broad contours of these projections, but noted that the upturn in 2010 could be stronger given signs of resilience in intra-regional trade and in advanced economies.

Table 6.Singapore: Medium-Term Scenario, 2006–14
Real growth (percent change)
Total domestic demand6.86.915.9-
Final domestic demand7.19.27.1-
Gross capital formation12.412.342.8-11.1-1.810.
Net exports 1/3.13.6-10.6-4.90.5-0.5-
Saving and investment (percent of GDP)
Gross national savings45.544.245.740.437.939.139.339.138.8
Central government5.
Private and other40.437.239.836.434.335.535.535.034.5
Gross capital formation20.120.730.927.124.725.
Inflation and unemployment (period average, percent)
CPI inflation1.
Unemployment rate2.
Output gap3.97.13.9-6.5-6.3-3.4-
Central government (percent of GDP) 2/
Overall balance7.511.
Primary balance-1.40.3-2.5-5.7-6.3-6.2-6.3-6.2-6.2
Merchandise trade (percent change)
Export volume11.47.43.0-
Import volume11.06.59.6-
Terms of trade-1.1-0.9-1.11.8-
Balance of payments (percent of GDP)
Current account balance25.423.514.813.313.
Balance on goods and services30.231.719.117.016.317.016.716.616.8
Balance on income and transfers-4.8-8.2-8.2-3.7-3.2-2.9-2.6-2.6-2.6
Gross official reserves (US$ billions)136.3163.0174.2184.0194.1200.8207.4214.0220.5
(In months of imports) 3/(4.9)(5.0)(6.9)(6.8)(7.0)(6.9)(6.9)(6.9)(6.9)
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.

20. Risks. There was broad agreement that, given Singapore’s status as a financial center and dependence on exports, the main growth risks relate to a further worsening of the external environment. First, global volatility may directly spill into local financial markets, undercutting bank credit. Second, international financial developments may precipitate a sharper contraction of the global economy, with renewed adverse effects on trade and related services. Macro-financial interactions could amplify either channel of contagion. On the upside, countercyclical policies at home and abroad could prove more effective than anticipated, and intraregional trade may pick up faster than expected.

21. Medium-term outlook. As global activity recovers, Singapore’s economy is expected to regain forward momentum. Domestic demand and exports would pick up. Growth would also be supported by increased public spending in infrastructure. Nonetheless, trend growth is likely to be weaker than before the crisis, as credit conditions remain tight and production adjusts to new patterns of external demand. In the outer years, assuming an unchanged real effective exchange rate, the current account balance would hover around 15 percent of GDP, substantially lower than before the crisis. This reflects: (i) declining savings owing to a return of corporate profitability to more normal levels and the early impact of population ageing; and (ii) rising public investment (about 2 percent of GDP per year on average over the next five years in the authorities’ plans), which partially offsets the unwinding of the recent boom in the property sector. The authorities shared staff’s views on the medium-term evolution of the current account, and noted that Singapore’s flexible economic structures should enable it to capitalize on new sources of growth. An Economic Strategies Committee—chaired by the Finance Minister and comprising representative from the public and private sectors—will be set up later this year. It will develop recommendations to identify new growth opportunities, strengthen corporate capabilities, foster a knowledge-based economy, and secure high-value jobs for Singaporeans.

VI. Policy Discussions

A. The Role of Macroeconomic Policies

22. Context. Recognizing the limits of countercyclical action in a small and highly open economy, policymakers have calibrated their response so as to strike a balance between supporting demand and facilitating structural adjustments.

23. Monetary policy. For monetary policy, this balancing act has involved loosening monetary conditions without undermining exchange rate stability or increasing the cost of credit to businesses and households.4 The MAS’ actions have achieved these goals by limiting volatility in both exchange and interest rates. Staff agreed that, with inflation concerns out of the picture, the monetary settings are appropriate. Barring a significant deterioration in the outlook for growth or inflation, monetary policy should stay the course for some time to come. There was agreement that, once a recovery is well established, a return to a trend appreciation for the NEER would safeguard price stability as slack in the economy is taken up.

24. Fiscal policy. Fiscal policymaking has also involved balancing different objectives. The authorities noted that the stimulus package for the current fiscal year supports growth without blunting incentives for structural adjustments.5

  • Staff agreed that the fiscal package had been timely, appropriately large, and diversified. It would support growth also over longer horizons through accelerated infrastructure spending. Furthermore, the authorities’ intention to undertake additional measures outside the normal budget cycle if the economy’s trajectory proves more fragile than currently expected added a desirable element of contingency to the fiscal plans. Staff and the authorities shared the view that a premature fiscal withdrawal in the next budget could undermine positive confidence effects of actions taken. The authorities noted that lack of sustainability concerns and a strong track record of responsiveness as well as short inside and outside lags lessen the need for pre-announcing the direction of fiscal policy.
  • Further along the recovery path, fiscal policy would need to play a part in fostering likely transformations in a post-crisis world. Public investment in physical and social infrastructure would continue to foster an enabling business environment. In the staff’s view, consideration could also be given to strengthening automatic stabilizers by assessing taxes on the basis of current rather than previous year’s income, with due regard to the administrative and compliance costs that such change might impose on taxpayers.

B. The Outlook for the Financial Sector

25. Context. Although the global turmoil will have a negative impact on short-term earnings of most financial institutions, Singapore’s financial system (which is bank-dominated) should be able to withstand a deeper and more prolonged global downturn. Post-crisis transformations would, if anything, boost demand for financial services, as regional trade and financial integration deepens.

26. Banks. Despite the turmoil, domestic banks remain profitable, liquid, and well capitalized (Figure 4 and Table 7).6 Their exposure to toxic assets was low to start with, with total CDO investments amounting to only 0.3 percent of total assets (2.6 percent of regulatory capital). Foreign banks (which account for over 50 percent of total banking system assets) are subject to stringent licensing procedures, and the MAS has assurances of liquidity support from their head offices.7 Looking forward, there was broad agreement that, although credit spreads have widened, banks will face pressure on profits from lower fee income and higher provisioning. Credit quality is expected to deteriorate in the near term, as a result of the slowing domestic economy. However, at present, these pressures look manageable. The MAS has undertaken extensive stress tests and, even under a severe scenario, domestic banks’ Tier 1 capital will remain substantially above the regulatory minimum.

Figure 4.Singapore: Financial Sector Developments

Sources: CEIC Data Co. Ltd.; the Monetary Authority of Singapore; and IMF staff estimates.

Table 7.Singapore: Financial Soundness Indicators: Local Banking Sector, 2004–08
(In percent)
Capital adequacy ratio
Regulatory capital to risk-weighted assets16.215.815.413.514.113.914.3
Regulatory tier I capital to risk-weighted assets11.511.411.29.810.510.611.3
Shareholders’ equity to assets9.
Asset quality
NPLs to nonbank loans5.
Total provisions to NPLs73.678.789.5115.6118.9117.2119.9
Specific provisions to NPLs40.741.141.339.938.841.443.5
Loan concentrations (in percent of total loans)
Bank loans23.324.122.816.217.717.116.6
Non-bank loans76.775.977.283.882.382.983.4
Of which:
Manufacturing loans7.
Building and construction loans8.48.89.511.412.112.312.3
Housing loans22.521.721.020.619.819.719.2
Loans to professionals and private individuals10.
Loans to nonbank financial institutions9.810.010.512.311.811.411.2
After-tax return on assets1.
After-tax return on equity11.611.213.712.912.212.511.9
Net interest margin2.
Non-interest income to total income41.439.042.639.136.536.434.2
Liquid DBU assets to total DBU assets11.410.39.810.
Liquid DBU assets to total DBU liabilities12.511.310.610.810.310.39.6
Source: Monetary Authority of Singapore.
Source: Monetary Authority of Singapore.

27. Insurance. Although investment income and premium revenues fell in late 2008, insurance companies continue to have strong capital and liquidity buffers. Insurers had no significant exposure to subprime loans or structured credit products, and regulations stipulate that they can only engage in derivatives trading for hedging purposes or efficient portfolio management. As a result, insurers tend to invest predominantly in cash, deposits, and government securities. Their liabilities also tend to be conservative (e.g., investment linked products account for a small fraction of their offerings). The MAS has stepped up its oversight of the industry, and the policyholders’ protection scheme is under review. There was agreement that the insurance sector is unlikely to pose systemic risks, given its small size and limited financial linkages.8

28. Property. The slowdown in the real estate market has weakened the financial position of property firms. Given the prospective excess supply, some segments of the private property market may come under further downward pressure, leading to some consolidation in the sector. However, the authorities noted that most property developers entered the downturn with strong balance sheets, and are benefiting from government schemes to support their cash flows (e.g., through property tax rebates or deferrals). Furthermore, bank lending to the property sector remains well within regulatory limits and there are no large exposures to individual developers.

Box 3.Asian Currency Units and Domestic Banking Units

Banks operating in Singapore book their activities in two distinct accounting units—the Domestic Banking Unit (DBU) and Asian Currency Unit (ACU). Singapore dollar transactions are recorded in the DBU, while foreign currency transactions are recorded primarily in the ACU.1/ The distinction between the DBU and ACU is purely an accounting convention, which in itself does not have implications for assessment of banks’ financial soundness. ACU and DBU are not separate legal entities. However, banks seeking to operate an ACU will need approval by the MAS. This arrangement was designed in 1970s to encourage foreign currency business in the so-called Asian Dollar Market (ADM), and thus develop Singapore as a regional financial hub. While ACUs are primarily funded from the interbank market, the main source of funding for DBUs is retail deposits.

As in other financial centers, foreign currency activities in Singapore are subject to a different regulatory treatment. ACUs are exempt from certain provisions of the Banking Act, notably the minimum cash balance and the minimum liquid asset ratio requirements. Historically, many foreign banks have set up operations in Singapore with the purpose of establishing an ACU.

While ACUs are exempt from some prudential rules, they are closely supervised by the MAS. Individual ACUs are subject to size limits set by the MAS. Banks are required to provide monthly detailed financial statements on their ACUs, and are subject to regular on-site inspections. Foreign banks with ACUs are required to provide assurances of liquidity support from their head offices.

Singapore Banking System: Distribution of Assets Between ACU and DBU Accounts

Sources: Monetary Authority of Singapore; and Fitch Ratings, Singapore Banking System (April 2008).

1/ Banks in other financial centers also have separate books for transactions in different currencies. In Singapore, all foreign currency transactions are aggregated in the ACU. For more details, see Financial System Stability Assessment (IMF Country Report No. 04/104) and Fitch Ratings, Singapore Banking System (April 2008).

29. Asset management. Hedge funds, wealth managers, private banking, corporate fund advisory, and REITs are an important segment of Singapore’s financial system. Assets under management in Singapore stood at US$814 billion at end-2007, but have dropped by end-2008 as a result of the global financial turmoil. Like elsewhere in the region, hedge funds managed in Singapore (which are reportedly less leveraged than their foreign peers) have faced large redemption pressures. Lack of comprehensive data on these funds makes it difficult to assess their links with the rest of the financial system. Nonetheless, in the view of many market participants, Singapore will continue to attract asset management business.

C. Exchange Rate

30. Developments. Since mid-2008, the Singapore dollar has depreciated by 2 percent in real effective terms. This reflected mostly a comparable depreciation of the nominal effective exchange rate, as the monetary stance has been loosened.

31. Assessment. Staff estimates the real effective value of the Singapore dollar to be somewhat weaker than its equilibrium (Box 4). As such, it provides countercyclical support. This assessment is subject to considerable uncertainty, as reflected in unusually high volatility implied by foreign exchange options as well as poor visibility about the direction of the global economy and fundamentals. In fact, since mid-2008, reserves have declined by nearly US$7 billion, but intervention has been two-sided. The authorities noted that according to their valuation models the real effective Singapore dollar is broadly in line with its fair value. They recognized nonetheless that unusual uncertainty clouds these assessments. They also stressed that monetary policy has delivered a trend appreciation of the exchange rate and has not hindered structural adjustments. There was agreement that Singapore’s exchange rate regime, which has helped achieve a track record of low inflation with prolonged economic growth, continues to serve the country well.

32. Policy mix. In the staff’s view, once a recovery is in train, the policy settings should allow for a resumption of the trend appreciation of the NEER. A longer-term appreciation of the Singapore dollar would be facilitated by a recalibration of the policy mix toward reduced public savings and tighter monetary conditions. The authorities noted that higher public spending is planned for the medium term. They also agreed that the real effective exchange rate would likely experience a trend appreciation over the medium term, and that such appreciation should not be resisted, if driven by fundamentals.

VII. Staff Appraisal

33. Macroeconomic setting. Singapore has been hard hit by the global recession and is set for the worst economic contraction in its history. The effects of the slowdown are being felt mostly through the trade channel as reflected in the slump in exports. Local financial markets have come under stress, but have continued to operate in an orderly fashion. Nevertheless, a further worsening of international market turbulence remains an important macroeconomic risk. Against this background, and given the openness of the economy, the authorities have rightly focused on lessening the blow of the external shocks, while ensuring Singapore is well positioned once the global economy starts to recover.

Box 4.Exchange Rate Assessment

The real effective Singapore dollar is somewhat weaker than its estimated medium-term equilibrium level.

The exchange rate has been on an appreciation trend since early 2005. This trend reflects relatively stable inflation differentials vis-à-vis trading partners and the appreciation of the NEER. The Singapore dollar weakened in real effective terms at the onset of the global crisis, but it has moved sideways in recent months, reflecting in part policy changes.

Exchange Rates

(REER, 2000=100)

Source: IMF, Information Notice System.

To assess the level of the exchange rate in relation to its medium term equilibrium, three CGER-type methodologies have been applied:

  • The macroeconomic balance approach estimates current account norm of about 10 percent of GDP. The relatively 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 1973–2007. According to the macroeconomic balance approach, the Singapore dollar is undervalued by about 5 percent (after multilateral consistency adjustments).
  • The external sustainability approach points to a broadly similar undervaluation. Under the assumption that the net foreign asset position (NFA) is stabilized at its 2007 level (estimated at about 175 percent of GDP), the implied undervaluation is 10 percent. Computing Singapore’s NFA with cumulative current account balances gives an NFA of around 200 percent of GDP—and an undervaluation of the Singapore dollar of around 2 percent.1/
  • The estimate from the equilibrium exchange rate approach is broadly in line with those above. According to this approach, the exchange rate is some 3 percent below its estimated medium term equilibrium. Productivity gains in tradables and rising NFA support a more appreciated equilibrium exchange rate, partly offsetting the effect of the steady deterioration in the terms of trade.

During the 2008 Article IV consultation, staff’s assessment was that the real effective Singapore dollar was 5–15 percent undervalued relative to its equilibrium level. The lower undervaluation in the current assessment reflects inter alia a smaller underlying current account balance (consistent with weaker projected demand in Singapore’s main export markets), negative terms of trade shock (from lower prices for financial services and refined oil products) and losses on Singapore’s external assets.

1/ As discussed in IMF Country Report No. 08/280, estimates based on the external sustainability approach are sensitive to the level of NFA used. For instance, adding market estimates of the GIC’s assets to the reported IIP would put Singapore’s NFA at about 250–300 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 2001–07 (similar to the CGER’s adjustment for capital gains). In this case, the estimated undervaluation is about zero.

34. Response to the global crisis. The authorities have responded forcefully with a large fiscal stimulus package, monetary policy easing, and measures aimed at ensuring financial stability. The extraordinary circumstances have warranted some departure from the medium-term compass at the core of Singapore’s policy frameworks, but the response has managed to strike a balance between supporting demand and avoiding delays in necessary structural adjustments.

35. Monetary policy. For monetary policy, this balancing act has involved loosening monetary conditions—inter alia to fend off deflation risks—without undermining exchange rate stability or increasing the cost of credit to businesses and households. The MAS’ two-step decision to first eliminate the appreciation bias and then re-center the NEER target band has achieved these goals. With inflation concerns out of the picture, the monetary settings are appropriate. Barring a significant deterioration of the outlook for growth or inflation, monetary policy should stay the course until a recovery is well established. Further along the recovery path, monetary policy will need to shift to a tightening stance, including with a return to a targeted trend appreciation for the NEER, to safeguard price stability as slack in the economy is taken up.

36. Exchange rate. The REER is somewhat weaker than its medium-term equilibrium. This assessment—which is subject to considerable uncertainty—does not imply the need of policy adjustments at present but points to the likely evolution of the real exchange rate once a global recovery takes root. The floating exchange rate continues to serve Singapore well and the exchange-rate-centered monetary framework has been an important source of stability in times of economic turbulence.

37. Fiscal policy. The large stimulus for the current fiscal year will go a long way toward mitigating the impact of the output contraction on households and businesses. The package is designed to minimize tensions between limiting the downturn and fostering microeconomic incentives that will support rapid adjustment to the changes in the global economy. Further measures should be considered if the economy’s trajectory proves more fragile than currently expected. As the authorities recognize, the next budget will need to be crafted in line with the evolving economic situation and avoid a premature fiscal withdrawal that could undermine positive confidence effects of actions taken. Over the medium term, fiscal policy will need to play a part in readying the economy for shifts in the pattern of global demand (as balance sheets are rebuilt in advanced economies and internal sources of growth gain prominence in emerging markets). Along with the flexible labor and product markets, stepped-up public investment in physical and social infrastructure would create an enabling environment in which Singapore could seize new opportunities.

38. Financial sector policies. Singapore’s financial system has entered the global crisis from a position of strength, and has coped well with the turbulence in international financial markets so far. Yet, asset quality will deteriorate as the recession drags on. Rigorous stress tests encompassing multi-year scenarios, tail events, and correlated shocks should remain a high priority for the MAS in the period ahead. Continued efforts to upgrade contingency planning and coordinate with supervisors in other jurisdictions, particularly as regards the unwinding of deposit guarantees, should also be a priority. Looking beyond the near term, the MAS should continue to adapt its supervisory and regulatory framework as lessons from the crisis are learned.

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

1The overall unemployment rate has risen from 2 percent to 3¼ percent during that period.
2A TED spread is the difference between the interest rate on interbank loans and that on a short-term government security. It captures perceived counterparty risks. An OIS spread is the difference between an interbank rate and that on an overnight indexed swap. It reflects the availability of credit in interbank lending.
3Access to standing facilities had been broadened beyond primary dealers in June 2008.
4With the NEER as the intermediate target of monetary policy, a monetary loosening involving an increase in the expected depreciation of the NEER (rather than a re-centering of the band) implies an increase in nominal interest rates, consistent with uncovered interest parity.
5For instance, the temporary nature of the adopted measures was underscored by the unprecedented decision of funding key components of the Resilience Package from past fiscal reserves. The remaining financing of the FY 2009 deficit would come from the budgetary surpluses accumulated during the current election cycle and will not require debt issuance.
6For the banking system as a whole, the loan-to-deposit ratio is about 80 percent, regulatory capital is 16.7 percent of risk-weighted assets (Tier 1 ratio is 13.1 percent), and the liquid asset ratio is 19 percent. Banks are funded primarily through retail deposits.
7Domestic Banking Unit assets (primarily in Singapore dollars) are split about equally between domestic and foreign banks. However, foreign banks account for 86 percent of Asian Currency Unit assets, all in foreign currency (Box 3). Most foreign banks operate in Singapore as branches. Their liquidity needs are included as part of the head office’s overall liquidity management and commitment to global operations. The MAS has regular contacts with both the head offices and home-country supervisors of the larger foreign banks in Singapore. The money market and funding operations of these entities in Singapore are important for these banks in the Asia and Pacific region and hence liquidity support by the head office is an issue often discussed and agreed upon.
8Insurance sector accounts for less than 6 percent of total financial sector assets. Local banks’ loans to insurance companies account for less than 0.2 percent of total loans.

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