Singapore investment

IMF concludes article IV consultation with Singapore

On July 16, 2008, the executive board of the International Monetary Fund (IMF) concluded the article IV consultation with Singapore. 

Spillovers from the global slowdown and lingering turbulence in international financial markets have been propagated to Singapore mostly through the trade channel. After growing by about 7.75% last year, flagging exports have weighed on the pace of activity since late 2007. Relatedly, the current account surplus fell from 24% of GDP in 2007 to 14% of GDP in the first quarter of this year. 

Inflation has risen significantly on the back of international and home-grown cost pressures, reaching a 26-year high of around 7% during January-April this year. Increases in food and energy prices have added to pressures from a hike in indirect takes, a housing boom, and tighter labour markets. Housing prices have stabilised but there may remain some froth in the high-end market. 

The global market turmoil has had only limited reverberations on Singapore's financial system. Credit spreads have widened, equity volatility has risen, and banks have incurred trading-related losses, including on structured credit products. Yet, none of these developments have had systemic implications, so far. 

Monetary policy has been tightened further. Following a slight increase in the slope of its policy band for the nominal effective exchange rate of the Singapore dollar last October, in April 2008 the Monetary Authority of Singapore shifted the band up by an estimated 2% in response to inflation concerns and upward pressures on the exchange rate. 

Fiscal policy has been loosened. After a sizable revenue over-performance last fiscal year (which ended in March), the FY 2008-09 budget is slightly expansionary. 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.

IMF executive directors commented that the pragmatic macroeconomic policies and proactive structural reforms have underpinned Singapore's strong economic performance and increased resilience to adverse external shocks. Directors observed that, given the challenges of weakening global growth, ongoing turbulence in international financial markets, and mounting inflation pressures, the pace of economic activity in Singapore is likely to decline in the near term, with inflation remaining elevated. Against this background, ensuring that inflation expectations remain well anchored is a policy priority. 

Solid growth

IMF directors agreed that, given the uncertainties in the global outlook facing Singapore's open economy, macroeconomic policies should remain flexible and pragmatic and seek an appropriate balance to sustain solid growth while containing inflationary pressures and maintaining macroeconomic stability. Directors welcomed the recent steps by the Monetary Authority of Singapore to tighten the monetary policy stance further by adjusting the exchange rate target band. The IMF staff assessment that the Singapore dollar remains weaker than the level implied by long-term fundamentals.

However, given the downside risks to growth, many directors favoured maintaining the current policy mix in the short-term, with the authorities remaining ready to modify the policy stance going forward if necessary. These directors felt that the extent of exchange rate undervaluation is difficult to gauge, and that given monetary policy lags, it would be sensible to assess the impact of the monetary tightening already in the pipeline before adjusting the policy stance. In this regard, indications of recent easing in wage pressures were welcomed. IMF staff recommended that a further degree of rebalancing of the macroeconomic policy mix toward a somewhat tighter monetary stance and a looser fiscal policy would be desirable in the current conjuncture from both a domestic and an international perspective.

Given the recent upsurge in inflation, they considered that a moderately faster pace of appreciation would help ensure that price expectations remain well-anchored and facilitate the needed external adjustment.  These directors acknowledged the difficulty of additional tightening when the external environment remains fragile, but observed that the width of the exchange rate policy band could provide flexibility to cope with adverse shocks. They also considered that a stronger Singapore dollar would fend off upside risks to inflation, facilitate external adjustment, and create room in the near-term for additional targeted spending to alleviate the impact of rising prices on low-income households.

IMF directors generally agreed that a gradual external adjustment is warranted in light of Singapore's exceptional trade and financial openness. Directors agreed that, over the medium term, a broader reorientation of the policy mix is desirable. Singapore's ample fiscal reserves provide space for more spending on physical and social infrastructures once inflation risks abate, in line with the authorities' medium-term priorities. 

Directors commended the Monetary Authority of Singapore for continuing efforts to bolster the already strong regulatory and supervisory frameworks, including by enhancing stress-testing and crisis management. In their view, this proactive approach has largely shielded domestic financial institutions from the impact of the global financial turmoil. Nonetheless, directors noted that the risks of a price correction in some segments of the property market and the possibility of contagion through the trade and financial channels warrant continued vigilance.Directors welcomed Singapore's participation in the IMF’s initiative to identify best practices for sovereign wealth funds.