RaboResearch - Economic Research

Country Report Singapore

Country Report


Singapore flag

Strong institutions and effective policymaking support (potential) GDP growth, while the state’s small size and ageing pose challenges. Healthy balance sheets across the board and a solid international creditor position reduces Singapore’s susceptibility to shocks and financial crises.

Strengths (+) and weaknesses (-)

(+) Strong infrastructure, institutions and high quality of government officials

Policymaking is effective and adequately responds to risks and shocks. Furthermore, the business environment is highly friendly and competitive: first place in the Ease of Doing Business ranking (since 2007) and second in the Global Competitiveness Report (since 2011-2012).

(+) Very healthy public fiscal stance

Government debt is only issued to provide a benchmark rate and absorb monies from the obligatory central pension fund, rather than to finance expenditure. Issuance proceeds are invested and only 50% of net returns can be used for expenditure. Public net financial assets are very large.

(+) Strong international creditor position

The net international investment position (228% of GDP, 2012) and international reserves (95% of GDP: 6-7 months of imports, 2013) are very large. As such, the risk of a balance of payment crisis is negligible and the scope for monetary policymaking, which targets the exchange rate, large.

(-) Very open city state that is ageing

Singapore’s GDP growth largely depends on global demand. Its specialisation in cyclically sensitive industries aggravates the county’s susceptibility to a slowdown in world growth. Moreover, the state’s small size and rapidly ageing population put a limit on the potential growth rate.

Key developments

1. A further increase in private credit, but slight fall in house prices

Between 12Q2 and 13Q2, household credit increased from 55% of GDP to 60% of GDP, and credit to non-financial corporations from 64% of GDP to 73% of GDP (Bank of International Settlements). Non-real estate related loans to the corporate sector made up for the largest share of the total private credit increase in 2013. Irrespective of the increase, private credit-to-GDP is below the average of peers, household assets amounted to more than 6 times liabilities in 13Q3, and households’ liquidity buffers are large (with about half of household assets being financial and half real estate). Nonetheless, some households and firms might be vulnerable to interest rate and/ or property price shocks as assets and liabilities are not necessarily equally divided among households and weak profits in recent years might have lowered some firms’ resilience to shocks. Moreover, nearly all loans are at variable interest rates, household liabilities consist for more than 75% out of mortgages and house prices have increased rapidly between 09Q2 and 13Q3 (with 62%, figure 1). We stress, though, that from 12Q4 to 13Q3 house prices only rose with 2% and they even fell slightly during 13Q4 as a result of macroprudential policies [1]. For the financial sector, risks stemming from a correction in property prices and (possibly related) payment defaults are manageable in our view, given the large capital and liquidity buffers of financial institutions. That said, bank balance sheets would suffer from a steep housing market correction, as about 45% of the total loan portfolio in Domestic Banking Units is exposed to the property sector (December 2013). Furthermore, economic growth would likely be hampered as well, as employment in and value added from real estate related activity, are substantial.

Figure 1: Houseprice stabilisation?
Figure 1: Houseprice stabilisation?Source: Reuters EcoWin
Figure 2: REER appreciation slowed down
Figure 2: REER appreciation slowed downSource: Reuters EcoWin

2. Social unrest has increased

Political unrest never used to be an issue of concern in Singapore. The ruling party (PAP) has been in charge since 1965, when Singapore became independent. Overall, this has led to great stability, but at some cost to both freedom of speech and assembly. Recently, social unrest and political opposition started to rise, which has led the government to take action and meet demands for greater social equality, for example [2]. Political stability and the government’s reform agenda are not expected to be threatened.

3. Higher GDP growth and lower inflation

In 2013, GDP grew 3.7% (compared to 1.3% in 2012, statistics Singapore), owing to improved demand from major economies. Unemployment remained around 2% and inflation fell from 4.6% in 2012 to around 2% in 2013, on the back of lower house and car (permit) price growth. Meanwhile, the Real Effective Exchange Rate (REER) again appreciated, but at a markedly lower rate than in 2012 [3] (figure 2), and the current account surplus remained about equal (18.5% of GDP compared to 18.6% of GDP in 2012). Looking forward, the economy is expected to grow with about 3.5% in 2014. Exports towards Singapore’s by far largest trading partner (the US) are likely to increase over the coming year(s) owing to higher economic growth in the US, whereas exports towards countries in the region might slow or need more time to pick up due to different challenges. A positive output gap and rising labour costs (growth of 6.25% in 2013), amid a tight labour market, feed inflation going forward. However, both tight monetary policy and the recent stabilisation of house prices lower inflation pressures. Note that house prices have only just stopped rising, so it might be too soon to talk about price stabilisation (figure 1). Anyhow, the REER expectedly continues to appreciate over the coming years, which will make exports more expensive and tends to rebalance growth more towards domestic demand.  That said, the current account surplus is expected to remain significant and to only come down gradually.

Factsheet of Singapore
Factsheet of SingaporeSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.


[1] Examples of measures during 2013 are loan-to-value limits and a cap on the Total Debt Servicing Ratio. Financial institutions are now required to take into account borrowers’ other outstanding debt obligations when providing property loans. The Monetary Authority also introduced a rule that requires the mortgage borrower to be the holder of the legal title to the property, which might smooth foreign investments in the Singaporean housing market, in order to prevent rising property prices due to speculation.

[2] Such as measures to support low- and middle-income households and increase accountability.

[3] Appreciation of the CPI-based REER eased from 4.6% in 2012 to around 2.4% in 2013 and appreciation of the ULC-based REER eased from 7.8% in 2012 to around 4.8% in 2013 (IMF).

Background information

Singapore’s population is wealthy and both private and public balance sheets are healthy. Income inequality has been rising in the past few years, however, and the gap between the high-skilled native workers and low-skilled foreigners growing. With respect to public balance sheets, the government acts in accordance with the Government Securities Act. The sovereign cannot issue debt to finance expenditure and has a long history of budget surpluses (5.3% of GDP, 2013). Nevertheless, Singapore does have gross public debt (108% of GDP, 2013). Marketable debt securities are issued to create a benchmark yield, while non-tradable bonds are issued to create an investment vehicle with guaranteed returns for the country’s obligatory fully funded pension scheme.  Issuance proceeds are invested in the Government Securities Fund (GSF). Net public assets are very large and external public debt is zero. Turning to the banking sector, regulation and supervision are strong and domestic banks are among the healthiest in the world. Capital and liquidity ratios, profitability and reliance on deposit funding are high; while maturity mismatches and non-performing loan ratios are very low. Yet, the financial sector is not completely free of risks, since total banking sector assets (650% of GDP, 2013) and external debt (315% of GDP, 2013) are very large, as is the interconnectedness with other financial centres, which possibly makes the sector vulnerable to deep global financial crises. A final note concerns the city state’s rapidly aging population (old-age dependency ratio will rise from 1/5 in 2012 to 1/2 in 2030). While the contribution based pension scheme and large public endowment funds to increment budgetary spending on social issues minimises the fiscal impact, a tightening labour force hampers potential GDP growth. In the 2013 budget, the government introduced productivity enhancing measures to tackle the ageing challenge. Though very welcome, their effectiveness still has to be proven.

Economic indicators of Singapore
Economic indicators of SingaporeSource: EIU

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