RaboResearch - Economic Research

Country report Singapore

Country Report


Flag Singapore

Strong institutions and effective policymaking support (potential) GDP growth, while the country’s small size and ageing pose challenges. Healthy private and public balance sheets and a solid international creditor position reduce 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: Singapore is first ranked in the Ease of Doing Business ranking (since 2007) and second in the Global Competitiveness Report (since 2011-2012).

(+) Very healthy public fiscal stance

Public debt is issued to provide a benchmark rate and absorb monies from the obligatory central pension fund, not to finance expenditure. Issuance proceeds are invested. Only half of the returns on net assets can be used for expenditure. Public net financial assets are very large (82% of GDP).

(+) Strong international creditor position

The net international investment position (189% of GDP, 2013) and international reserves (90% of GDP) 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, sizeable.Public external debt is zero.

(-) Very open city state that is ageing

Singapore’s economy is highly open and specialised in cyclically sensitive industries. Accordingly, it is susceptible to a slowdown in the world economy. The state’s small size and rapidly ageing population put a limit on the potential growth rate. The impact of ageing on public finances has already been covered though.  

Key developments

1. Household debt slightly up, house prices slightly down

In the third quarter of 2014, household debt reached 75.8% of GDP, compared to 73.3% a year earlier. The rapid credit growth of the previous decade has thus slowed somewhat. This is at least partly the result of strong macro-prudential policies by the Monetary Authority of Singapore (MAS) in the past few years. Even so, household debt is still among the highest in the region at about 230% of household income (14Q2). This is not that surprising, given the high level of home-ownership and house prices. Risks stemming from the high household debt are mitigated by the extremely large household assets, which amount to more than six times liabilities (figure 1). As a matter of fact, households’ liquid financial assets (currency and deposits, 88% of GDP) are larger than household debt.

Nevertheless, some households might be vulnerable to income, interest rate and property price shocks. First, assets and liabilities are not necessarily equally divided among households. Second, a large share of all loans is at variable interest rates. Interest rates in Singapore have a high correlation with US interest rates. The Singapore dollar is pegged to a basket of currencies, with one of the currencies being the US dollar. Consequently, the likely near-term policy rate hike by the Fed could pose challenges for households (and corporations) with loans at variable interest rates. 

Households are susceptible to house price corrections as 74% of household debt consists of mortgages (14Q3). Yet, only a very steep fall in house prices likely has the potential to pose widespread debt servicing problems. According to the MAS, the overall loan-to-value ratio is only 48.6% (14Q3) and just 5% of outstanding housing loans has a loan-to-value ratio of above 80%. In 2013, the MAS introduced a limit on the loan-to-value ratio for new loans of 70%. Together with other macro-prudential policies[1] this has led to a moderation of housing demand and a fall in house prices by almost 4% between 13Q4 and 14Q3 (figure 2).

All in all, risks stemming from a correction in property prices and (possibly related) payment defaults are manageable in our view. Under a stress scenario of the MAS, non performing housing loans remained below 6% (currently 0.4%) and banks continued to meet their minimum regulatory capital adequacy ratio of 10%. Nevertheless, the situation deserves some attention. About 46% of the total loan portfolio in Domestic Banking Units is exposed to the property sector (November 2014) and the IMF has estimated that 5-10% of households is overleveraged on their property (2013). Furthermore, a sharp housing market correction would likely hamper economic growth, as employment in and value added from real estate related activity, are substantial.

Figure 1: High household net worth
Figure 1: High household net worthSource: Monetary Authority Singapore
Figure 2: House prices start to fall
Figure 2: House prices start to fallSource: Macrobond

2. MAS slows exchange rate appreciation

In January, the MAS unexpectedly announced that it would slow the appreciation of the Singapore dollar. It will reduce the slope of the Singapore Dollar Nominal Effective Exchange Rate policy band. The main reason the MAS gave was the benign inflation outlook. Inflation fell from 2% in 2013 to around 1% in 2014, on the back of lower house and car (permit) price growth and the large drop in oil prices. Inflation is expected to fall further to average between -0.5% and 0.5% in 2015. Behind the scenes, another likely reason is the recent strengthening of the Singapore dollar against the currencies of most main trading partners, except the dollar.

3. GDP growth slowed down but is still robust

In 2014, GDP grew 2.8% (compared to 3.7% in 2013, statistics Singapore) and unemployment remained low (2%).The economy is expected to grow between 2% and 4% in 2015 (statistics Singapore). Exports towards the US are likely to increase over the coming year(s) owing to higher economic growth in the US. Exports towards countries in the region might slow or need more time to pick up due to different challenges. The still rather fragile recovery in the eurozone and weak dynamics in Japan will also keep weighing on export growth. And so will the appreciation of the Singapore dollar. Meanwhile, low unemployment and sustained wage growth should benefit domestic demand.

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

Background information

Singapore’s population is wealthy and private balance sheets are healthy. Income inequality has been rising in the past few years, however. With support measures, the government now tries to build a more equitable society. Public balance sheets are strong. The government acts in accordance with the Government Securities Act, implying the sovereign cannot issue debt to finance expenditure. Nevertheless, Singapore does have a high gross public debt ratio. Marketable debt securities are issued to create a benchmark yield. 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. 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 and the non-performing loan ratio is very low (around 1%, 2014). Furthermore, with strong macro-prudential policy, the MAS attempts to curb excessive household borrowing. Yet, the financial sector is not completely free of risks. Total banking sector assets (597% of GDP, 2014) and external debt (305% of GDP, 2014) are very large. The interconnectedness with other financial centres might make the sector vulnerable to deep global financial crises. A final note concerns the city state’s rapidly aging population (old-age dependency ratio of 1/2 in 2030). The contribution based pension scheme and large public endowment funds to increment budgetary spending on social issues minimise the fiscal impact. Furthermore, to lower the impact of a tightening labour force on potential GDP, the government has introduced measures to restructure the economy to enhance productivity. The effectiveness of these measures still has to be proven though.

Economic indicators of Singapore
Economic indicators of SingaporeSource: EIU


[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.


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