Singapore at 50 Confronts Aging, Economic Restructuring

Singapore’s economy performing well, with full employment, low inflation

Greater emphasis on skills and productivity

Growing stress on equity, with spending on health, education, infrastructure

The report, which comes on the eve of the fiftieth anniversary of Singapore’s founding, says that the uncertain global recovery, and the turning of Singapore’s credit and housing cycles are contributing to a moderation of consumption growth, and capital accumulation.

But domestic demand has been supported by a more accommodative monetary policy since January, as well as a supportive fiscal policy, and lower energy prices. The labor market is tight, with unemployment below 2 percent, inflation is subdued, and there is little sign of inflation pressure.

More accommodative monetary policy

The Monetary Authority of Singapore (MAS) operates a basket-band-crawl exchange rate–based monetary policy tailored to the country’s economy. The country is heavily dependent on exports, and this makes the exchange rate the dominant channel of monetary policy.

MAS shifted to a more accommodative policy stance in January, by reducing the pace of appreciation of the nominal effective exchange rate band from 2 to 1 percent. This move seems appropriate says the IMF report, as inflation expectations are well anchored, and downside risks to growth dominate.

Changes in Singapore’s exchange rate are linked (through interest parity) to changes in domestic and international interest rates. The reduction of the pace of appreciation of the Singapore dollar is contributing to tighter credit conditions.

As U.S. rates normalize, interest rates in Singapore are expected to increase. Rising levels of leverage may lead to a strengthening of the interest rate channel of monetary policy transmission. Stronger adjustments in the exchange rate may be required in the future to achieve monetary policy objectives.

Strong household balance sheets

Singapore’s financial cycle has turned, says the report. Credit growth is moderating, and house prices are registering a modest, gradual decline supported by the active use of macroprudential policies. Risks are related to the high level of household leverage as interest rates rise. But aggregate household balance sheets are strong, and the additional debt service burden should be manageable.

Risks from banks’ exposures to housing-related debt appear limited given the low unemployment, high rates of home ownership, and high down payments mandated...