Singapore: Through choppy waters with an eye on the future Asia Pacific Economic Outlook, Q3 2016

Singapore faces both the cyclical problem of weak global demand as well as the structural problems of an ageing population and competition from economies that have a cost advantage. Though the latter could be tackled through transition to value creation and higher value addition, increasing labor costs and muted productivity growth are significant barriers.

A weak and uneven global economy continues to burden Singapore’s economy, even as the country navigates the process of economic transition. Singapore’s economic problems are therefore both cyclical and structural. On the one hand is the cyclical problem of weak global demand (figure 1). On the other, an ageing population (figure 2) and competition from economies with comparative cost advantages make the case for a structural transition to higher value addition and value creation. However, businesses face problems, which include increasing labor costs as Singapore limits the entry of low-skill and low-wage foreign workers. This is coupled with muted growth in productivity even as the economy invests in education, technology and infrastructure for future growth (figure 3). This report looks at Singapore’s economic performance in Q1 2016, the economy’s fiscal response to short-term cyclical concerns and longer-term structural challenges, and the current state of monetary policy. Additionally, it takes a brief look at the problems that are likely to persist through the medium term and the growth outlook for 2016.

Singapore_Figure 1. World imports from Singapore have declined

Singapore_Figure 2. By 2005, approximately 30 percent of Singapore's population will be above the age of 50 years

Singapore_Figure 3. Productivity growth remains muted as unit labor costs continue to grow

Singapore made a weak start to 2016

Real GDP grew at a year-over-year rate of 1.8 percent in Q1, the same as the previous two quarters. However, seasonally adjusted annualized growth from Q4 2015 to Q1 2016 was muted, at just 0.2 percent (figure 4).1 On the goods-producing side of the economy, manufacturing subtracted from overall GDP growth for the sixth straight quarter, while construction, driven by public sector construction of infrastructure, made a positive contribution to overall growth (figure 5). The slowdown in manufacturing is underscored by a large drop (9.0 percent year over year) in non-oil domestic exports (NODX) in Q1. NODX has declined for three straight quarters, and the trend is likely to continue due to weak demand from Singapore’s export destinations (particularly due to slowing demand from China). The services-producing industries, led by wholesale and retail trade and finance and insurance, continued to contribute to GDP growth, albeit to a smaller degree than in previous quarters. The slowdown in services growth reflects a decline in consumer confidence and increasing operating costs. News of slowing external demand and soft economic growth in the goods-producing industries of the economy have probably hit consumer confidence. Additionally, consumers are likely to be wary of changes in job demands as Singapore transitions toward a technology- and advanced-skills-driven economy.

Singapore_Figure 4. Quarterly GDP growth, year on year, has moderated

Singapore_Figure 5. Percentage contribution to growth in real GDP

Singapore’s expansionary fiscal policy seeks to address both short-term and long-term obstacles

Singapore’s budget for 2016–17, declared in March, is designed to boost the economy. The Ministry of Finance seeks to address both short-term cyclical concerns and long-term structural challenges. The expansionary fiscal policy approach includes business promotion measures, which seek to address the short-term concerns of small and medium-sized enterprises (SMEs). For instance, fiscal support through the Wage Credit scheme aims at helping SMEs adjust to quick increases in wages in a tight labor market. Similarly, an expansion of the corporate income tax rebate is likely to benefit SMEs. The budget also contains measures aimed at enabling the long-term vision of becoming a value-creating economy. The Automation Support Package, National Robotics Programme, and research plans such as the Research, Innovation and Enterprise 2020 plan are likely to contribute toward enabling the transformation of Singapore’s economy over the medium to long term. Furthermore, the budget seeks to address Singapore’s demographic challenge of an ageing population by introducing quarterly payouts under the Silver Support scheme that focuses on the welfare of Singaporeans above the age of 65 years. Additionally, the extension of the Special Employment Credit scheme through which the government offsets a percentage of the wages for employees above the age of 55 is likely to support Singapore’s relatively high rate of labor force participation among cohorts above the age of 55 years. Finally, Singapore continues to invest in the SkillsFuture initiative along with new initiatives such as the TechSkills Accelerator to address the problem of weak growth in productivity.2

A financial advantage that Singapore has in addressing possible budgetary shortfalls in the future is access to returns on investments made by its large sovereign wealth funds. Along with prudent management of expenditure, this advantage could possibly save future generations the burden of fiscal debt.

Risk of fiscal shortfall is not grave in the near term

Initial concerns about the fiscal plans for 2016–17 center on the rise in expenditure. The increase in expenditure over the previous budget is S$ 5 billion (an increase of 7.3 percent).3 In fact, the economy is projected to run the largest primary budget deficit in its history (figure 6). This will also be the first time in a decade that Singapore has recorded a primary deficit for two consecutive years. However, the overall budget balance is projected to remain in surplus (0.8 percent of GDP).4 This is primarily because of the inclusion of Temasek Holdings in Singapore’s National Investment Returns (NIR) framework (figure 7). Temasek is a state-owned investment fund, which now joins Government of Singapore Investment Corporation (GIC—another state-owned investment fund) and the Monetary Authority of Singapore (MAS) as part of the NIR framework. The NIR framework, implemented in 2009, allows the government to spend up to 50 percent of expected long-term real returns on the net assets managed by Temasek, GIC, and the MAS.5 The NIR’s contribution to the budget for 2016 is S$ 14.7 billion, up from S$ 9.9 billion in the previous fiscal.6

Singapore_Figure 6. Growth in expenditure has outpaced growth in revenue since 2013

Singapore_Figure 7. NIR contribution to Singapore’s budget increased sharply in 2016

Other sources of increased revenue in fiscal 2016 are the contributions from autonomous government agencies (especially from the MAS), revenue from motor vehicles tax, and revenue from personal income tax. However, the Ministry of Finance has identified these as one-off factors.7 Therefore, despite a budget surplus in fiscal year 2016, the long-term concern is that growth in expenditure will likely outpace growth in revenue. This has been the case since 2013. The other fiscal years during which growth in expenditure outpaced growth in revenue are the early 2000s (2000 to 2003, marked by the dotcom crash and the SARS epidemic), 2008 and 2009—in general, years marked by an economic downturn or external shocks. However, expansion in expenditure in recent years, though aimed at addressing a slowdown in GDP growth, focuses on development spending as an investment for the future.

A financial advantage that Singapore has in addressing possible budgetary shortfalls in the future is access to returns on investments made by its large sovereign wealth funds. Along with prudent management of expenditure, this advantage could possibly save future generations the burden of fiscal debt. Another advantage is Singapore’s competitive indirect tax structure. The Goods and Services Tax (GST) stands at 7 percent, which is low relative to other developed economies. In fact, the GST rate was last increased in 2007, leaving room for a tax raise, if required, in the future.

Most of Singapore’s long-term fiscal decisions, however, will depend on the success of the transformation plan outlined in the current budget.

Monetary policy is likely to remain accommodative, further easing is unlikely

The MAS eased monetary policy in October 2015 by reducing the rate of appreciation of the Singapore dollar’s nominal effective exchange rate (S$NEER) with the aim of propping up the external-facing sectors of Singapore’s economy. However, given the weak economic performance in Q1 2016, the MAS chose to further ease monetary policy in April by reducing the S$NEER rate of appreciation to 0.0 percent, stalling the appreciation of the S$NEER policy band. This represents a shift from a policy of modest and gradual appreciation of the S$NEER adopted in April 2010 to a neutral policy. This move is likely to benefit Singapore’s external-facing sectors, particularly as global economic growth and global trade remain weak. The move is also likely to prop up consumer prices, especially since Singapore imports much of its consumer goods. Singapore’s consumer price index has declined every month since November 2014, primarily due to lower oil prices, falling home prices, and relatively weak economic growth. The MAS’s core inflation measure, which excludes private transport and accommodation, has indeed picked up since November 2015 but remains very low at 0.8 percent (April 2016).8 However, this indicates that much of the decline in headline consumer prices is because of falling energy prices (private road transport) and falling home prices. In fact, Singapore’s home prices have dropped for ten consecutive quarters.9

Given that the MAS measure of core inflation is on a gradual upward trend and the Ministry of Finance has chalked out an expansionary investment budget, it is unlikely that the MAS will ease monetary policy any further in the near term.

GDP growth likely to be modest in 2016

It is likely that Singapore will continue to face obstacles in the near to medium term. Cyclical challenges due to weak global demand, particularly due to the slowdown in China, are likely to persist through 2016. Additionally, certain structural challenges, such as weak gains in productivity, are also likely to continue until broad-based investment in education and skill building reaps returns. Weak productivity growth (averaging -0.3 percent over the last eight quarters) is likely to exacerbate Singapore’s demographic challenge of a rapidly ageing population. It is estimated that by 2025, approximately 30 percent of Singapore’s population will be above the age of 50 years,10 and Singapore’s fertility rate of 1.2 falls short of the required replacement rate of 2.1.11Given the current economic backdrop, the Ministry of Trade and Industry expects GDP growth to moderate to between 1 percent and 3 percent in 2016.12The composite median forecast for GDP growth in 2016 in Singapore is 1.8 percent, slower than the 2.0 percent growth in 2015.13