Singapore

MAJOR MACRO ECONOMIC INDICATORS

(e) Estimate (f) Forecast

RISK ASSESSMENT

Business to take a hit from the Chinese economic slowdown

Singapore's economy in 2016 is likely to continue slowing as the country suffers from the downturn and restructuring of the Chinese economy. The government’s objective is now to attract new high value-added industries at the same time as the authorities are introducing new measures aimed at restricting access by foreign workers to the labour market. The country’s economy, which is very open, is dependent on international trade and particularly Chinese demand.  Industrial output is therefore likely to continue suffering from the decline in exports. Whilst the biomedical industry sector remains resilient, electronics, chemicals, transport and precision engineering are slowing. Services will however continue to play a role in support of activity due in particular to the vitality of tourism. In addition, despite a high level of debt, household consumption should remain strong. Unemployment will stay low and transfer payments should continue to grow. Added to this, foreign investments and the implementation of major infrastructure projects such as the high-speed line linking Singapore and Kuala Lumpur should continue to boost growth.

Inflation is likely to increase moderately after the stagflation recorded in 2015. Price rises eased significantly as a result of the sharp drop in transport costs.  The government has implemented macro-prudential measures aimed at limiting property and transport costs, the biggest components of the price index. The cost of registration certificates has been reduced and new regulations require a minimum deposit of 40% when buying a vehicle. The controls on residential property prices are a source of deflationary pressure, as is the reduction in oil prices. In this context, monetary policy is likely to continue targeting a gradual increase in the value of the Singapore dollar. The monetary authorities could in 2016, once again, slow this rate of revaluation to help boost economic activity. 

Robust financial situation

Singapore’s budget will remain very sound. The country will continue to achieve a budget surplus in 2016 despite the government implementing a large number of measures aimed at boosting investment in new technologies, infrastructures and improving social protection. And whilst the level of public debt may be high, it will remain sustainable as it is mostly domestic. In addition, the public debt is not being used to finance the public deficit but for the development of a local government bond market. In addition, the level of debt will also remain well below the value of the assets of the two sovereign funds (Temasek and GIC).

The substantial external accounts surplus will continue into 2016. However the current account balance should weaken following the decline in exports. In this context, the level of currency reserves remains high, ensuring that the country has a solid basis for withstanding any sudden exodus of capital.

Singaporean banks are exposed to the slowdown in the Chinese economy through their trade finance operations. Credit outstandings with regard to China currently amount to 40% of GDP. A further deterioration in credit risk in China would pose a threat to the quality of the assets and could undermine investor confidence. Although the banks are exposed to property risk, the management of the risks associated with granting mortgage loans has been cautious and complies with the regulatory requirements. Nevertheless, the Singaporean banking system could prove to be exposed if the economic situation worsens. The rapid expansion of credit together with very high property prices effectively makes the sector vulnerable to higher interest rates. The banking sector should nevertheless remain resilient: non-performing loans accounted for less than 1% of assets in 2014 and Basel 3 regulations will have very limited impact on a banking system that is already well capitalised and regulated.

The ruling party confirms its dominance

In the early parliamentary elections held in September 2015, the People’s Action Party (PAP) won 83 of the 89 seats in contention. With almost 70% of the votes, compared with 60% in the May 2011 elections, it thus confirmed its dominance of political life, credited for the active policies of the government during the crisis and the maintenance of social stability. The country also has the best governance in Asia, thanks to an effective legal system for debt collection.

In geopolitical terms, its relations with Malaysia should become closer with the increasing investment opportunities in Malaysia’s Iskandar project which aims to create an international scale industrial, commercial and tourist metropolis in the region by promoting cutting edge sectors such as information technologies, biotechnologies and health technologies

Last update: January 2016