The International Monetary Fund (IMF) recently finished its yearly assessment of Singapore’s economy. The IMF noted that while Singapore’s economy remains strong, it is facing challenges from both global and domestic factors.

Singapore’s economic growth slowed to 2% in 2015, down from 3.3% in 2014, and was 2.2% in the first half of 2016. While unemployment is still low, job creation slowed significantly in 2015, and inflation has remained negative since late 2014. In response, Singapore has loosened its monetary policy and increased government spending. The financial sector remains stable thanks to proactive policies. Lower global energy prices increased Singapore’s current account surplus in 2015, though it declined in early 2016.

The IMF predicts growth will slow to 1.7% in 2016 as the full impact of recent global economic shocks is felt, but should rebound to 2.2% in 2017. This growth will be driven by supportive policies, low energy prices, and the ongoing global recovery. However, there are short-term risks to this outlook, particularly the risk of slow global growth and potential disruptions from volatility in global financial markets. Inflation is expected to remain low in 2016, with both headline and core inflation projected to be -0.3% and 0.8% respectively. Inflation is expected to rise to 1.1% and 1.4% in 2017 as energy and commodity prices recover. The current account surplus is projected to decline over the medium term due to the aging population and government policies aimed at increasing domestic demand, such as improvements to healthcare, pensions, and social safety nets.

Singapore continues to focus on transforming its economy into one based on innovation and productivity growth, particularly in sectors that don’t directly trade internationally. This involves targeted support for businesses to encourage automation, innovation, and global expansion. The government is also increasing investment in infrastructure and other long-term projects, along with policies to improve education and healthcare, particularly for the elderly.

IMF Directors acknowledged Singapore’s strong economic fundamentals, praising the government’s adept economic management. They noted that Singapore’s strong financial position and low government debt allow it to respond effectively to slower growth and external risks like the slow growth of advanced and emerging economies and volatility in global financial markets. The IMF supports Singapore’s recent moves to increase government spending and further lower interest rates in response to weaker than expected economic growth and inflation. There is a consensus that the current government spending policy is providing helpful support to economic activity and that the government’s willingness to quickly address changing conditions is commendable.

However, some IMF Directors believe there is room for additional government spending to boost domestic demand, close the gap between actual and potential economic output, and provide a buffer against the significant risks facing economic growth. Some Directors emphasized that Singapore’s existing fiscal rule has served the country well, while others suggested it might be beneficial to modify it to better reflect economic cycles. Regarding monetary policy, the IMF believes current policies are appropriate but that clear communication about monetary policy is important to prevent short-term instability. While some believe more frequent communication about the outlook for inflation would be beneficial, others support maintaining the current approach, which has served Singapore well.

The IMF recognized Singapore’s ongoing efforts to transition its economy into one based on knowledge. They welcomed the government’s more focused approach to supporting automation, innovation, and productivity, while simultaneously expanding social safety nets and social insurance programs. The IMF urged Singapore to increase research and development spending, encourage private sector research and development, and provide support for new and innovative companies. They are interested to see the initiatives put forward by the Committee on the Future Economy, which was established to identify future growth areas and position Singapore for future success.

The IMF noted that Singapore’s financial cycle has shifted, and the growth of credit to residents has slowed. They highlighted the positive impact of existing policies in successfully containing household debt, suggesting these policies should be maintained. The IMF also noted that while high levels of corporate debt require careful monitoring, the risk is mitigated by the strong ability of companies to repay their debts.

The IMF praised Singapore’s strong financial sector regulations and oversight. They observed that despite challenges posed by changes in global capital flows and lower oil prices, banks remain profitable, with low levels of non-performing loans, and maintain large capital reserves and readily available funds. The IMF supports the ongoing efforts to further improve the regulation and oversight of banks, emphasizing the need for banks to remain vigilant. They acknowledged Singapore’s ongoing work to align its framework for combating money laundering and terrorist financing with global standards and welcomed recent efforts to improve enforcement.

The IMF determined that Singapore’s balance of payments position is stronger than would be expected based on economic fundamentals and desirable policies, but acknowledged significant uncertainty exists in this assessment. The current account surplus continued to grow in 2015, as strong consumer spending only partially offset a shrinking deficit in the oil trade. Increased government spending is expected to help lower this surplus in the near term. Over time, the aging population and policies designed to boost domestic demand and improve social inclusion - like investments in healthcare, pensions, and other social insurance programs - should significantly reduce Singapore’s external imbalances.