Restrictions on foreign labour supply that could crimp Singapore's competitiveness, as well as the spillover effects of slowing global growth, are among the risks that could hurt the economy, the International Monetary Fund (IMF) has highlighted.
In its annual review of Singapore's economic and financial policies issued late last Friday, the IMF noted that the "slowing inflow of foreign workers, as part of the ongoing economic restructuring, could moderate potential growth and lower competitiveness".
With Singapore being an open economy, other risks include a protracted period of slower growth in advanced and emerging economies, as well as the continued build-up and eventual unwinding of excess capacity in China.
There could also be an abrupt surge in financial market volatility as investors reassess underlying risks, and geopolitical risks, added the IMF.
These concerns have come to the fore in the past week as global markets took fright and the Straits Times Index lost all the gains it had made in the year.
Concerns have mounted over the United States economy, which seems to be losing steam, while recent euro zone data has been weak. The moderating of growth in China is also another concern.
Advance estimates of Singapore's third-quarter gross domestic product growth came in at a lower- than-expected 2.4 per cent, while last month's export numbers edged up only slightly, as global demand slowed.
The IMF noted that as Singapore continues with its restructuring policies, tighter labour supply due to the slowing inflow of foreign workers and an ageing population will boost wages.
But as productivity gains are unlikely to fully compensate, this will lead to an increase in core inflation - a measure of everyday out-of- pocket costs - temporarily.
As the Monetary Authority of Singapore maintained its stance on a modest and gradual appreciation of the Singdollar last week, it forecast core inflation to pick up gradually into early next year before easing in the second half of the year. It is forecast to be 2 per cent to 2.5 per cent this year, and 2 per cent to 3 per cent next year.
The IMF noted that Singapore's ambitious restructuring efforts could "set the stage for a new era of sustainable growth".
But it cautioned that productivity improvements might take some time to materialise and may not fully offset the effects of declining labour force growth.
OCBC Bank economist Selena Ling said the IMF assessment is broadly in line with the Government's approach. "It is the domestic and structural challenges that confront Singapore at this juncture," she said.
The IMF's executive board of directors singled out Singapore's macroeconomic management for praise, along with its financial supervision and regulation frameworks.
But it noted that the country's dependence on trade flows has left it particularly vulnerable to a slowdown in the growth of trading partners, as well as to global financial market volatility.
Singapore should also continue to be vigilant for risks in the finance and housing sectors, it added.
Other recommendations from the IMF include further efforts to promote external rebalancing, which is to move from a reliance on exports to one on domestic demand, and reducing inequality.
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