THE restructuring of Singapore's economy has led to a permanent rise in real wages but continues to curb its growth, which has also been hit by the slow global recovery and turning of credit and housing cycles, the International Monetary Fund (IMF) said on Wednesday.
The IMF now expects Singapore to grow an average of 2.5-3 per cent in 2015 - in the lower half of the official forecast range of 2-4 per cent - and flagged the many external risks clouding this outlook.
"A protracted period of slower growth in advanced and emerging economies is the most important short-term risk. Side effects from global financial conditions, such as a surge in financial volatility and persistent US dollar strength, and a growth slowdown and financial risks in China, could also have an important impact," the IMF said in a preliminary note issued at the end of its annual two-week visit.
A full report on Singapore's economic and financial policies will be released later in the year.
Last year's IMF review highlighted domestic risks to growth - how policy moves to slow the inflow of foreign workers could crimp potential growth and competitiveness.
But its latest comments struck a more positive note about Singapore's restructuring push. Describing the shift to a growth model relying less on foreign workers as "well under way", IMF said that the rise in labour force participation among women and older workers was a welcome one.
In its view, the restructuring has already led to a permanent increase in real wages, relative to the cost of capital. Together with government incentives, this should make it more desirable for firms to use more capital relative to labour in the long-term, which "will translate into increased investment as the restructuring matures", IMF said.
It also had a positive take on the slowdown in bank lending growth, reading it as the result of macroprudential measures that "have contributed to the welcome cooling of property markets and helped contain financial sector stability risks".
Alex Mourmouras, who led the IMF team that visited Singapore this year, also noted that the Monetary Authority of Singapore (MAS) has strengthened its prudential framework with new caps on unsecured consumer lending, while banks here continue to boast high capital ratios and profitability and low non-performing loans.
His assessment of the growth outlook for 2015 echoed that of the MAS's in its Macroeconomic Review in April - that Singapore should see a broad-based recovery in domestic demand in the rest of this year. The economy grew a tepid 2.1 per cent in Q1 as the manufacturing sector contracted, advance estimates show.
Factors pointing to such a recovery include the gradual pick-up in demand from abroad, more government spending, a less restrictive monetary policy stance and lower energy prices. "These factors are expected to offset the drag from the continued, moderate downward trend in real estate prices and rising interest rates," Mr Mourmouras said.
But Singapore is still very exposed to external volatility and risks, which could be exacerbated by household and corporate debt levels. These have been elevated since the global financial crisis, IMF said.
The external risks it flagged have also been underscored by events this week. Global stock and bond markets were rattled by renewed fears that Greece could default on its heavy debts and exit the eurozone.
There was also more gloomy economic data from China on Wednesday - growth in retail sales and fixed asset investment fell to multi-year lows, signalling further loss in growth momentum.
In the face of these risks, Singapore has strong fundamentals working in its favour. "A very strong external position, adequate level of foreign reserves, large fiscal buffers and strong bank balance sheets - could help absorb shocks and facilitate effective counter-cynical policy response," said Mr Mourmouras.
The IMF deems the MAS's current monetary policy stance of a gradual, modest appreciation in the Singapore dollar's nominal effective exchange rate "appropriate", given the benign inflation outlook, moderate growth and ongoing external uncertainty.
It expects Singapore to experience no inflation this year - the mid-point of the official -0.5 to 0.5 per cent forecast range. Core inflation, which strips out accommodation and private transport costs, is expected to be a higher one per cent. This too, falls right in the middle of the official 0.5 to 1.5 per cent forecast range.
This article was first published on May 14, 2015.
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