Singapore shopping mall

SINGAPORE, November 8, 2021 – Singapore’s economy continues to recover steadily from a sharp contraction in 2020 on the back of effective containment measures, accelerated vaccination rollout, and extended policy support for affected businesses and households. The government’s roadmap to ensure safe reopening and support a transition to the new COVID-19 endemic normal is crucial in securing Singapore’s economic recovery in 2021 and beyond.

These conclusions are highlighted in the 2021 Annual Consultation Report on Singapore published today by the ASEAN+3 Macroeconomic Research Office (AMRO). The report was based on its virtual 2021 Annual Consultation Visit to Singapore from May 17 to June 18, and data and information available up to July 31, 2021.

Economic outlook

Singapore’s economy is recovering steadily following the progressive resumption of economic activities since the second half of 2020, bolstered by strong policy support and effective containment measures. As a result, the overall unemployment rate has declined to 2.7 percent in June 2021 from its peak at 3.5 percent in the third quarter last year.

The Singapore economy is forecast to grow by 6.3[1] percent in 2021 and 4.0 percent in 2022, underpinned by the recovery in domestic economic activities and robust exports. However, the recovery in tourism-related sectors will remain slow due to the continued restrictions on cross border travel reflecting the resurgence of the pandemic and the slow pace of vaccination in many countries.

Inflation has picked up, in line with the rebound in oil prices and strengthening economic activity. After a decline to -0.2 percent in 2020, both headline inflation and core inflation are expected to increase moderately in 2021.

Risks and vulnerabilities

In the short term, key risks to growth are a resurgence of the COVID-19 pandemic and the resulting adverse effects on hard-hit businesses and households. Rising financial distress among the more vulnerable businesses in Singapore and abroad can lead to a deterioration in banks’ asset quality, although the increase in banks’ provisions and strong capital buffers are expected to help mitigate the rising credit risk.

In the medium term, potential changes to international tax rules could affect tax revenues and investments by multinational companies. Over the longer term, Singapore would also need to contend with the major challenges arising from an aging population and climate change.

Policy responses and recommendations

The large and timely policy support bolstered by fiscal reserves has significantly mitigated the impact of the pandemic on the economy and supported the strong recovery. With most sectors improving steadily, the shift in policy support from a broad-based to a more targeted approach is appropriate.

As fiscal policy space remains ample, the authorities are encouraged to remain flexible and be prepared to extend further support in the event of a resurgence in infections or if growth falters.

The accommodative monetary policy should be maintained in view of the recovering but uncertain outlook and moderate inflationary pressures. Monetary policy should remain accommodative to complement fiscal policy until recovery is entrenched.

Against the backdrop of a resilient financial sector, Singapore’s debt relief, credit support, and bank regulatory easing measures have prevented a sharp increase in defaults among vulnerable households and businesses. A gradual exit from the broad-based debt relief scheme is appropriate and it will reduce the risk of supporting nonviable borrowers. Nonetheless, support should continue to be rendered to viable businesses that are still experiencing operational difficulties.

The tight macroprudential policy stance should be maintained amid a steady rise in housing prices.

The ongoing review of Singapore’s structural transformation plans is essential in strengthening workforce productivity and firms’ competitiveness. Efforts to promote FinTech, digital banking, cross-border retail payments, and other modern services sectors are laudable. Ensuring a right mix of local and foreign workers by taking into consideration talent gaps and labor supply conditions would also enhance Singapore’s competitiveness.

The Green Finance Action Plan would play a critical role in promoting green financing and sustainable growth. As a financial hub, Singapore is well-positioned to make a significant contribution to the region’s climate finance needs.

Last but not least, the planned debt issuances under the Significant Infrastructure Government Loan Act to finance major long-term infrastructure investments are welcomed. This approach will promote intergenerational equity and facilitate a more efficient budget management.

[1] Growth was revised downwards slightly from 6.5 percent in 2021 based on AMRO’s latest assessment as of September 2021.

About AMRO

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute towards securing macroeconomic and financial stability of the ASEAN+3 region, comprising 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to the members.

About AMRO’s Annual Consultation Report

The Annual Consultation Report was prepared in fulfillment of AMRO’s mandate. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.