Singapore dollar undervalued, says IMF, urges more public spending

To fight inflation, Singapore should allow the Singapore dollar to strengthen and increase public spending to help the people, says the International Monetary Fund, which expects Singapore's growth rate to fall to 4.5 percent in 2008-2009. The IMF expects inflation in Singapore "would near 7 percent in 2008 –  a 27-year high — but taper off next year." However, it adds: "The uncertain external environment may weigh on growth, and inflation could become entrenched."

The Singapore dollar is "5 to 15 percent below its equilibrium level", says the IMF, which adds Singapore has ample reserves to increase public spending. Foreign capital is "surging" into Singapore because economic uncertainties have made investment in the West less attractive, it says. The report can be downloaded from the IMF website as a PDF file.

Singapore's economic problems are not due to the sub-prime crisis, says the IMF, which points out the Singapore banks have only limited exposure to the sub-prime market. "Based on market estimates, total losses at three Singaporean banks may amount to US$0.3 billion (about 3 percent of aggregate bank capital)," it says, "compared to US$144 billion in the United States and US$123 billion in Europe (about 15 and 9 percent of aggregate bank capital, respectively)."

About Singapore's official reserves and the balance of payments, the IMF says: "After reaching about 24 percent of GDP in 2007, the current account surplus dropped to around 14 percent of seasonally adjusted GDP in the first quarter of this year as the trade balance shrunk. With lingering concerns about asset quality in major advanced economies, Singapore has continued to experience a surge in capital inflows and official reserves have kept on rising…

"Since end-2006, official reserves and the forward book have increased by a combined US$73 billion to US$268 billion (or about 140 percent of GDP)."

However, Singapore is heavily dependent on the US economy. The IMF notes:

"While direct exposure to the United States has declined, total exposure, accounting for trade via third countries, has remained stable at about 30 percent of GDP during the last decade," says the IMF. "Moreover, U.S. holdings of Singaporean securities have risen to about 35 percent of GDP—suggesting a channel for adverse balance sheet and wealth effects in the case of portfolio rebalancing.

"A 1 percentage point decline in U.S. growth could lower growth in Singapore by about 0.9 percentage point (directly and through other trading partners), about twice the impact of ten years ago."

Calling for a stronger Singapore dollar and further financial loosening, the IMF says:

"A stronger Singapore dollar over the near term would support disinflation and anchor inflation expectations at a lower level. It would also make room for more fiscal loosening, including additional targeted measures to cushion the impact of the rising cost of living. Once inflation pressures abate, the rebalancing of the policy mix could be pursued further by expanding public expenditure on physical and social infrastructures, a medium-term policy priority for the authorities. Higher spending can be afforded by ample fiscal reserves which, under current policies, would continue to rise."

The IMF praises Singapore's economic policies and says, "Singapore's financial system remains sound."

Singapore economic indicators (from IMF report)

Nominal GDP (2007): US$161.3 billion
Main exports (percent of total domestic exports): Electronic products (30 percent) and chemical products (19 percent)
Population (2007): 4.6 million
Unemployment rate (2007): 2.1 percent
Net FDI (2007): US$ 11.8 billion
Public debt (2007): 96 percent of GDP
Foreign government debt (2007): none

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