Singapore shuns tightening amidst global economic slowdown

The government can afford to pursue looser monetary policy amidst its strong fiscal position.

The government may adopt a looser fiscal policy for FY2019/20 in a bid to soften the blow from unfavourable global economic conditions, according to a report by Fitch Solutions.

With a predicted slowdown in growth in 2019 for economies such as US, Europe, Japan and China, the downside risks for Singapore’s export-oriented economy will increase as trade uncertainties continue to loom. On the bright side, public finances remain healthy, indicating ample room for authorities to provide some support, Fitch Solutions cited in its report.

Singapore’s economy ended on a soft note in Q4 2018 with a real gross domestic product (GDP) growth of 2.2% YoY compared to 2.3% YoY in Q3 which marked the weakest pace of expansion since H2 2016.

Also read: Enhanced tax incentives could secure Singapore's fiscal sustainability: EY

“The city-state’s export oriented manufacturing sector remains under pressure amidst slowing global demand for electronics, with the manufacturing purchasing managers’ index falling for the fourth straight month to 51.1 in December 2018 and the external government still uncertain over the coming quarters,” Fitch Solutions added.

Moreover, Singapore is in a strong fiscal position to set low interest rates as its primary surplus is expected to hit 0.6% of GDP in FY2018/19 compared to the deficit of 1.6% by the government.

The public construction sector is amongst those that could benefit from Singapore's looser monetary policy given its underperformance in the second half of 2018 and potential to prop up the domestic economy's slowing growth prospects.

“Infrastructure has been a key theme in the previous two budgets, and this has the potential to feature prominently again as the investments will bode well for the city-state’s long-term development projects,” Fitch Solutions explained. “The Singapore government will likely reiterate its commitment to infrastructure investment, with a possibility of bringing forward more projects, having mentioned the need to spend more to develop new infrastructure such as rail and redevelopment over the next decade.”

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