Summary: KEY ISSUES Context. Growth recovered and inflation declined sharply in 2013. Leverage has risen, with real estate a major beneficiary, but providing only a muted growth impulse. Intensive use of macroprudential measures recently stabilized house prices, which had grown rapidly. The financial sector has so far absorbed expectations of tapering by the Federal Reserve with limited volatility. Measures to encourage productivity growth continue to be rolled out, including through further tightening of foreign worker policies, which has pushed up wages. Outlook, risks and macroeconomic policies. Growth is likely to reach 3½ percent in 2013-14, supported by stronger G3 demand, despite softening in the region. A positive output gap and rising labor costs will raise core inflation, but headline inflation will stabilize on smaller asset price increases. External and domestic factors tilt the balance of growth risks to the downside. Cyclical conditions warrant a restrictive stance overall. The current policy of modest gradual appreciation is consistent with limiting the output gap and anchoring inflation expectations, while continued targeting of macroprudential policies will help contain asset prices and ensure prudent lending. The budgeted fiscal stimulus is warranted to support the goal of raising productivity to relieve future supply constraints. Financial sector issues. Significant risks have built up under very low interest rates, but appear manageable, although confirmation will come only once the cycle has turned. Regional and global interconnectedness also brings risks. A countercyclical capital buffer, stepped-up onsite bank inspections, strengthened fx liquidity management practices by banks, and vigorous enforcement of international AML/CFT commitments are advised. Higher leverage increases aggregate sensitivity to macroeconomic shocks and interest rate cycles, exacerbated by significant balance sheet heterogeneity. Demographic shifts. Prospective population aging and workforce shrinkage call for continuing to boost labor productivity, aided by the higher education levels of younger cohorts and continuing to tap foreign workers—though at a slower pace than previously. Recent commitments to strengthen social safety nets in a targeted manner, especially for the elderly, are welcome. External sector assessment. From a multilateral perspective and taking into account Singapore’s unique characteristics, the external position is stronger than warranted by fundamentals. Increased public spending and a tighter labor market caused by a slower pace of foreign worker inflows—consistent with the authorities’ plans—and appropriate adjustments in other countries should narrow the large current account surplus.

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