The International Monetary Fund says Singapore, home to one of the world’s biggest wealth management centres, must guard against inflation pressures but the IMF broadly praised the jurisdiction for maintaining economic stability in a turbulent period.

The International Monetary Fund says Singapore, home to one of the world’s biggest wealth management centres, must guard against inflation pressures but the IMF broadly praised the jurisdiction for maintaining economic stability in a turbulent period.

In a report on the jurisdiction, the IMF said Singapore’s growth rate has eased and turned more erratic since the recovery from the global financial crisis. Gross domestic product growth decelerated to 1.25 per cent last year before rebounding in 2013; the current account surplus has sharply narrowed to a still-high 18.5 per cent of GDP last year.

“Executive directors [of the IMF] welcomed the authorities’ sound policies and skillful macroeconomic management that have spurred the rebound in economic activity and kept inflation in check. Looking ahead, directors counselled vigilance against a re-emergence of inflationary pressures and risks in the financial and housing sectors, and stressed the importance of further efforts to promote external rebalancing and address demographic challenges,” the report said.

“Directors concurred that cyclical conditions call for a moderately restrictive policy mix. A tight monetary stance, reflected in the current targeted nominal exchange rate appreciation, will help avoid overheating and anchor inflation expectations,” it added.

The IMF said Singapore-based bank’ large capital and liquidity cushions, together with appropriate macroeconomic actions, will help mitigate risks to the financial system.

Levels of leverage have risen strongly in recent years, boosting the property market, and bank loans have expanded fast to reach more than 170 per cent of GDP in the middle of this year; housing and construction now makes up 46 per cent of bank loans, while household debt is now more than double household income.

House prices have risen by 55 per cent since 2009 but stabilised after macro-economic policies were enacted to cool the market.

Financial sector

The IMF noted that the city-state’s financial centre has expanded in spite of tough global conditions.

“Local financial markets absorbed expectations of future tapering by the [US] Federal Reserve and the accompanying turbulence in emerging markets with limited volatility so far. Currency and equity prices weakened only modestly, but long-term interest rates have risen by around 1 percentage point,” the IMF said.

Looking ahead, the IMF predicts Singapore’s GDP will grow by 3.5 per cent in 2013-2014, bolstered by stronger demand from the major advanced economies.