Solid growth expected in 2022

Singapore’s economic recovery will broaden as the country further treats COVID-19 as endemic and reopens its borders. While we expect the GDP growth rate to moderate in 2022 after a solid rebound in 2021, it is still likely to remain above trend. Still, robust external demand will benefit the Singaporean economy, albeit less than expected, given its heavy reliance on international trade. Although Singapore does not have strong economic ties with Ukraine and Russia, the war in Ukraine and subsequent sanctions affect global consumption and exacerbate already tight supply conditions, affecting international trade. Moreover, China’s stringent COVID policy adds downside risks.

That being said, the dynamic demand for electronic products, as well as for machinery and transport equipment, which together account for almost half of all domestic exports (merchandise exports excluding re-exports), should support the manufacturing industry (>20% of GDP). The info-communications and financial sectors (nearly 20% of GDP) will continue to thrive, alongside the pharmaceutical industry, in the COVID era. Construction should continue to face challenges related to higher material costs and labor shortages. Despite the relaxation of border restrictions and domestic COVID-related containment measures, private investment (around 25% of GDP) may be constrained by an enfeebled business confidence in geopolitical uncertainty, global economic slowdown, and rising inflation affecting input costs.

In the first quarter of 2022, the unemployment rate was back to the pre-pandemic level at 2.2%, and job vacancies recorded all-time highs. While an improvement in the labor market will support household spending (33% of GDP), consumers’ purchasing power is being eroded by rising inflation, which is a crucial concern for the authorities. The consumer price index growth rate hit over a decade-high in May 2022, driven by food, utilities, and transport costs. Rising inflationary pressures were the key reason behind the Monetary Authority of Singapore’s decision to tighten its monetary policy thrice within six months, including an off-schedule policy meeting in January 2022.

A move towards fiscal balance

The budget deficit has drastically narrowed from 15.4% in FY2020 to 0.9% in the fiscal year ending in March 2022. As the crisis subsided, the government’s relief measures became more targeted in 2021, aiming to support businesses and workers in vulnerable sectors (e.g., retail, food & beverage, aviation) as export-facing sectors have steadily recovered. With the continuation of the rally, Singapore should get closer to fiscal balance in the current fiscal year. Although the government announced a new package of measures to help households and businesses to cope with rising inflation in June, the government continues to show efforts to minimize the public deficit as it plans to fund it by reallocating the existing budget. Despite a significant drawdown of SGD 42.9 billion in FY2020 and FY2021 (8% of 2021 GDP) in the reserves built up in the past to fund a budget balance that turned into a deficit, Singapore’s fiscal resources remain substantial, estimated at between 200% and 300% of GDP.

Singapore is a net creditor country with a strong balance sheet and zero net debt. The seemingly high public debt (146% of GDP in 2021) comprises mainly long-term bonds and securities issued for reasons unrelated to the government’s fiscal needs. However, the parliament passed the Significant Infrastructure Government Loan Act in May 2021, which allows the government to borrow up to SGD 90 billion to finance long-term and large infrastructure projects (costing at least SGD 4 billion each). The plan to increase the goods and services tax (GST) by two percentage points – two one-point increases in 2023 and 2024 - will help raise SGD 3.0 to 3.6 billion in revenue annually. The government plans to dedicate this to healthcare amid the aging population.

Singapore continues to enjoy a substantial current account surplus (18% of GDP in 2021), driven by a trade (goods and services) surplus exceeding 30% of GDP. Nevertheless, it is expected to decline in 2022, with the recovery in private consumption driving imports. The country is a net recipient of foreign direct investment (15-20% of GDP in recent years), which is more than offset by its outflows of portfolio investment, financial derivatives, and other investments. In 2020, Singapore registered a net inflow in its financial account for the first time since 1993. This was explained by a reduction in the net outflow of portfolio investment and that financial derivatives and other investments turned into net inflows. In 2021, financial results and other assets were back in net outflows, which led the financial account to post a net flow, albeit smaller than in past years.

Political leadership succession

The People’s Action Party (PAP) remains a dominant ruling party in Singapore’s politics, although its 2020 general elections saw its famous vote drop to 61% from 70% in 2015. In April 2021, Deputy Prime Minister Heng Swee Keat announced that he would step aside as the fourth-generation PAP leadership team leader, disrupting Singapore’s leadership succession plan. A year later, Prime Minister Lee Hsien Loong finally named Finance Minister Lawrence Wong as the PAP 4G (fourth generation) team leader. During his political career, Wong was appointed Minister for National Development and Minister of Education and co-shared the COVID-19 multi-ministerial taskforce, among other things. In June 2022, the presumptive next PM was promoted to Deputy Prime Minister. With the announcement of a roadmap for the next decade (Forward Singapore) and the 2022 budget, he has emphasized social policies amid growing inequality, rising healthcare costs, and an aging population.