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Singapore has been accumulating current account surpluses since 1988. As of 2006, the surplus stands at 27% of GDP, one of the biggest in the world. This paper seeks to examine the reasons behind Singapore's extensive current account surplus, and discusses the benefits and problems the surplus has on the economy. We will then review the monetary policy of the Monetary Authority of Singapore (MAS) and discuss the potential measures MAS should undertake in the face of the huge current account surpluses.

The current account will be examined from two perspectives. The first is based on the national income and production accounts. This approach shows how changes in a nation's saving and investment are reflected in the trade and current account balance. The current account balance is measured by the difference between national saving (S) and domestic investment (I).

Current Account = S- I or Current Account = SPrivate Ð'- I + (T-G)

The current account balance can also be defined as the difference between exports and imports, or the difference between the credits and debits of goods and services, income, and transfers.

Current Account = (Export Ð'- Import) + Net factor income + Net transfer payment


Using the savings and investment approach, the evolution of Singapore's current account surplus will be examined according to three time periods Ð'- Since independence to 1987, 1988-1997 and the post Asian crisis period.


Period: 1965-1987

Table 1: Current Account Balance (as a percentage of GDP) from 1972-1987

Year Ð''72 Ð''73 Ð''74 Ð''75 Ð''76 Ð''77 Ð''78 Ð''79 Ð''80 Ð''81 Ð''82 Ð''83 Ð''84 Ð''85 Ð''86 Ð''87

CAB (% of GDP) -17 -12 -20 -10 -10 -4 -6 -8 -13 -11 -8 -4 -2 0 2 -1

Since independence to 1987, Singapore has persistent current account deficits, averaging 8.4% of GDP (1972-1987). During this period of time, Singapore was importing large amounts of capital goods as it was transiting from entrepot services to labour intensive production in the early 1960s, to more capital intensive manufacturing in the early 1970s, resulting in non-residential construction investment to pick up significantly . By mid 1980s, Singapore had moved into higher value-added production such as electronics.

The deficits were due to increasing investment rather than declining savings (Refer to figure 1). These were essential for the growing investment needs of an industrializing economy. Gross investment hence rose from about 20% of GNI in 1960s to 40% of GNI in the 1980s.

The shortfall of savings over investment was due to consumption and investments of private entities. The increase in private domestic investment to support Singapore's growing needs was the principal engine of growth for Singapore.

Period: 1988 to 1997

Following the completion of infrastructure projects, the savings-investment gap turned positive in 1988 (Refer to figure 1). The gap started to increase, as the investment rate declined while the saving rate continued to climb. In terms of composition, the growing current account surpluses from 1988-97 comprises of public sector surpluses, especially from the late 1980s to the mid-1990s. In comparison, the private sector continued to register a net deficit position for most years until 1997 due to increase in outward direct investment by Singapore-based companies.

Figure 1 : Savings and Investment in Singapore

This sharp increase was driven by several factors, including demographic factors such as the steady decline in the population dependency ratio and higher labour force participation leading to high income growth. Prudent fiscal policy also played an important role in the accumulation of public sector saving, while institutional factors, such as the CPF saving scheme, helped to bolster private saving.

Period: 1998 to present

Singapore's current account surplus continued to rise steadily since 1998 due the widening of the S-I gap, attributable to the decline in investment.

This reflected the plunge in residential investment during the post-crisis period, as the construction sector was plagued by oversupply and generally weak economic conditions. Non-residential investment also fell, with investment opportunities and returns reduced by three consecutive shocks (Asian financial crisis, Global electronics downturn and SARS outbreak) to the Singapore economy.

Table 2: Savings Investment Gap Ð'- Government and Private (Percent of GDP)

1998 1999 2000 2001 2002 2003 2004

Gross Domestic Savings Ð'- Gross domestic investment gap 20.7 17 14.9 18.1 21.4 32 29.7

Fiscal Balance 3.43 7.15 10.04 5.13 4.31 6.48 5.61

Private balance 17.3 9.9 4.9 13 17.1 25.5 24.1

From the table, the increase in private sector net saving since 2001 more than offset the fall in net saving of the public sector. In fact, the private sector S-I gap actually exceeded that of the public sector since 2001. The smaller public sector S-I gap was primarily due to smaller fiscal surpluses as the government adopted a more expansionary fiscal stance in the face of the weak economic environment.

Reasons for high savings rate in Singapore

Singapore has one of the highest savings rate in the world (Refer to table 1). Generally, they can be attributed to the following reasons:

Table 3: National Savings: Gross savings as a percentage of GNI

2001 2000 1999 1998 1997 1996 1995 1994 1993

World 21.2 22.3 22 22.1 22.6 22.2 22.4 21.8 21.5

Singapore 43.7 46.7 50.6 53.3 52.1 49.6 50.4 48.2 44.5

Malaysia 37.3 36.5 34.8 34.9 40.1 37.7 41.9 39.1 38.8

Hong Kong 31.7 32.1 30.8 30.7 31.8 30.8 30 29.9 29.7





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