Download Singapore`s Balance of Payments, 1965 to 2003: An Analysis

Singapore's
Balance of Payments
1965 to 2003:
An Analysis
MAS Staff Paper No. 33
August 2004
SINGAPORE’S BALANCE OF PAYMENTS,
1965 TO 2003: AN ANALYSIS*
BY
JEAN TAY
SAKTIANDI SUPAAT
SHIVANI THARMARATNAM
EDWARD ROBINSON
ECONOMIC POLICY DEPARTMENT
MONETARY AUTHORITY OF SINGAPORE
AUGUST 2004
*
THE VIEWS IN THIS PAPER ARE SOLELY THOSE OF THE AUTHORS
AND SHOULD NOT BE ATTRIBUTED TO THE MONETARY AUTHORITY OF
SINGAPORE. THE AUTHORS ARE GRATEFUL TO DR KHOR HOE EE,
PROFESSOR BARRY EICHENGREEN, TAN MIN-CHING AND NG YI PING FOR
USEFUL DISCUSSIONS AND COMMENTS DURING THE PREPARATION OF
THIS PAPER. THIS PAPER HAS ALSO BENEFITED FROM INPUTS FROM OUR
COLLEAGUES IN THE MONETARY MANAGEMENT DIVISION.
 THE MONETARY AUTHORITY OF SINGAPORE
JEL CLASSIFICATION NUMBER: F21, F31, F32
KEYWORDS: CURRENT ACCOUNT BALANCE, CAPITAL
SAVING-INVESTMENT GAP, BALANCE OF PAYMENTS
FLOWS,
MAS Staff Paper No. 33
August 2004
EXECUTIVE SUMMARY
1
This paper provides a historical overview of developments in
Singapore’s balance of payments over the years. We first analyse the trends
in the current account balance using the saving-investment (S-I) and
international trade perspectives. Then, we study the composition of the
financial account, focusing on the nature and volatility of such flows. Finally,
we conclude by examining the trends in the overall balance of payments and
drawing out its links to foreign reserve accumulation.
The Evolution of Singapore’s Current Account Position
2
Singapore’s current account surplus has displayed a steady trend
increase from a deficit position of about 14% of Gross National Income (GNI)
in 1980, reaching a surplus of 31% of GNI in 2003. (Chart 1)
Chart 1
Current Account (% of GNI) and REER
200
Phase 2
Phase 1
Phase 3
30
REERULC (LHS)
160
20
140
10
% of GNI
Index (1976=100)
180
40
0
120
Current Account (RHS)
-10
100
80
-20
1976
1982
1988
1994
2000 2003
3
Apart from some cyclical fluctuations coinciding with the business
cycle, the trend increase has been virtually uninterrupted over the past three
decades. However, the underlying factors contributing to the rise in the
current account balance have changed during the period.
Table 1
summarises the driving forces underpinning the developments in the current
account balance.
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August 2004
Table 1
Factors Underlying Current Account Balance
Phase 1: 1965-1987
Phase 2: 1988-97
Phase 3: 1998-2003
Persistent current account
deficits (Avg: 9% of GNI)
Persistent current account
surpluses (Avg: 12% of GNI)
Widening current account
surpluses (Avg: 21% of GNI)
Negative private S-I gap,
reflecting strong growth in
private investment
Increasing public S-I gap,
reflecting strong fiscal
position
Increasing private S-I gap,
due to drop in private
investment
Large deficits in the goods
balance
Large surpluses in the
services balance
Large surpluses in the
goods balance
4
The rising current account position has been associated with an
improving official foreign reserves (OFR) position, which increased almost 12fold since 1980 to reach S$163 billion at end-2003. In addition, since the late
1980s, the rising current account surplus has also been accompanied by
larger outflows from the financial account, reflecting the acquisition of foreign
assets abroad by residents. This is consistent with Singapore’s status as a
net exporter of capital.
5
The increased flows through the financial account balance have
largely reflected net outflows from the portfolio and "other investment"
accounts, which have typically offset the inflows due to foreign direct
investment (FDI). Our analysis shows that net portfolio investment flows are
persistent, reflecting long-term investment by private and government entities
in bonds, equities and acquisition of companies abroad. In comparison, flows
from the “other investment” account are highly reversible, reflecting the more
volatile nature of flows through the banking system. We also verify that FDI
flows are persistent and largely permanent in nature.
6
Chart 1 also shows the real effective exchange rate (REER), which
is the international price complement to the current account. Singapore’s
REER has generally been on a strengthening trend, accompanying the
improvement in the current account position over the years. Nevertheless, it
has exhibited cyclical swings, coinciding with the mid-1980s recession and the
series of shocks in the most recent period from 1998 onwards.
7
The last phase in the development of the current account, covering
the period 1998 to 2003, was marked by an increased frequency of cyclical
shocks hitting the Singapore economy. As a result, the secular movements in
the current account were accentuated by short-term influences. These
included a sharp fall in investment, a rise in precautionary saving on the part
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MAS Staff Paper No. 33
August 2004
of the private sector and a fall in the public sector S-I gap, reflecting the more
expansionary stance of fiscal policy. From the trade perspective, the
contraction in gross national expenditure had caused imports to decline, thus
boosting the merchandise trade surplus. On balance, these factors have
boosted the current account surplus position.
8
Going forward, as the economy returns to its potential growth path,
we can generally expect the current account surplus to moderate in line with a
pickup in investment spending. In the private sector, a pickup in nonconstruction investment spending and inventory stock accumulation alongside
some moderation in the saving rate is likely to imply a narrowing of the private
sector S-I gap. Moreover, while the public sector resource gap is likely to
improve with strengthening revenues, the permanent reductions in direct
income tax rates would imply that the magnitude of the surplus may not reach
the levels experienced during the 1990s. Nevertheless, Singapore is unlikely
to see a significant narrowing of the overall S-I gap until about 2012, when
demographic factors start having a greater influence on government spending
and private saving.
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MAS Staff Paper No. 33
August 2004
TABLE OF CONTENTS
EXECUTIVE SUMMARY
i-iii
TABLE OF CONTENTS
iv
1.
INTRODUCTION
1
2.
SINGAPORE’S CURRENT ACCOUNT
2
2.1 UNDERSTANDING THE CURRENT ACCOUNT
2
2.2 STYLISED FACTS ON SINGAPORE’S CURRENT ACCOUNT 3
2.3 A PERSPECTIVE BASED ON INTERNATIONAL TRADE
IN GOODS AND SERVICES
Box Item A: Determinants of Singapore’s Saving Rate
3.
12
8
Box Item B: How Large is Large? An International Comparison of
Singapore’s S-I Gap
11
Box Item C:The Role of the Income Balance in Switzerland:
Lessons for Singapore?
17
SINGAPORE’S CAPITAL AND FINANCIAL ACCOUNT
19
3.1 UNDERSTANDING THE CAPITAL & FINANCIAL ACCOUNT 19
4.
3.2 STYLISED FACTS ON SINGAPORE’S CAPITAL &
FINANCIAL ACCOUNT
19
3.3 PERSISTENCE OF CAPITAL FLOWS
28
Box Item D: Merger and Acquisition Activity in Singapore
24
SINGAPORE’S OVERALL BALANCE OF PAYMENTS
32
4.1 UNDERSTANDING THE BALANCE OF PAYMENTS
32
4.2 HISTORICAL TRENDS IN THE OVERALL BOP AND OFR
ACCUMULATION
32
APPENDIX 1
ASSESSING THE RELATIVE IMPORTANCE OF PERMANENT AND
TEMPORARY COMPONENTS OF CAPITAL FLOWS
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MAS Staff Paper No. 33
1.
August 2004
INTRODUCTION
1
This paper provides an analysis of developments in Singapore’s
balance of payments from 1965-2003. We first analyse the trends in the
current account balance from the saving-investment and the trade
perspectives by examining the different components of the current account.
Then, we study the composition of the financial account, focusing particularly
on the nature and volatility of the flows. Finally, we conclude by examining
the trends in the overall balance of payments, and drawing out its links to
foreign reserve accumulation.
Revisiting the Balance of Payments
2
Before undertaking a detailed discussion of trends in Singapore's
balance of payments, it is useful to first revisit the basic economic
relationships underpinning a country's balance of payments transactions.
3
The balance of payments (BOP) is the statistical record of
economic transactions between domestic residents (households, firms and
governments) and foreigners. There are two sides to these external accounts
– namely the current account balance (CAB) and the capital and financial
account balance (KAB). In principle, the sum of these balances must be zero
under a floating exchange rate regime; that is:
CAB + KAB = 0
4
Under a managed exchange rate system, the overall balance of
payments is measured by changes in the official foreign reserves (OFR), or
the central bank's holdings of financial assets denominated in foreign
currency. This implies the following relationship:
CAB + KAB = BOP
5
From this identity, it is clear that if the current account balance is
persistently in deficit, it will be matched by surpluses on the capital and
financial account, and a drawdown in OFR. Conversely, as in the case of
Singapore, persistent current account surpluses are accompanied by deficits
in the capital and financial account, and an accumulation of foreign reserves.
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2
SINGAPORE’S CURRENT ACCOUNT
2.1
UNDERSTANDING THE CURRENT ACCOUNT
6
There are at least two complementary ways of describing the
current account balance. First, the current account balance can be defined as
the difference between the credits and debits of goods, services, income, and
transfers, or simply the difference between exports and imports. Transactions
classified under goods relate to the movement of merchandise and generally
involve a change in ownership. Services refer mostly to the transportation
and insurance of merchandise shipments, transport fares paid by travellers,
tourist services1, royalties and license fees, and communication charges.
Income may be derived from labour (compensation of employees) and from
financial assets or liabilities (such as interest and dividend income).
7
Second, another perspective 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 identical to the economy's resource gap, as
measured by the difference between national saving (S) and domestic
investment (I). That is,
CAB = S - I
8
As implied from this equation, a change in the current account
position (such as an increase in the surplus or a decrease in the deficit) must
be matched by an increase in national saving relative to investment. In
addition, the current account is also equal to the sum of the resource gaps of
the public and private sectors, such that a given current account balance may
be consistent with various combinations of private and public sector deficits
and surpluses.
CAB = (S-I)public + (S-I)private
9
All these concepts are relevant measures of the current account
balance. Each highlights a different aspect of an economic system in which
interacting events in both domestic and global economies determine the
1
Travel services (receipts/payments) consist of the expenditure by tourists (including
medical patients), foreign students and cross-border or seasonal workers.
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MAS Staff Paper No. 33
August 2004
current account balance. The next section examines the historical trends in
Singapore’s current account balance using the saving-investment (S-I)
perspective, as well as the different components that make up the current
account balance (i.e. goods, services, and income).
2.2
STYLISED FACTS ON SINGAPORE'S CURRENT
ACCOUNT
10
Singapore experienced persistent current account deficits from
1965 to 1984, averaging 10% of GNI, financed by large capital flows mainly in
the form of foreign direct investment. The large deficits over the two decades
were not a cause of concern for policymakers, as they represented the
burgeoning investment needs of an industrialising economy and were
financed through long-term equity inflows. Since 1988, however, the current
account has recorded surpluses, which averaged 12% of GNI in the pre-crisis
period of 1988-1997.
11
Since 1998, the size of the current account surpluses has risen to
an average of 21% of GNI. In this section, we use Singapore’s saving and
investment behaviour to trace the current account’s transition from deficits to
large surpluses over the years. In particular, the development of Singapore’s
current account can be divided into three distinct phases: from 1965 to 1987;
then from 1988 to 1997; and finally 1998 to 2003. (Chart 2.1) Total
investment corresponding to the three phases is shown in Table 2.1, with a
further breakdown for the first phase.
Chart 2.1
Current Account Balance
45
Phase 2
Phase 1
Phase 3
% of GNI
30
15
Current Account
Balance
(S - I Gap)
0
-15
-30
1965
MONETARY AUTHORITY OF SINGAPORE
1970
1975
1980
1985
1990
1995
2000 2003
3
MAS Staff Paper No. 33
August 2004
Table 2.1
Total Investment By Component
(% of GNI)
Phase 1
Phase 2
Phase 3
1965-69
1970-79
1980-87
1988-97
1998-2003
23.3
40.7
44.7
34.7
25.7
11.0
15.1
23.2
16.0
15.8
Machinery & Equipment
8.0
14.2
13.0
12.2
10.1
Transport Equipment
2.5
6.8
6.5
5.3
4.0
Change in Stocks
1.9
4.6
2.1
1.2
-4.2
Overall Investment
By Investment Type
Construction & Works
Phase 1: 1965 to 1987
12
In the period 1965-1987, the persistent current account deficits
(averaging around 9% of GNI) or the shortfall in saving over investment were
associated with a rise in domestic investment rather than a fall in saving.
(Chart 2.2) Singapore imported a large amount of capital goods at that time
as it was going through a housing boom and an industrialisation process,
shifting from entrepôt services to labour-intensive production in the 1960s and
subsequently to more capital-intensive manufacturing such as petroleum
refining in the 1970s. By the mid-1980s, Singapore had moved into higher
value-added production such as electronics and related components.
Chart 2.2
(a) Saving and Investment Rate
(b) Saving-Investment Gap
60
50
45
Investment
Rate
30
GNI (YOY % Growth)
Per Cent
% of GNI
40
30
20
Saving
Rate
0
-15
10
0
1965
15
S - I Gap
(% of GNI)
1974
1983
1992
2003
-30
1965
1974
1983
1992
2003
13
As a result, Singapore’s gross investment rate rose sharply, from
about 20% of GNI in the mid-1960s to about 40% in the 1980s. Residential
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August 2004
construction investment constituted a significant portion of gross fixed capital
formation (GFCF) in the 1960s, as housing projects took off to meet the needs
of a growing population. Subsequently, private housing construction also
benefited from the government’s decision in 1981 to permit the use of CPF
saving towards the purchase of private residential property. Non-residential
construction investment also picked up significantly in the 1970s with the
expansion in manufacturing. Private sector investment in machinery and
transport equipment more than doubled from 5.5% and 1.9% of GNI
respectively in the 1960s, to around 12% and 6.0% in the 1970s to 1980s. At
the same time, the gross national saving rate climbed up steadily, from 11% in
1965 to 42% of GNI in 1985. Nevertheless, it was not until 1988 that the
increase in saving was sufficient to fully finance the capital formation needs of
the economy.
14
Using the saving-investment perspective, we can also disaggregate
the S-I gap into its public and private sector components.2 During the period
1965-85, the shortfall in saving over investment was attributable to the private
sector, as the public sector’s saving-investment position was largely in
surplus.3 (Chart 2.3) In this regard, the external imbalances (current account
deficits) experienced in the earlier years of Singapore’s development reflected
to a large extent the optimising outcome of consumption and investment
decisions of the private sector.
2
In this paper, the public sector is defined to include the central government and the
government’s holdings in government-linked companies, as well as selected major
statutory boards.
3
Public sector saving is internally estimated by EPD, MAS. Provided the public sector is
in balance or the fiscal deficit is not excessive, the current account deficits reflect the
outcome of optimising consumption and investment decisions of the private sector. We
are grateful to Chris Murphy, our macro-modelling consultant for assistance in this
area.
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August 2004
Chart 2.3
Saving-Investment Gap and Its Components
(a) Private Sector
(b) Public Sector
20
25
30
10
25
0
S-I Gap
(RHS)
20
-10
15
-20
Investment
Rate (LHS)
10
5
1975
1981
1987
1993
-30
-40
1999 2003
25
Investment Rate
(LHS)
Saving Rate 20
(LHS)
20
15
15
10
10
5
5
% of GNI
% of GNI
30
% of GNI
Saving Rate
(LHS)
35
30
% of GNI
40
0
S-I Gap (RHS)
0
1975
1981
1987
1993
-5
1999 2003
EPD, MAS internal estimates
Phase 2: 1988 to 1997
15
With the completion of major infrastructure projects, the resource
(S-I) gap turned decisively positive in 1988, when it registered a surplus of
7.5% of GNI. The S-I gap remained positive throughout Phase 2, with the
current account surplus averaging around 12% of GNI from 1988 to 1997.
Indeed, the S-I gap widened over this period, as the investment rate stabilised
while the saving rate continued to climb. In terms of composition, the growing
current account surpluses from 1988-97 were underpinned by public sector
surpluses, especially from the late-1980s to the mid-1990s. (Chart 2.4) In
comparison, the private sector continued to register a net deficit position for
most years until 1997.
Chart 2.4
Budget Deficits and Surpluses in Singapore
10
8
S$ Billion
6
4
2
0
-2
-4
1985
1990
1995
2000
2004E
Fiscal Year
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MAS Staff Paper No. 33
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16
The sharp and sustained rise in Singapore’s saving resulted in a
doubling of the national saving rate from around 20% in the early 1970s to
around 40% in the mid-1980s. It rose further to over 50% by 1995, and
peaked at a high of 53% in 1998, before moderating somewhat in recent
years. This sharp increase was underpinned by several factors, including
demographic factors such as the steady decline in the population dependency
ratio, the trend increase in labour force participation, and 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. Box Item A examines some of the
underlying factors underpinning the sharp increase in Singapore’s saving rate.
In particular, we note that slightly over half of the increase in Singapore’s
gross domestic saving can be attributed to demographic factors.
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MAS Staff Paper No. 33
August 2004
Box Item A
Determinants of Singapore’s Saving Rate
Our empirical study of the factors behind Singapore’s saving behaviour over 19702000 found that demographic and income effects were the main factors behind the
increase in gross domestic saving (GDS) over the period. Our estimates suggest
that slightly over half (54%) of the increase in Singapore’s GDS during the period
1970s through the 1990s can be attributed to demographic variables – in particular,
the decline in the proportion of young and aged dependents relative to the earning
population. This is shown by a decline of the dependency ratio, and the trend
increase in the labour force participation rate over this period. Rapid income growth,
in the generally high growth years of the late 1970s and the late 1980s, also
contributed roughly 25-30% of the increase in the GDS ratio. Nevertheless, the
importance of the demographic and income factors suggests that going forward,
Singapore’s saving rate may plateau and decline somewhat, as the population ages
and the economy settles into a slower pace of growth in the longer term.
Similarly, a recent IMF (2003) study1/ which assessed the role of demographics in the
evolution of the current account balance, found that population dynamics help explain
the historical shift in Singapore’s current account from a deficit to surplus position.
The study had calibrated an intertemporal optimising model which successfully
replicated this broad shift in Singapore’s current account balance. The model
predicts that demographic forces will tend to keep Singapore’s saving rate high till at
least 2010, before the baby boomers start to dissave in retirement. (Chart A1)
Chart A1
(i) IMF Simulated S-I Gap
(ii) Old Age Dependency Ratio
25
0.6
20
Hong
Kong
Investment Rate (LHS)
0.5
20
10
0.4
0
Ratio
15
% of GDP
% of GDP
S-I Gap(RHS)
Korea
Japan
0.3
Malaysia
0.2
10
-10
5
-20
1910 1950 1990 2030 2070 2110
Thailand
0.1
Saving Rate (LHS)
Singapore
0.0
1950
1970
1990
2010
2030
2100
Source: IMF Estimates
1/
“Population Ageing and Current Account Surplus”, Singapore: Selected Issues, IMF Country
Report No. 04/103, pp. 39-45, available at http://www.imf.org/external/country/SGP/index.htm.
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In comparison, about 6.5% of the increase in Singapore’s GDS ratio was attributable
to an increase in government saving since 1977. (Another important empirical result
concerns the crowding out effect of government saving on private saving. It was
found that government saving induces only a partial offset to private saving, implying
that the Ricardian Equivalence does not hold fully.2/)
Finally, the study found that CPF scheme has also contributed to the rise in
Singapore’s GDS ratio, although its importance appears to have declined from the
late 1980s onwards. This was largely due to the further liberalisation of CPF funds
for investment, and consequently the increasing extent to which households have
come to regard their own voluntary or discretionary saving as substitutable with CPF
saving. Finally, sound macro and exchange rate policies have helped to foster a
stable macroeconomic environment with low inflation, which in turn has encouraged
individuals to take a long-term perspective in their planning decisions.
2/
According to the Ricardian Equivalence hypothesis, changes in government saving rates
induce offsetting changes in private saving, implying no change in the overall saving rates.
Phase 3: 1998 to 2003
17
Singapore’s current account surplus has continued to rise steadily
since 1998, averaging 21% of GNI over 1998-2003. However, unlike in the
earlier period, when the rise in the S-I gap was underpinned by strong growth
in the saving rate, the more recent widening of the S-I gap was attributable to
a decline in investment.
18
In particular, we note that private sector net saving has played an
increasingly important role, compared with net saving in the public sector.
The rise in private sector S-I gap was due to a sharp decline in investment, as
private investment as a ratio of GNI dropped from 30% in 1997 to an average
of 14% in 2001-03. (Chart 2.5a) This mainly reflected the plunge in
residential investment during the post-crisis period, with the construction
sector plagued by oversupply and generally weak economic conditions. Nonresidential investment also fell, albeit at a slightly slower pace, with
investment opportunities and returns reduced by three consecutive shocks to
the Singapore economy (namely, the 1997 Asian financial crisis, the 2001
global electronics downturn and the 2003 SARS outbreak). (Chart 2.5b)
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Chart 2.5
(a) Private and Public Sector Investment (b) Construction Investment
14
40
Private
Investment
12
Private Residential
10
S$ Billion
% of GNI
30
20
Public
Investment
8
6
Public Residential
4
10
Private
Non-residential
2
0
1960
1967
1974
1981
1988
1995
Public
Non-residential
0
1960
2003
1967
1974
1981
1988
1995
2003
19
The increase in private sector net saving since 1997 has more than
offset the fall in net saving of the public sector. In fact, the private sector S-I
gap has actually exceeded that of the public sector since 2002. The smaller
public sector S-I gap in recent years was primarily due to smaller fiscal
surpluses as the government adopted a more expansionary fiscal stance in
the face of the weak economic environment. (Chart 2.6)
Chart 2.6
Saving-Investment Gap
Total
30
Public
Phase 1
Private
Phase 2
Phase 3
% of GNI
20
10
0
-10
-20
-30
1975
1979
1983
1987
1991
1995
1999
2003
EPD, MAS internal estimates
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Box Item B
How Large is Large? An International Comparison of Singapore’s S-I Gap
International comparisons are often used as a benchmark in examining the adequacy
of national saving and investment levels. The comparisons indicate that Singapore’s
S-I gap is relatively large when compared to the NIE-3, G7 and OECD averages.1/
(Chart B1) The NIE-3 average showed a narrowing S-I gap or smaller current
account surpluses since 1988, while the fairly stable gap for the OECD indicated a
current account that was close to balance.
Chart B1
International Comparison of S-I Gap
40
30
Singapore
% of GDP
20
10
OECD
NIE-3
0
-10
-20
-30
1960
1966
1972
1978
1984
1990
1996
2003
Prior to the mid-1980s, Singapore, like the NIE-3 countries, ran current account
deficits, as domestic investment surged reflecting the rapid industrialisation of the
economy. From the 1990s, however, Singapore recorded persistent current account
surpluses that were significantly larger than the NIE-3 and OECD averages.
The main reason behind this appears to be the striking difference in the saving
patterns, given that the investment rate in Singapore and the NIE-3 have shifted
down closer to the OECD level. (Chart B2(i)) Indeed, Chart B2(ii) shows that
although the NIE-3 countries had similar, strong saving patterns till the mid-1970s,
the saving rate for the NIE-3 started to trend down by 1988, dragged down by a
marked decline in private sector saving. In comparison, Singapore’s relatively high
saving rate continued to increase further to a new high of 53% in 1998, far above the
30% for the NIE-3 and 24% for the OECD. As mentioned earlier, while Singapore’s
1/
These comparisons are best made on a gross basis, because methods of calculating depreciations
can vary markedly across countries and can result in misleading inferences. Hence, this section
uses gross domestic saving and investment rates as a basis of comparison.
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private sector saving was initially boosted by demographic and income factors, public
sector saving was underpinned by the government’s prudent fiscal policy stance, with
budget surpluses averaging around 4.3% of GDP each year over the 1990s. In
comparison, the NIE-3 countries ran a small budget deficit, which averaged 0.7% of
GDP each year over the same period, while OECD countries recorded a slightly
larger deficit averaging 3.2% of GDP. More recently, however, the main factor
driving the sharp increase in Singapore’s current account surplus in 2002-03 was the
collapse in investment rather than an increase in the saving rate.
Chart B2
International Comparison of
(i) Domestic Investment Rate
(ii) Domestic Saving Rate
60
60
50
50
Singapore
40
% of GDP
% of GDP
40
NIE-3
30
20
Singapore
NIE-3
30
OECD
20
10
OECD
10
0
0
1960
2.3
1969
1978
1987
1996
2003
-10
1960
1969
1978
1987
1996 2003
A PERSPECTIVE BASED ON INTERNATIONAL TRADE IN
GOODS AND SERVICES
20
We now turn to assess developments in Singapore’s current
account balance by examining the components of the current account,
namely, goods, services and income balances.
21
Singapore’s rapid growth in exports since the early 1980s resulted
in a turnaround in the current account from a deficit to a surplus position since
1988. Although the goods balance recorded consistent deficits prior to 1994
(except in 1988), the services balance has all along been in surplus, while the
income balance showed a surplus from 1984 till the late 1990s.
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MAS Staff Paper No. 33
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Trends in the Goods Balance
22
Since 1994, the rapid growth in Singapore’s exports led to a
turnaround in the goods balance from a deficit to a surplus position. Along
with the strong demand for Singapore’s manufactured goods, Singapore’s
attraction as a major bunkering port and centre for repairs of ships and aircraft
also led to the growth in goods procured in ports and repairs of goods.4
23
Reflecting these developments, the goods balance rose steadily
from an average deficit of 2.3% of GNI in 1988-93, to a surplus of 5.9% in
1994-97, and 20% in 1998-2003. Concomitantly, its contribution to the overall
current account surplus surged from 12% in 1994 to over 100% in 2003. The
large goods balance has provided offset to the general deterioration in the
services and income balances since 1994. (Chart 2.7)
Chart 2.7
Goods/Services/Income Balances
(a) S$ Billion
(b) % of GNI
60
30
50
% of GNI
S$ Billion
10
30
20
Services
10
0
-10
-20
0
-30
-10
Income
-20
Goods
Services
Income
-40
-50
1980
4
20
Goods
40
1986
1992
1998
2003
1980
1986
1992
1998
2003
In 1998, the implementation of BPM5 led to the re-classification of certain balance of
payments items. This included the shift of repairs on goods, and goods procured in
ports from the services to the goods account. The income balance was also shifted out
of the services balance to form a separate category under the current account balance,
to reflect the importance of cross-border income flows. The series were backdated to
1980, so that the current account data before and after 1998 are comparable.
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Trends in the Services Balance
24
The strength of the services balance helped to underpin the overall
current account surplus in the 1980s and early 1990s. More recently, the
smaller services surpluses recorded in 2001-03 were largely due to the steady
decline in the travel balance5 since 1993, which turned into a deficit position in
the last three years. These trends have reflected both a decline in travel
receipts, as competition from the region to attract tourists intensified, as well
as an increase in residents’ travel expenditure abroad. (Chart 2.8a)
Chart 2.8
(a) Travel Receipts and Payments (b) Breakdown of Services Balance
12
12
Travel Receipts
Other
Services
8
S$ Billion
S$ Billion
10
8
6
4
0
Travel Payments
4
-4
2
Travel
Government Services
Transportation
Insurance
-8
1989
1993
1997
2001 2003
1989
1993
1997
2001 2003
25
The increased deficits in the transportation and insurance balances
have also contributed to the decline in the services balance. While
Singapore’s position as a transportation hub underscores the importance of
transportation receipts, the substantial payments for port services and freight
shipments have led to persistent deficits in the transportation services
account. Similarly, the insurance balance has historically shown a deficit
position, largely reflecting premium payments incurred for the import of goods.
(Chart 2.8b)
26
With the exception of the “other services” segment, all the other
major services balances were in a deficit position over the past three years.
The “other services” balance covers a wide spectrum of activities including
financial services, construction services, computer & information services,
royalties, social services and other services. Financial services is a key
segment, and accounted for a sizable 12% share of “other services” receipts
5
From 1995, the coverage of the services account was expanded, facilitated by a
number of DOS surveys such as the Survey on International Trade in Services (TIS).
MONETARY AUTHORITY OF SINGAPORE
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MAS Staff Paper No. 33
August 2004
in 2002-03, reflecting the development and importance of Singapore as a
financial and business services hub.6 Indeed, the increased surplus in the
“other services” balance until 1997 was largely due to a rise in financial
services’ net receipts. (Chart 2.9) Thereafter, the “other services” surplus
dropped sharply, in part due to the significant increase in royalty payments for
manufactured goods especially pharmaceuticals.
More recently, its
improvement in 2002-03 was underpinned by a recovery in financial services
net receipts.
Chart 2.9
Major Components of Other Services
10.0
Other Services
7.5
S$ Billion
5.0
2.5
Financial Services
0.0
-2.5
-5.0
Royalties
-7.5
1995
1997
1999
2001
2003
Trends in the Income Balance
27
The income balance has held up over the years, indicating the
importance of net investment income as a source of earnings. It registered a
net positive inflow throughout the 1990s, as the income from foreign reserves
and government investments abroad more than offset the repatriation of
profits by foreign MNCs in Singapore. Indeed, the surplus in the income
balance averaged around S$2.5 billion each year over the period 1990-99,
with income receipts more than doubling since the early 1990s, from S$11.8
billion in 1990 to peak at S$27.6 billion in 2000. (Chart 2.10)
6
As a share of total services exports, financial services accounted for 5.1% in 2002-03.
This was smaller than the shares for travel (14%) and transportation (39%).
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MAS Staff Paper No. 33
August 2004
Chart 2.10
Income Balance
6
30
S$ Billion
2
25
Income
Receipts 20
(RHS)
15
0
10
Income
Payments (RHS)
-2
S$ Billion
Income
Balance (LHS)
4
5
-4
1980
1984
1988
1992
1996
2000
0
2003
28
The moderation in total income receipts since 2000, to S$24.7
billion in 2002 and S$23.4 billion in 2003, reflected the decline in receipts from
both public and private investment income, as interest income fell in line with
the soft global interest rate environment. At the same time, payments due to
private investment income have remained relatively stable over the past few
years, reflecting large foreign investment in Singapore. As a result, the
income balance narrowed and turned in deficits of S$0.2 billion and S$2.0
billion in 2002 and 2003 respectively.
29
Nevertheless, as Singapore continues with its efforts to develop an
“external wing” overseas, it is likely that the income balance would play an
increasingly important role in sustaining the current account surplus. In the
following box item, we look at the case of Switzerland, which has recorded
consistent current account surpluses over the years underpinned by strong
surpluses in the income account, and attempt to draw some comparisons with
Singapore. (See Box Item C.)
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MAS Staff Paper No. 33
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Box Item C
The Role of the Income Balance in Switzerland: Lessons for Singapore?
Like Singapore, one small and open European economy that has consistently
experienced a high current account surplus relative to its GDP is Switzerland. The
country’s current account balance has recorded persistent surpluses averaging
around 8% of GDP since 1990. On closer examination, however, we find that the
composition of the large current account surpluses for these two economies is
considerably different in structure. While Singapore’s surpluses can be attributed
primarily to the large surpluses generated by its goods and services balance,
Switzerland’s current account surpluses have generally been dominated by the
income account.
The Switzerland Case
Until the early 1980s, Switzerland’s current account balance, like Singapore’s, was
largely determined by fluctuations in the goods and services account. In the past two
decades, however, growing surpluses from the income account balance have come
to exert increasing influence over the current account balance. (Table C1) In fact,
from the mid-1990s up till 2002, the surplus from the income balance accounted for
around two-thirds of Switzerland’s current account balance. The remainder was
mostly due to the services account surplus, while the goods account actually
recorded small surpluses or even deficits in recent years.
Table C1
Switzerland’s Current Account (% of GDP)
Current Account Balance
Trade Balance
Services Balance
Income Balance
Current Transfers, net
1980-89
3.6
-3.3
3.3
4.5
-0.9
1990-99
7.4
0.0
4.0
4.7
-1.3
2000-02
11.3
1.3
4.9
6.5
-1.5
The surpluses from the income account have been sizeable, averaging around
US$13 billion a year since 1990. These were entirely due to the contribution of net
investment income, as net labour income has been recording deficits for most years.
About a fifth of the Swiss workforce is foreign based, and this trend is set to continue
as Switzerland becomes more and more closely integrated with the rest of Europe
and the mobility of labour increases.
In comparison, Switzerland’s net investment income rose practically without
interruption over the period 1950 to 2000, to peak at US$26.5 billion in 2000. The
reason for this steady increase was the growth in Switzerland’s net international
investment position, as well as the uptrend in interest rates till the end of the 1980s.
More recently, however, the marked reduction in interest rates has put strong
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MAS Staff Paper No. 33
August 2004
downward pressure on the investment income surplus in 2001 and 2002. Both
investment income from abroad as well as payments abroad plummeted as a result
of lower interest rates and receding direct investment income. With income on Swiss
investment abroad falling at a much faster rate compared to the decline in payments
relating to foreign investment in Switzerland, the income account surplus narrowed in
2001 and 2002.
Lessons for Singapore?
Compared with Switzerland, contributions from the income account to Singapore’s
current account surplus remain relatively limited. Going forward, however, the
importance of the income balance should not be underestimated as a key source of
inflows, as illustrated by the case of Switzerland.
First, we note that the strong inflows from Switzerland’s income account have been
underpinned by the accumulation of a large net international investment position over
the years. Indeed, Switzerland’s net foreign assets have risen six-fold over the past
two decades, from US$69.7 billion in 1983 to US$432 billion in 2002 (or 161% of
GDP). In comparison, Singapore’s net international investment position stood at a
much more modest position.
More notably, Switzerland’s external wing is
significantly more well-developed than Singapore’s.
Since the mid-1980s,
Switzerland’s direct investment overseas have outstripped foreign investment into the
country, with net outflows from the direct investment account averaging US$9.3
billion each year over the period 1988-2002. In comparison, while direct investment
abroad by Singaporean investors has risen sharply since the late 1990s, it remains
considerably lower than direct investment into Singapore. This has led to net inflows
to the direct investment account almost every year (with the exception of 2001, which
saw a high level of M&A activity).
As a result, it is not entirely surprising that the level of net income receipts into
Singapore is still only a fraction of income inflows to Switzerland, despite some trend
increase over the past decade. In addition, the weak global investment and soft
global interest rate conditions over the recent few years have put further downward
pressure on income receipts, even as income payments have remained fairly stable.
Given that Singapore’s stellar economic performance over the past three decades
has been primarily driven by large-scale investment by MNCs and foreigners, the
high level of direct investment flows into Singapore is hardly unexpected.
Nevertheless, this also implies that the large and growing factor payment to abroad,
due to the repatriation of profits and other factors, has probably offset to a large
extent, the increase in receipts from overseas investments. In particular, we note
that the rise in income receipts since 1999 has generally been offset by higher
income payments over the same period, resulting in a smaller surplus or even deficit
in the income account in recent years.
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MAS Staff Paper No. 33
3
SINGAPORE’S CAPITAL AND FINANCIAL
ACCOUNT
3.1
UNDERSTANDING THE CAPITAL AND FINANCIAL
ACCOUNT
August 2004
30
While transactions involving goods and services appear in the
current account of the balance of payments, international sales or purchases
of financial assets appear in the financial account, a subdivision of the capital
and financial account. The capital and financial account shows how an
economy’s balance of payments transactions are financed. If an economy’s
saving exceeds its investment, the surplus must be reflected in net financial
outflow or net financial investment in the rest of the world. If, on the other
hand, an economy’s saving is less than its investment, the economy will be a
net importer of goods and services from the rest of the world. These net
imports must be financed by a net financial inflow from the rest of the world.
In other words, a deficit on current account transactions would be financed by
a capital and financial account surplus, while a current account surplus would
be matched by net outflows from the capital and financial account and
changes in OFR.
31
In the case of Singapore, which has recorded persistent current
account surpluses since the mid-1980s, net capital and financial outflows
reflect the acquisition of foreign assets abroad by residents. There has also
been an accompanying build-up in OFR. In line with Singapore's position as a
net exporter of capital, the overall capital and financial account has largely
been in deficit since the early 1990s.
3.2
STYLISED FACTS ON SINGAPORE’S CAPITAL AND
FINANCIAL ACCOUNT
32
The overall capital and financial account balance (KAB) in
Singapore comprises the capital account balance and the financial account
balance. The former consists of capital transfers (which include migrants'
transfers, debt forgiveness, etc.) and the acquisition and disposal of nonproduced and non-financial assets (e.g. patents and copyrights). The capital
account balance has consistently recorded a small negative balance, and its
contribution to the overall KAB has been relatively small in Singapore
(averaging 0.2% of GDP since 1993). The KAB has therefore been
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MAS Staff Paper No. 33
August 2004
dominated by flows from the financial account. Comprising the financial
account are the direct investment account, portfolio investment account, as
well as "other investment" account, which represents financial flows
intermediated through the banking system (e.g. trade credit, loans and
advances, currency and deposits).
33
As noted earlier, the excess of national saving over investment in
Singapore has allowed more resources to be deployed overseas to acquire
foreign assets. The government has been investing public sector surpluses
abroad, and has also encouraged private entities to develop an “external
wing” overseas, i.e. long-term investment abroad which will over time
generate a steady source of foreign income for the country. This strategy has
been reflected in a shift of Singapore’s financial account position from a
surplus to a deficit since 1993. (Chart 3.1) The net export of capital has been
dominated by huge outflows of portfolio investment, particularly net purchases
by residents (including the government) of overseas equities and to a smaller
extent, debt securities. Nevertheless, net FDI has remained positive despite
the surge in outward direct investment by Singapore-based companies since
1993, as Singapore continued to attract large inflows of FDI to finance a
substantial part of domestic investment (especially in manufacturing). Such a
unique arrangement, in which the bulk of domestic saving is invested abroad
while a substantial proportion of domestic investment is financed by FDI, has
served the Singapore economy well over the years.
Chart 3.1
Current Account and Capital and Financial Account
40
60
40
Overall Balance
of Payments
Current Account
Balance
20
% of GNI
S$ Billion
20
0
Capital &
Financial Account
Balance
-20
Overall Balance of Payments
Current Account Balance
Capital & Financial Account Balance
30
10
0
-10
-20
-40
-30
-60
-40
1980
1984
1988
1992
1996
2000 2003
1980
1984
1988
1992
1996
2000 2003
34
Net outflows from the capital and financial account have increased
since the Asian crisis, and at a more rapid rate than the expansion in the
current account balance during that period. The capital and financial account
deficit has risen from around 7% of GNI over the pre-crisis period of 1993-97,
MONETARY AUTHORITY OF SINGAPORE
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MAS Staff Paper No. 33
August 2004
to an average of 15% over the period 1998-2002, in line with the increase in
the current account surplus. More recently, the capital and financial account
deficit has surged to 28% of GNI in 2003, largely reflecting a sharp increase in
outflows from the “other investment” account. In particular, net outflows from
the "other sectors" and official category within the “other investment” account
amounted to S$35 billion in 2003, compared with S$9.1 billion in the previous
year.
Nature and Composition of Singapore’s Financial Flows
35
The flows in the financial account are divided into three main
categories – direct investment, portfolio investment and other investment.
Direct investment is usually distinguished from portfolio equity investment by
the size of the stake taken in a foreign company. A stake greater than 10 per
cent is deemed to indicate some degree of control and constitutes direct
investment. Anything lower than that is deemed to be a portfolio allocation
decision. Prior to 1993, the financial account was dominated by net inflows
from the direct investment account. Since then, however, net outflows from
the portfolio and "other investment" accounts have tended to be the more
important components. (Chart 3.2)
Chart 3.2
Components of the Financial Account Balance
30
20
20
Direct
Investment
10
0
0
% of GNI
S$ Billion
Financial
10 Account Balance
Portfolio
Investment
-10
-20
-10
-20
Other
Investment
-30
Financial Account Balance
Direct Investment
Portfolio Investment
Other Investment
-30
-40
-50
-40
1980
1986
1992
1998
2003
1980
1986
1992
1998
2003
Direct Investment
36
Direct investment is defined as a category of international
investment in which a resident entity in one economy (the direct investor)
acquires a lasting interest in an enterprise resident in another economy (the
direct investment enterprise).
Direct investment implies a long-term
relationship between the direct investor and the direct investment enterprise
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MAS Staff Paper No. 33
August 2004
and a significant degree of influence by the direct investor on the
management of the direct investment enterprise. The IMF’s Balance of
Payments Manual (5th edition) recommends a minimum equity stake deemed
necessary for an effective voice as 10%.
37
Direct investment inflows have generally increased over the years,
rising by over 60% from an average of S$13.2 billion a year in the 1990s to
S$21.7 billion a year since 2000. Indeed, FDI inflows to Singapore have
consistently been in excess of S$10 billion each year since 1994. (Chart 3.3)
Since 1997, Europe has overtaken Asia as the largest source of FDI in
Singapore, accounting for nearly 40% of the total stock of FDI as at end-2001.
In terms of country breakdown, the US remains Singapore's largest foreign
direct investor, accounting for around 17% of the total stock of FDI in
Singapore, followed by Netherlands and Japan at 16% and 13% respectively.
The bulk of the foreign investment has been in the financial services (37%)
and manufacturing sectors (36%), which made up over 70% of total
investment.
Chart 3.3
Gross Inflows and Outflows for Foreign Direct Investment
30
40
Inflows
30
Outflows
20
20
10
% of GNI
S$ Billion
Inflows
10
0
-10
0
-10
Outflows
-20
-20
-30
-40
1972
1978
1984
1990
1996
2003
-30
1972
1977
1982
1987
1992
1997
2003
38
Nevertheless, the stable inflows from FDI have increasingly been
offset by significant outflows due to a rise in investment abroad, reflecting
efforts to develop Singapore’s “external wing”, as well as an increase in
merger and acquisition (M&A) activity in recent years. (See Box Item D for
further details on M&A activity and its impact on direct investment outflows.)
Gross outflows from the direct investment account have doubled from an
average of S$7.0 billion per year over the 1990s to S$14.0 billion per year
since 2000. These outflows have been somewhat more volatile than gross
direct investment inflows, and range from as low as S$5.0 billion in 1998
immediately following the Asian crisis, to as high as S$30.6 billion in 2001,
MONETARY AUTHORITY OF SINGAPORE
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MAS Staff Paper No. 33
August 2004
before moderating to around S$9.6 billion last year. In terms of the location
and activity of overseas operations, nearly half of Singapore's direct
investment abroad was concentrated in Asia, with China being the largest
host country, accounting for 13% of total direct investment abroad as at end2001, followed by Malaysia (7.9%) and Hong Kong (7.1%). US also
accounted for a significant proportion of overseas investment, at 5.0%.
39
Reflecting these developments, the size of net inflows from direct
investment has risen steadily since the Asian crisis to peak at S$20.5 billion in
2000, underpinned by a surge in gross direct investment inflows that year to a
high of S$29.7 billion. Subsequently however, with the pickup in local
investment abroad, net inflows moderated sharply, and even turned negative
in 2001, due to the high level of M&A activity during the year.
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MAS Staff Paper No. 33
August 2004
Box Item D
Merger and Acquisition Activity in Singapore
Merger and acquisition (M&A) activity in Singapore picked up strongly since the late
1990s, with the number of such deals rising steadily from 137 in 1998, to a high of
679 in 2003. Similarly, the total value of M&A activity has increased sharply from
US$5 billion in 1998 and US$22.4 billion in 2000, to peak at US$44.6 billion in 2001,
before falling off in 2002. In terms of composition, M&A activity in Singapore has
been dominated by domestic merger and acquisition activity, as well as overseas
acquisitions by local companies. In comparison, foreign acquisition of local
companies appears to have been somewhat less significant, especially in recent
years.
Chart D1
Completed and Pending M&A Deals
50
Local Acquisition Abroad
700
Foreign Acquisition in S'pore
600
Domestic Merger Activiity
Volume of M&A Activity (US$ Billion)
Number of deals
800
500
400
300
200
100
0
Local Acquisition Abroad
Foreign Acquisition in S'pore
40
Domestic Merger Activiity
30
20
10
0
1997
1998
1999
2000
2001
2002
2003
1997
1998
1999
2000
2001
2002
2003
Source: Bloomberg
While the number of deals has been fairly large over the years, most of the M&A
volume can be traced to a small number of big deals. In particular, Singtel’s
acquisition of Optus in 2001 represented the largest acquisition abroad by a local
company thus far, amounting to US$9.7 billion. Another high volume deal was DBS’
acquisition of Dao Heng bank in 2001, which amounted to around US$5.3 billion.
Domestic M&A activity also picked up strongly in 2001, with mergers of several local
banks taking centrestage as a result of the consolidation in the domestic banking
sector. The largest foreign acquisition of a Singapore company was made in 2000
when Solectron Corp acquired Natsteel Electronics for around US$2 billion.
Impact on BOP Flows
In general, M&A activity is captured in the financial account under direct investment
inflows (if it is a foreign acquisition in Singapore) or outflows (if it is an acquisition
abroad by a local company). For instance, the large acquisitions abroad by Singtel
and DBS were reflected in the jump in gross direct investment outflows to S$24.1
MONETARY AUTHORITY OF SINGAPORE
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MAS Staff Paper No. 33
August 2004
billion in Q3 2001, from an average of S$1.6 billion over the previous two quarters.
As a result, total investment abroad by local investors amounted to S$30.6 billion in
2001, which more than offset the S$26.9 billion direct investment inflow into
Singapore, leading to a net outflow from the direct investment account for the first
time in over thirty years.
These large acquisitions abroad led in turn to high demand for US$ by Singtel and
DBS, and contributed to significant downward pressure on the Singapore dollar in
2001. In comparison, foreign acquisitions of local companies, such as the Solectron
deal in 2000, would have had the opposite effect. In this case, the high demand for
S$ resulted in MAS’ intervention to dampen the strong appreciation of the domestic
currency, and keep the trade-weighted index within its policy band.
Portfolio Investment
40
The portfolio investment component of the financial account covers
transactions in equities, other securities, and financial derivatives – except
when these transactions relate to the direct investment or reserve assets
components of the financial account. The essential characteristic of these
instruments is that they are traded. That is, they offer investors the flexibility
to shift – regardless of the underlying maturity of the instrument invested –
capital from one instrument to another.
41
In Singapore, the portfolio investment account has consistently
recorded large net outflows over the years, especially since the Asian crisis.
(Chart 3.4) Indeed, this appears to be the main channel by which the sizeable
public sector surpluses, as well as net saving from the private sector, are
recycled abroad. The portfolio investment account is divided into the official
and “other sectors” categories. Official outflows reflect the government's
investment abroad, while the latter is largely due to resident investors
purchasing equities and debt instruments overseas. Prior to 2000, the official
outflows comprised the bulk of the overall net portfolio outflows. Since then,
however, the size of private sector outflows has risen significantly and
contributed a larger proportion of the net portfolio outflows.
MONETARY AUTHORITY OF SINGAPORE
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MAS Staff Paper No. 33
August 2004
Chart 3.4
Gross Inflows and Outflows for Portfolio Investment
10
10
Inflows
5
0
% of GNI
S$ Billion
0
-5
-10
-5
-10
-15
Outflows
-15
-20
-25
1972
Outflows
5
Inflows
1978
1984
1990
1996
2003
-20
1972
1977
1982
1987
1992
1997
2003
42
The size of net official outflows has been fairly large and stable,
averaging around S$11.8 billion over the period 1993-99. This mainly
reflected the government's overseas investments in foreign equity and debt,
as the sizeable public sector budget surpluses over this period were
channelled abroad. In comparison, the size of net outflows from the private
sector was significantly smaller, averaging S$4.3 billion each year between
1993-99.
43
Nevertheless, in recent years, the composition of portfolio
investment outflows has shifted, with outflows from the private sector
exceeding official outflows. (Chart 3.5) Since 2000, the size of these private
sector outflows has risen sharply to average S$11.8 billion per year, while that
of official outflows has dipped to S$8.0 billion during the same period. Not
only has the increase in private sector outflows reflected increased investment
by local investors in foreign debt and equity markets, it has also reflected the
pullback of foreign investors from the local stock market, particularly in the last
two years.
Chart 3.5
Outflows of Portfolio Investment
5
Private
Public
0
S$ Billion
-5
-10
-15
-20
-25
1993
MONETARY AUTHORITY OF SINGAPORE
1995
1997
1999
2001
2003
26
MAS Staff Paper No. 33
August 2004
Other Investment
44
The “other investment” account is a residual category that includes
all financial transactions not considered direct investment, portfolio
investment, or reserve assets. In Singapore, the "other investment" category
comprises mainly loans, currency and deposits, and inter-company debts.
These largely reflect the flows between the banking sector as well as other
non-bank sectors and their foreign counterparts (including the Asian Dollar
Market), and are driven by their financing requirements and investment
decisions. Given the nature of such flows, they can be fairly volatile and
easily reversible, with their direction varying from quarter to quarter. The
absolute size of such flows has increased significantly, especially since the
Asian crisis. On the whole, the “other investment” balance has tended to
record net outflows (with the exception of 1990, 1993, 1996 and 1997 due to
the large interbank inflows). (Chart 3.6a)
Chart 3.6
Other Investment Balance
(a) Gross Inflows and Outflows
(b) Components
80
30
60
Net Official Flows
Net Other Sector Flows
Net Bank Flows
20
Inflows
10
% of GNI
S$ Billion
40
20
0
0
-10
-20
Outflows
-40
Net
Outflows
-60
-20
-30
1980
1986
1992
1998
2003
1980
1986
1992
1998
2003
45
Flows from this category can be divided into three sectors, namely
the banking, official, and other sectors. (Chart 3.6b) The banking sector
records the foreign assets and liabilities of commercial banks, including
interbank assets and liabilities with Asian Currency Units (ACUs) and foreign
commercial banks.
46
Other sectors include individuals, non-bank financial institutions
(e.g. merchant banks, finance companies) and other companies.
Transactions of non-bank residents with ACUs are also included here. The
other sectors have generally recorded net outflows in recent years, mainly
due to the consistently large outflows of residents' deposits to ACUs and other
MONETARY AUTHORITY OF SINGAPORE
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MAS Staff Paper No. 33
August 2004
foreign institutions that are recorded on the asset side. This has typically
more than offset the gross inflows due to loans from ACUs and other foreign
creditors, which are recorded on the liability side.
47
Prior to the crisis, the size of net flows from the “other investment”
category could range from an inflow of S$4.0 billion to an outflow of as high as
S$7.8 billion, bringing the overall average to S$0.2 billion for 1990-97. Since
the crisis, however, the size of net outflows has averaged S$16.2 billion a
year, surging to over S$20 billion each year in 1998-99 before moderating
somewhat in the subsequent years. Most recently, net outflows from “other
investment’ hit a new high of S$35.0 billion in 2003, reflecting increased
placement of funds abroad by non-financial institutions and individuals. This
was due to both a higher outflow of funds from residents to ACUs, as well as
increased external lending abroad by companies.
3.3
PERSISTENCE OF CAPITAL FLOWS
48
In this section, we briefly examine the different components of the
financial account to determine whether they are “hot” (volatile and easily
reversible) or “cold” (persistent and permanent) flows. As a first step, we
present in Table 3.1 the summary statistics of the quarterly financial account
flows.
Table 3.1
Summary Statistics on Components of Capital and Financial Account Balance,
1990Q1-2003Q4
Mean
(S$ million)
Standard
Deviation
(S$ million)
Coefficient
of Variation
(%)
Average Share
in Capital and
Financial
Account (%)
-3,407.6
5518.6
162
100
-50.6
29.2
58
2
Foreign Direct
Investment
1,656.2
3578.7
216
-49
Portfolio Investment
-3,255.6
2232.8
69
95
Other Investment
-1,757.6
6383.1
363
52
Capital and Financial
Account (net)
Capital Account
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49
From the computed coefficient of variation7, the capital account and
portfolio investment flows appear to be less volatile than foreign direct
investment and “other investment” flows. While the relatively high degree of
volatility for “other investment” flows is not surprising, that for direct
investment flows might initially appear somewhat unexpected. Nevertheless,
a closer characterisation of capital flows into “hot” or “cold” would require an
examination of the persistence and reversibility characteristics of the flows
(Claessens, Dooley and Warner (1995)).
50
We calculate the autocorrelations for each type of capital and
financial account transaction. A “cold” capital flow is represented by a series
of large and positive autocorrelations. Alternatively, a “hot” money flow is one
that is subject to quick reversibility, and therefore, its autocorrelations would
show alternating signs.
51
Chart 3.7 displays the quarterly autocorrelations for each type of
capital flows calculated over the sample period 1990Q1 to 2003Q4. Portfolio
investment flows show signs of persistence as highlighted by the positive
autocorrelations for a number of quarterly lags. This provides evidence that a
substantial amount of these flows are actually long-term investment by private
and government entities in bonds, equities and acquisition of companies
abroad.
52
In comparison, the alternating signs of the “other investment”
autocorrelations point towards the quick reversal of fund flows in and out of
the banking system. This result is also unsurprising, given that such flows are
especially volatile and “hot”, as funds move in and out of the banking system
relatively quickly and are highly responsive to exchange rate and interest rate
movements.
53
Finally, the autocorrelations of net FDI flows show that they are
transitory in nature. This seems to contradict the usual perception that direct
investment consists of mostly "cold" or more persistent flows, since they
should reflect strategic, long-term interests of investors.
However, in
Singapore, the volume of outward direct investment can be substantial, and
the timing of the outward flows may tend to offset the relatively stable inward
flows such that, on a net basis, the overall series appears to lack persistence.
7
The coefficient of variation is a measure of relative dispersion and is given by:
coefficient of variation = standard deviation/mean. It is generally expressed as a
percentage. The use of the coefficient of variation lies partly in the fact that the mean
and standard deviation tend to change together in many experiments.
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MAS Staff Paper No. 33
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Chart 3.7
Autocorrelations of Net Capital Flows, 1990Q1 – 2003Q4*
1.5
0.4
0.5
0.0
Net Portfolio
Investment Account
-0.5
0.2
0.1
0.0
-0.1
Net Other Investment
Account
-0.2
-1.0
Autocorrelation
Autocorrelation
1.0
Autocorrelation
0.5
0.3
-0.3
-1.5
-0.4
1
6
11
16
21
26
31
Lag
36
0.4
0.3
0.2
0.1
0.0
-0.1
Net Direct Investment
Account
-0.2
-0.3
-0.4
-0.5
-0.6
1
6
11
16
21
26
Lag
31
36
1
6
11
16
21
26
Lag
* Dotted red lines represent two times the estimated standard errors
54
It is important to gauge the degree of permanence of capital inflows
into Singapore, since their reversibility can potentially generate high
adjustment costs arising from resource allocation, sunk costs or other market
imperfections. Therefore, we focus on assessing the permanence or
persistence of gross inflows (as opposed to net flows) over the period 19902003. In particular, we compare the persistence of capital flows across three
broad categories, namely, portfolio inflows, foreign direct investment inflows,
and “other investment” flows which capture both bank and corporate/individual
flows.
55
We examine the persistence of capital flows using the unobserved
components model suggested by Harvey (1981, 1989).8 This model allows
the inflows to be broken down into its permanent and temporary components
using maximum likelihood estimation. The relative contribution of each
component is given by the estimated variance parameters. If a large and
statistically significant proportion of the variation in flows is attributed to the
permanent component, we would expect a large part of the capital flows to
remain in the country for an indeterminate period of time. In comparison, if a
large portion of the variation is explained by movements in the temporary
components, this indicates a higher degree of potential reversibility.
56
Our results in Chart 3.8 show that the permanent component is
largely responsible for most of the variation in direct investment inflows. This
is consistent with the view that FDI inflows are more persistent and largely
permanent in nature. It also lends credence to the earlier observation that the
8
These methods were applied by Sarno and Taylor (1999), to gauge the relative
importance of the permanent and temporary components of capital flows to Latin
American and Asian developing countries over the period 1988-97.
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31
36
MAS Staff Paper No. 33
August 2004
unexpectedly low persistence in net direct investment flows is mainly due to
the size and volatility of outflows.
Chart 3.8
Relative Contribution of the Persistent and Temporary Components
to the Total Variation in Inflows
100
Estimated SD of error term :
Per Cent of Total
Permanent Component
80
Temporary Component
60
40
20
0
Portfolio
Investment
Direct
Investment
Other
Investment
57
Similarly, changes in portfolio inflows are also dominated by the
permanent component. The high degree of persistence for portfolio inflows
provides evidence that a substantial amount of these flows are actually longterm investment by foreign entities in domestic bonds and equities and
acquisition of companies. In comparison, we find that “other investment”
inflows appear to contain a relatively large temporary component, which
indicate that such flows are highly volatile and easily reversible.
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4
SINGAPORE’S OVERALL BALANCE OF
PAYMENTS
4.1
UNDERSTANDING THE BALANCE OF PAYMENTS
58
As mentioned earlier, under a floating exchange rate system, a net
surplus on current account transactions would be exactly matched by a net
deficit on international capital and financial transactions. (That is, CAB + KAB
= 0.) In theory, any imbalances between the current and capital and financial
account flows would be adjusted automatically through movements in the
exchange rate.
59
Under a managed exchange rate system, any mismatch between
both sides of the external accounts (i.e. current and capital/financial
transactions) is known as the overall balance of payments (BOP). (That is,
CAB + KAB = BOP.) This overall balance of payments is measured by
changes in the value of official reserve assets, or MAS’ holdings of foreign
currency assets.
Foreign exchange intervention operations and swap
operations by the MAS facilitate the conversion into Singapore’s official
foreign reserves (OFR).
Chart 4.1
Official Foreign Reserves
25
180
150
Overall BOP
(LHS)
15
10
120
90
Change in Stock
of OFR (LHS)
5
0
60
30
Stock of OFR (RHS)
-5
1965
4.2
S$ Billion
S$ Billion
20
0
1971
1977
1983
1989
1995
2003
HISTORICAL TRENDS IN THE OVERALL BOP AND
OFR ACCUMULATION
60
With current account surpluses exceeding capital and financial
account deficits, Singapore’s overall BOP has been positive for almost every
year since 1966 (with the exception of 2001), thus allowing for a build-up of
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foreign reserves. Nevertheless, we observe that the overall BOP surplus has
shrunk in the post-crisis period, reflecting larger capital outflows from the
capital and financial account in recent years, which have offset a greater part
of the inflows from the current account. (Chart 4.2)
Chart 4.2
Overall Balance of Payments
(a) S$ Billion
(b) % of GNI
60
40
40
Overall Balance
of Payments
Current Account
Balance
20
% of GNI
S$ Billion
20
0
Capital &
Financial Account
Balance
-20
Overall Balance of Payments
Current Account Balance
Capital & Financial Account Balance
30
10
0
-10
-20
-40
-30
-60
-40
1980
1984
1988
1992
1996
2000 2003
1980
1984
1988
1992
1996
2000 2003
61
In line with the rise in the current account surplus over the years,
the size of the overall BOP surplus has increased from an average of 6.6% of
GNI in the 1980s to around 10% of GNI between 1990-97. Since then,
however, it has fallen to around 3.3% of GNI in the post-crisis period of 19982002. More recently, the overall BOP has risen to 7.5% (or S$11.8 billion) in
2003, largely reflecting the surge in the current account surplus due to the
strong export-led recovery.
62
In line with these developments, we also observe a rapid
accumulation of OFR from 1990-97, averaging S$10.1 billion per year. Over
this period, the strong growth of the Singapore economy, and widening of the
current account surplus resulted in upward pressures on the domestic
currency.
Institutional factors like the sizeable fiscal surpluses and
contributions to the CPF which implied a withdrawal of liquidity from the
banking system, also put additional upward pressure on the S$. This led the
central bank to intervene (by “leaning against the wind”) to dampen the S$
appreciation, which contributed to the build-up of OFR.
63
Subsequently, however, the rate of OFR accumulation slowed to
around S$4.6 billion per year in the post-Asian crisis period of 1998-2002, as
the overall BOP surpluses declined mainly due to increased outflows from the
capital account. During this period, the frequency of shocks hitting the
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Singapore economy increased and the domestic currency experienced more
episodes of speculative pressure. As a result, the MAS had to intervene to
stem the downward pressure on the S$ exchange rate.9 These developments
moderated the rate of OFR accumulation over this period.
64
In 2003, the BOP surplus surged to S$11.8 billion, reflecting a
sharp rise in the current account surplus, which was underpinned by a
turnaround in the external environment and strong export recovery. The
improved domestic economic outlook in the second half of 2003, coupled with
the general weakness in the US$, exerted strong upward pressure on the S$.
In the later part of the year, MAS intervened to keep the trade-weighted
exchange rate stable within its lower, re-centered band, so as to support the
incipient economic recovery amidst benign inflationary pressures.10
Singapore’s OFR increased by about S$20 billion for the year as a whole.11
9
The small BOP deficit in 2001 reflected a sharp rise in outflows from the financial
account, which more than offset the increase in the current account surplus. The larger
financial account deficit was mainly due to a surge in outward direct investment that
year, as M&A activity picked up strongly. This M&A activity in turn led to strong
demand for US$ in the foreign exchange market.
10
Please see MAS Monetary Policy Statement, 12 April 2004.
11
The difference between the OFR and overall BOP figure is primarily due to valuation
gains and losses.
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APPENDIX 1
ASSESSING THE RELATIVE IMPORTANCE OF PERMANENT AND
TEMPORARY COMPONENTS OF CAPITAL FLOWS
This appendix briefly describes the methodology used to examine the
permanence of various categories of capital flows to Singapore over the
period 1990-2003.
Capital flows are classified into three broad categories: portfolio flows; foreign
direct investment, whereby a firm largely owned by foreign residents acquires
or expands a factory or subsidiary firm located in Singapore; and “other
investment” flows which capture both bank and corporate/individual flows.
We analyse the time series properties of these various categories of flows and
in particular, their degree of persistence using maximum likelihood Kalman
filtering techniques. It allows the time series to be broken down into
unobserved permanent and temporary components. Sarno and Taylor
(1999)12 used this approach to gauge the relative importance of permanent
and temporary components of capital flows to Latin American and Asian
developing countries.
The unobserved components model may be written as:
fit = uit + vit + eit
i= 1,..., N; t=1,..., T
(1)
where f may be any of the financial and capital account component, u is a
trend component, e is the irregular component which is approximately
normally independently distributed with zero mean and constant variance, and
v represents a first order autoregressive, AR(1) component.
Intuitively, equation (1) expresses the capital flow as the sum of a permanent
component (u), a purely temporary, zero persistence component (e) and a
more slowly decaying temporary component (v). Thus the model separates
out the persistent and temporary components of the data in a general
comprehensive fashion. The estimation of the unobserved components
model is done in a state space form. The estimated variance parameters are
then assessed to indicate the relative contribution of each component in the
12
L. Sarno, M.P. Taylor, (1999), Hot money, accounting labels and the permanence of
capital flows to developing countries: an empirical investigation, Journal of
Development Economics, Vol. 59, pp 337-364.
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state vector to explaining the total variation in the time series under
consideration.
These estimated variances provide information on the size of the nonstationary and the stationary components in the series and help quantify the
degree of persistence of the series in question. If a large and statistically
significant proportion of the variation in flows is attributed to the stochastic
trend level (u), for example, then we expect that a large part of the capital
flows will remain in the country for an indeterminate period of time. In
comparison, if a large portion of the variation in the time series is explained by
movements in the temporary components (e) or (v), then the capital flows
under consideration may be regarded as characterised by low persistence,
indicating a higher degree of potential reversibility.
Results
Table 1 classifies the various model specifications estimated for the different
categories of capital flows to Singapore. The most appropriate model for
each component is made on the basis of the goodness of fit criteria. Table 2
shows the results of estimating the most appropriate structural time series
model in state space form by the Kalman filter maximum likelihood method.
In the second and third columns of Table 2, details of the unobserved
components included in the estimated structural time series model are
reported. The fourth column shows the estimated standard deviations (SD) of
the disturbances of the stochastic components. The last column contains the
estimated AR(1) coefficient (the damping factor ρ), which provides evidence
on the degree of persistence of the stationary AR(1) component of the model.
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Table 1
Structural Time Series Models Adopted in Modelling Capital Flows
Model 1: Stochastic level (no slope) + AR(1)
ft = µt + νt
µt = µt-1 + ηt
νt = ρννt-1 +ξt ρν<1
Model 2: Stochastic level (no slope) + irregular component
ft = µt + εt
µt = µt-1 + ηt
Model 3: Stochastic level (no slope) + AR(1) + irregular component
ft = µt + νt + εt
µt = µt-1 + ηt
νt = ρννt-1 +ξt ρν<1
Model 4: Stochastic level (fixed slope) + AR(1) + irregular component
ft = µt + νt + εt
µt = µt-1 + β + ηt
νt = ρννt-1 +ξt ρν<1
Model 5: Stochastic level (fixed slope) + irregular component
ft = µt + εt
µt = µt-1 + β + ηt
Model 6: Stochastic level (fixed slope) + AR(1)
ft = µt + νt
µt = µt-1 + β + ηt
νt = ρννt-1 +ξt ρν<1
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Table 2
Results of Unobserved Components Model Estimation
using Gross Inflows
Investment
Inflow
Category
Model
Portfolio
2
Direct
2
Other
3
Components
Stochastic level,
Irregular
Stochastic level,
Irregular
Stochastic level,
AR(1), Irregular
Estimated SD
of error term
Level: 0.098
Irregular: 0.061
Level: 0.202
Irregular: 0.123
Level: 0.323
AR(1): 3.100
Irregular: 3.105
Estimated
AR
parameter,
ρν
0.370
The results (Column 4) show that for portfolio and direct investment inflows,
the permanent component has a higher variance compared to the variance of
the irregular component. This is clearly consistent with our prior reasoning
that FDI inflows are largely permanent in nature. The high degree of
persistence for portfolio inflows provide evidence that a substantial amount of
these flows could actually be long-term investment by foreign private and
government entities in bonds, equities and acquisition of companies. This
suggests that both these types of flows are relatively more sensitive to the
long-term structural forces relating to Singapore’s performance.
In
comparison, “other investment” flows, which comprise of inter-bank, corporate
and household flows, are more volatile and appear to contain a relatively large
temporary component.
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