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Nikkei Markets

IMF urges Singapore banks to strengthen FX liquidity

Income inequality down but government can spend more to tackle aging, climate change

Singapore is the world's third-largest trading center for foreign exchange after New York and London.   © Reuters

SINGAPORE (Nikkei Markets) -- The International Monetary Fund acknowledged Singapore's economic performance over the past two decades but said the government could afford to spend more to tackle issues related to an aging population and climate change.

The fund also recommended that the authorities continue to help strengthen banks' US dollar liquidity.

"Singapore's financial system is considered resilient, underpinned by a strong regulatory and supervisory framework. At the same time, liquidity stress tests reveal vulnerability in U.S. dollar liquidity," the IMF said in a press release accompanying its Financial Sector Assessment Program report on the city-state.

The FSAP, which was established in 1999, is carried out by the IMF every five years or so for countries like Singapore where the financial sector is considered systemically important.

The city-state is the world's third-largest trading center for foreign exchange after New York and London. According to the IMF, commercial banks in the country hold some 2.6 trillion Singapore dollars ($1.92 trillion) in assets, or around 570% of GDP, while asset management firms manage around S$3.3 trillion.

The FSAP report was released alongside the IMF's annual assessment of Singapore carried out in consultation with the government.

In the FSAP report, the fund noted that the banking system's loan-to-deposit ratio in foreign currency has risen some 12 percentage points over the past two years to 128%, which means many banks are reliant on financial markets for short-term funding.

While systemically important banks like DBS Group, Oversea-Chinese Banking Corp, United Overseas Bank and the local operations of Citi and HSBC have much lower foreign currency loan-to-deposit ratios in the region of 90%, the U.S. dollar liquidity coverage ratio is relatively low at 48%, which means the banks could face a shortfall in adverse circumstances.

The coverage ratio refers to the amount of high-quality liquid assets held by banks. The IMF noted that other jurisdictions have found it useful to introduce minimum ratio requirements for specific foreign currencies.

While the authorities have the capacity to provide U.S. dollars to banks through money market operations and Singapore's foreign-exchange market has historically been resilient in periods of stress, the fund said it was important for banks to self-insure more of their foreign currency liquidity risk.

In its response, the Monetary Authority of Singapore said it would review the IMF's recommendations and take appropriate measures to further strengthen its financial oversight.

Referring to the economy, the fund noted that gross domestic product per capita has more than doubled in the last 20 years while income inequality has been declining since the global financial crisis.

However, the government could afford to spend more on infrastructure and to address issues such as ageing and climate change, the IMF said.

As in many previous reports on Singapore, the IMF pointed to the city-state's huge current account surpluses and called for greater use of fiscal policy for more balanced growth.

"The external position in 2018 was substantially stronger than what is consistent with fundamentals and desirable policies," the fund said.

It added that based on the current-account imbalance, the Singapore dollar's real exchange rate was undervalued by 2.2%-14.2%.

The IMF expects Singapore's current account surplus to fall to 15.8% of GDP this year from an average of about 17% over 2015-18.

Looking ahead, the fund said Singapore faces slowing growth due to trade tensions and a tougher external environment, with risks tilted to the downside.

But "over the medium term, growth should stabilize around 2.5%, increasingly driven by modern services alongside other trade-related sectors," it added.

--Kevin Lim

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