Singapore Budget 2018: Rosier outlook could set stage for tax hike, monetary policy tightening

Singapore

THE Singapore economy is expected to expand at a more moderate pace this year as surging growth in the manufacturing sector stabilises and other industries pick up the baton.

This rosier economic climate sets the scene for a potential tax hike in Budget 2018 and could also prompt the central bank to tighten its Singdollar policy this year, economists say.

The economy expanded 3.6 per cent last year - faster than initial estimates - thanks largely to strong growth in the manufacturing sector.

Trade also staged a turnaround in 2017 with non-oil domestic exports (NODX) expanding at the fastest pace in seven years. Trade agency IE Singapore has upgraded its NODX forecast for 2018 to 1 to 3 per cent, from an earlier estimate of zero to 2 per cent.

Growth this year is expected to slow slightly but remain firm, the Ministry of Trade and Industry (MTI) said on Wednesday.

Government forecasters are tipping economic expansion of 1.5 to 3.5 per cent this year. The MTI expects growth to come in "slightly above the middle of the forecast range".

Singapore's external demand outlook is likely to be slightly weaker this year compared with last year as the country's key trading partners enter a more mature phase of recovery, the MTI said.

Still, the manufacturing sector, which surged 10.1 per cent in 2017, is likely to continue growing at a brisk clip and supporting the rest of the economy, noted MTI permanent secretary Loh Khum Yean.

The pick-up in economic activity is also broadening out to benefit more sectors, said Mr Loh. Domestically-oriented sectors like retail and food services are expected to do better on the back of improving consumer sentiment, as the labour market recovery gains traction.

OCBC economist Selena Ling said 2017 was a "stellar year".

"Manufacturing slowed a bit in the fourth quarter but services offset the slide...this bodes well for more balanced growth this year," she noted, adding that while manufacturing growth is expected to continue moderating, the overall outlook is more upbeat.

Economists say the strengthening economic environment is conducive for a widely-expected tax hike announcement in Budget 2018, which Finance Minister Heng Swee Keat will deliver in Parliament on Monday.

Most tax experts and economists are expecting a hike in the Goods and Services Tax (GST), especially as Singapore's rates are relatively low compared with its regional peers. There has also been talk of e-commerce taxes.

"Tax increases are difficult to implement during recessions. Now is a good opportunity," said UOB economist Francis Tan.

Given the structural changes in the economy, Mr Tan said that "even if the government decides not to raise the GST rate in Budget 2018, it is simply a matter of time before it will eventually happen."

Still, the Budget will retain its focus on the long term even amid this more sanguine environment, said CIMB Private Bank economist Song Seng Wun.

"We have to remember that this pick-up is not because the economy is on a structurally firmer growth path - it's due partly to luck and the better global environment," he noted. This means 2017's growth might not be sustainable.

While the Finance Minister "might be more generous with hongbao" on the back of stronger-than-expected revenue collections in this fiscal year, any tweaks to tax policy will be made with a view to Singapore's longer-term growth trajectory, Mr Song added.

Some economists are also expecting the Monetary Authority of Singapore (MAS) to tighten its exchange rate policy this year in view of the improving growth outlook and uptick in inflation, which turned positive last year for the first time since 2014.

The central bank uses the exchange rate as its main monetary policy tool to strike a balance between inflation from overseas and economic growth.

The rate is allowed to float within a band that can be adjusted when monetary policy is reviewed.

A stronger currency - which corresponds to tighter monetary policy - counters inflation by making imports cheaper in Singapore dollar terms, while a weaker Singdollar helps lift growth by making exports cheaper abroad.

The exchange rate is managed against a basket of currencies of Singapore's major trading partners.

The Singdollar policy band is now on a path of zero appreciation against the currencies of key trading partners - a "neutral" stance put in place in April 2016 amid slow growth and low inflation.

"Other Asian central banks... have already started pre-emptive policy normalisation," said Ms Ling.

"The MAS may move to tighten earlier rather than later and odds are growing that they will tweak policy (at their next meeting) in April."

Still, any adjustments are likely to be very gradual.

"Monetary policy is driven by the quality of growth as well as inflation expectations," said Mr Song.

"On the ground we are not feeling that stronger growth yet; people are not splashing out in a big way for Chinese New Year, for instance. From a policy standpoint, not all the engines are firing equally strongly yet."

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