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 GNI in 1980, reaching a surplus of 31% of GNI in 2003.  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. 

3        The rising current account position has been associated with an improving official foreign reserves (OFR) position, which increased almost 12-fold 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.

4        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. 

5        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 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.

6        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 non-construction 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.