By Robin Chan

MEASURES taken by the Singapore Government during the recession have won high praise from the International Monetary Fund (IMF).

The international lender said that the Republic's economic fundamentals remain strong and its financial system can withstand a deeper and longer slowdown.

It was issuing its report on Singapore's policies to counter the global recession.

The report was based on a week of consultations between IMF staff and Singapore's economic officials, including Finance Minister Tharman Shanmugaratnam and Monetary Authority of Singapore managing director Heng Swee Keat.

It was concluded on July 16.

IMF staff noted that the Government had responded 'forcefully with a large fiscal stimulus package, monetary policy easing and measures aimed at ensuring financial stability'.

With inflation not a concern, Singapore's monetary policy is appropriate, the report said, and should remain so for some time.

But it added that Singapore should return to a policy of allowing the currency to strengthen gradually once economic recovery is 'well established'.

As the recession took hold last November, Singapore moved to a neutral exchange rate policy, where the currency neither appreciates nor depreciates, and then shifted down the band within which it trades in April this year.

A weaker Sing dollar policy helps boost export competitiveness while a stronger Sing dollar policy helps to fight inflation.

The Government's $20.5 billion fiscal resilience package was described as 'timely, appropriately large and diversified'.

But as risks remain on the horizon, the IMF said that the Government intended to undertake additional measures if the economic growth path proved to be weaker than expected.

It also warned that removing the stimulus prematurely in the next Budget could undermine the confidence established by the stimulus package.

Singapore's financial sector has also coped well in the economic crisis so far.

However, asset quality will deteriorate as the recession drags on, the report said.

And the MAS should continue to perform rigorous stress tests for the economy.

The Government forecasts the economy to contract by between 4 and 6 per cent this year. Second-quarter GDP grew 20.7 per cent from the first, in strong signs that the economy is rebounding.

The IMF predicts global economic activity to pick up modestly next year and Singapore's GDP to grow by a conservative 2.5 per cent.

Over the medium term, trend growth is likely to be weaker than before the crisis, due to tighter credit, and as trade and production patterns shift to new markets.

Under the IMF's Article IV, members are obligated to direct their economic and financial policies to creating orderly economic growth and to avoid manipulating exchange rates to gain unfairly over other countries.

S'PORE'S REPORT CARD

• Monetary policy: Appropriate and should remain for some time given inflation is not a concern. Should shift to gradual appreciation of exchange rate to protect against inflation once recovery is secure.
• Fiscal policy: Timely, appropriately large and diversified. Should avoid early removal of stimulus in next Budget as that may undermine confidence.
• Financial sector: Entered crisis from position of strength and has coped well so far. Asset quality will worsen as recession goes on. Deeper regional trade and financial integration post-crisis to boost demand for financial services.

This article was first published in The Straits Times.