BMI's Executive Summary

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From Q108 we will be calculating the Commercial Banking Business Environment Rating (CBBER) for each of the countries surveyed by BMI. This will permit a more systematic and comprehensive comparison of the conditions within the banking industries of the various countries than was possible in the past. For each country, it will also facilitate a comparison of the conditions within the banking sector and conditions prevailing in other sectors.

Singapore's overall CBBER is 74.9. The equivalent figures for the USA and the eurozone are 84.8 and 81.4, respectively. Singapore's CBBER is higher than that of most other countries in the Asia Pacific region (with the exceptions of Australia, Hong Kong and Japan).

Within the CBBER, the most important aspect is the banking market element of the limits of potential returns. This element accounts for 42% of the overall CBBER. Singapore's rating for this element (66.9) is lower than the overall CBBER and also lower than the country element (73.2) of the limits of potential returns. Although reasonably small compared to the bigger players in the region, the total assets of Singapore's banking sector are growing strongly (and are projected to continue doing so). Client loans, however, are growing far less swiftly.

Preliminary data for the third quarter of 2007 suggests that Singapore's economy has once again exceeded expectations, with activity up 9.4% on the same quarter in 2006. This, combined with strong date for first half of 2007 has led BMI to increase its year-end forecast of 6.5%. The ability of the manufacturing sector to take advantage of supportive external demand conditions, and the city-state's booming construction industry, were the most significant factors in the results. However, continued moderation in global growth during our forecast period, and a restructuring of Singapore as a more service-oriented economy, will ensure that growth prospects remain limited, leading us to forecast a five-year GDP growth rate averaging 5.1%, which sits firmly within the government's upwardly revised 4.0-6.0% projection.

Rising inflation, a result of low unemployment rate and a booming property market, has led the Monetary Authority of Singapore to tighten its policy of ‘modest and gradual appreciation' towards the Singapore dollar. Figures for September 2007 show consumer price inflation rose by 2.7% year-on-year (y-o-y), rising from 0.3% at the start of the year. The upcoming GST hike and elevated oil prices will add to inflationary pressures. As a result, we expected inflation to average 1.7% in 2007, compared with 0.9% in 2006. To stall this accelerating trend the central bank may pursue an even stronger appreciation bias in H108.