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Singapore has attracted sustained foreign capital inflows, helped by its leading position as a global business hub and international financial centre. The city-state has recorded gross capital inflows every year since 1995, except for 1998 during the Asian Financial Crisis (AFC), and 2009 during the Global Financial Crisis (GFC). Overall gross capital inflows into Singapore have risen steadily since the aftermath of the GFC to hit a high of almost SGD300bn in 2021, notwithstanding uncertainty during the COVID-19 pandemic.

We believe Singapore remains highly competitive to draw in greater foreign capital flows over the coming years, despite a tougher global environment. We expect forthcoming non-resident inflows to spill over positively to the real economy, while monetary policy stays effective in ensuring medium-term price stability. Our analysis in this report looks at dynamics of gross non-resident inflows from the balance of payments (BOP) data.   

FDI a major part of gross capital inflows

Rising foreign direct investments (FDI) increasingly dominate overall gross capital inflows into Singapore. Singapore’s gross FDI inflows rose to SGD235bn in 2023, 1.6 times higher than SGD144bn in 2019 before the COVID-19 pandemic, and 2.9 times above SGD80.6bn in 2013.

Singapore’s FDI inflows are persistent and permanent in nature. These contrast with ‘hot’ portfolio investment (PI) and other investment (OI) inflows that are highly volatile, and are easily reversible quarter-to-quarter, as seen from the movements and confirmed by our autocorrelation analysis. Despite the quarterly volatility, annual foreign PI and OI inflows have been mostly positive since 1995, and this trend is likely to remain intact. Given relatively smaller contribution by PI and OI inflows, FDI can hopefully provide sufficient cushion during turbulent market conditions.

Singapore is already a very competitive economy globally, and is also supported by political stability, which FDI investors will view favourably. Singapore ranked fourth out of 64 economies and top in Asia on the IMD World Competitiveness Ranking 2023. We also expect the government’s continued efforts to enhance Singapore’s value proposition to attract and anchor greater investments by foreign enterprises over the coming years, despite high business costs (see Singapore Budget 2024: Support for the long haul).

Attracting FDI inflows will likely have significant positive spillovers onto Singapore’s real economy, having been a key pillar of its economic development strategy. We note that as of 2023, foreign enterprises contributed sizeable nominal value add to Singapore’s economy of roughly 70% of the total, despite accounting for just about 20% of the total number of enterprises. Continued FDI inflows will also help Singapore to further expand its production and export capacities in both the goods and services sectors.

Effective monetary policy amid foreign inflows

Singapore’s deep and liquid financial markets allow non-resident inflows to be intermediated effectively. We see the Monetary Authority of Singapore (MAS)’s exchange rate-centred monetary policy staying effective in ensuring medium-term price stability that is conducive for sustainable economic growth.

Our analysis shows a positive correlation between Singapore’s gross capital inflows and the Singapore dollar nominal effective exchange rate (SGD NEER). This suggests that the SGD NEER appreciates based on the MAS’s policy parameters (slope of policy band, width of policy, and level at which policy band is centred) during foreign capital inflow periods, as it seeks to fulfil its medium-term price stability objective. Episodes of receding foreign capital inflows tend to coincide with global economic weakness, with the MAS having the tendency to loosen monetary policy. For e.g. during the COVID-19 pandemic, 2Q20 and 3Q20 non-resident capital inflows were negative, while the MAS adopted zero percent per annum appreciation of the SGD policy band in March 2020.

To keep the SGD NEER path within the chosen policy parameters amid capital inflows, the MAS intervenes in the FX market by buying US dollars in exchange for SGD. This results in MAS accumulating official foreign reserves (OFR). We see evidence of this from the positive correlation between OFR and gross capital inflows. Yet, there is little impact on money supply from the OFR accumulation, due to MAS’s sterilisation via its money market operations.

The MAS’s tighter monetary policy in recent years has been effective in containing inflation, with little impact from rising foreign capital inflows. Singapore’s core inflation pick-up from end-2021 was due to strong increases in imported food and global energy prices, coupled with strong domestic cost pass-through due to a tight labour market. The MAS’s early and aggressive monetary policy tightening between October 2021 and October 2022 has therefore helped to curb imported inflation. We expect the MAS’s existing restrictive policy stance and appreciating SGD policy to continue to nudge core inflation lower (see Singapore: Assessing core inflation). The SGD NEER’s setting is considered appropriately restrictive to lower core inflation down to 2% by early 2025, barring exogenous shocks.


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