Views from the World
How the Global Financial Crisis has Affected Singapore
Dennis Chan, Deputy Money Editor, The Straits Times
(Keizai Koho, May 2009 issue)

A recent survey by Forbes showed that the combined net worth of the wealthiest people in the world fell by about a third last year.

Likewise, Singapore?fs non-oil domestic exports in January plunged by a third compared to the same period last year.

This ?grule of thirds?h is equally applicable to businesses and enterprises. Speak to any business owners and entrepreneurs today and one is likely to hear him lamenting that revenue has fallen by 30-40% compared to last year.

The rule of thirds, as any avid photographers can attest, is simply this: When the subject of a composition is framed at one third of the screen instead of simply centering it, the picture will have more energy, tension and interest. This rule sums up aptly the global upheaval and its dreadful impact on Singapore.

January?fs dismal numbers prompted Prime Minister Lee Hsien Loong to suggest that the Singapore economy could shrink by as much as 8%, if weak exports persist. The maths is straightforward. Exports account for a quarter of the country?fs gross domestic product. Hence, 1/3 x 1/4 = 1/12, which works out to 8%.

This scenario is, perhaps, too gloomy. Firstly, the other legs of the economy, while not exactly thriving, are not as badly hit. Construction, which accounts for about 15% of the economy, is expected to continue to grow. The pump priming measures announced by the Government during the annual Budget in January will give significant boost to this industry. The services sector, which makes up 3/5 of the economy, is likewise a beneficiary of the expansionary Budget.

Non-oil exports in February fell by slightly less than a quarter from a year ago period. While the weak numbers suggest the environment remains challenging, there is some glimmer of light at the end of the tunnel. Some economists believe January?fs exports may have hit the trough.

However, it is too early to tell if the worst is behind us.

Before proceeding further, it is pertinent to recap the state of the Singapore economy. As a very small country, Singapore is extremely sensitive to the vagaries of the external environment. In good times, its GDP will far outperform the global economy. In bad times, its vulnerability to a global slowdown is far more pronounced than other economies. As a result, the boom and bust cycle is short. Singapore is facing its fourth recession in the last 10 years.

The Asian crisis in 1998, the dotcom bust in 2001, the Sars threat in 2003 all exacted a heavy toll on the economy. But none were as widespread as the crisis today. In each of the last three crises, Singapore and Asian manufacturers were able to export their way out of trouble, thanks to the insatiable demand of the American consumers.

But following the bursting of the consumption bubble in the US, a new paradigm for recovery is needed. While every country has its own unique sets of problems, a global consensus is taking shape in the form of a coordinated, three-pronged front. The first front was the rapid easing of monetary policy. Since the collapse of investment bank Lehman Brothers in September last year, central bankers have slashed interest rates to decades low in an attempt to spur private investments and spendings. To boost money supply, they have pumped trillions of dollars into the banking system - the latest being a US$1.2 trillion injection by the US Federal Reserves to increase its purchases of mortgage-backed securities and debt in mortgage giants Fannie Mae and Freddie Mac. But easier monetary policy alone has been unsuccessful to unfreeze credit as fearful banks have stopped lending to one another and to customers to preserve capital in the wake of massive losses that originated from the subprime fiasco. The ensuing financial crisis forced governments worldwide to embark on a second thrust, through direct equity injection into troubled banks to keep them alive. Even in Asia where banks are in far better shape than their American and European counterparts, governments have had to issue blanket guarantees for bank deposits to avoid capital flight from jittery depositors seeking the safest possible haven for their savings.

Equity injection into banks by governments have had mixed success so far. On the one hand, US government backing for AIG, Citigroup, Freddie Mac, Fannie Mae, RBS and Barclays has had the desired effect of stabilising the financial sector. On the other hand, the injection of government money into financial institutions and the threat of nationalisation has either driven away private investors or deter them from participating in future fund raiser by these companies.

This brings us to the third and last of the three-pronged agenda to saving the economy - massive fiscal stimulus. This is the preferred tool of the US, the UK, China, Japan as well as many of the smaller Asian economies. However, the reaction from the major European countries, with the exception of the UK, toward fiscal stimulus has been disappointing.

In Singapore, the government has put together a S$20.5 billion resilience package that is designed to absorb some of the global fallout. But make no mistake, public spending is meant to ameliorate the recession. This alone cannot overcome it. The Singapore government is under no illusion that it can spend its way back to growth for three reasons: * Domestic consumption has never been a key plank of the country?fs GDP; * A heavy reliance on exports and imports. At 3.5 times, Singapore has the world?fs highest trade to GDP ratio. * Leakages. It has been estimated that for every dollar spent locally, 70 cents will leak out of the country, given the openness of the Singapore economy.

To get maximum bang for the buck, a targeted fiscal stimulus to help its people and companies is, therefore, necessary. This will take the form of an expansionary Budget of some significance, a record $20.5 billion spending plan that will result in a budget deficit of some S$8.7 billion. This is more than doubled the previous largest deficit ever incurred, in 2001. While unusual for Singapore, such a huge deficit is of no real consequence. Unlike some countries, the Singapore government does not need to borrow to fund the deficit.

Thanks to a strict adherence to fiscal prudence over the decades and careful management of surpluses, the government has managed to build up reserves estimated at S$300-S$450 billion. A portion of this year?fs budget deficit is funded by the reserves.

The Budget broadly addresses five issues.

1. Jobs for Singaporeans:
a. The single biggest item is a S$4.5 billion jobs credit scheme, in which the government will pay 12% of the first S$2,500 of the wages of citizens and permanent residents. This temporary wage subsidy is equivalent to a 9 percentage point cut in mandatory contributions by employers toward their workers?f pension fund. b. Some S$750 million will go to fund training and upgrading courses for workers of various skills and education levels. c. Another $150 million will go to low-wage workers in the form of a special payout for low-income earners to top up their incomes.

2. Loans for businesses:
The government has set aside S$5.8 billion in capital to help businesses secure loans in the current credit crunch. It includes a new bridging loan programme to help mid-sized companies manage their cash flow, and enhanced measures to help exporters secure trade financing. This is in addition to existing loan schemes for small and medium-sized enterprises.

3. Cost cuts for companies:
Corporate tax rate was cut by 1 percentage point to 17 per cent from Year of Assessment 2010. There were also a 40 per cent property tax rebate for commercial and industrial properties and a 30 per cent road tax rebate for goods vehicles, buses and taxis.

4. Help for families:
Consumption tax credits were doubled. Families in public housing will also benefit from more rebates on service and conservancy charges and rentals.

5. Help for individuals:
Individual taxpayers will get a 20 per cent personal income tax rebate, capped at S$2,000.

The measures are starting to have an impact, with a thawing of the credit freeze that has adversely affected many small and medium enterprises. Recent data shows that the number of companies getting government-backed loans rose to 729 in February, up by 77 per cent compared to the previous month. It also compares favourably with last year?fs monthly average of 250 loans.

The jobs credit scheme has helped companies to reduce their wage bills. Given the commitment shown by the government to preserve jobs, employers are exploring ways to cut costs. Firing of workers is regarded as acceptable only as a last resort.

But for companies that have seen their orders evaporated to virtually nothing, wage reduction alone cannot save them. Hence, layoffs are increasing, with job losses in the first quarter expected to top 10,000. In comparison, the number of workers who lost their jobs for the whole of last year totalled about 16,000, which, itself, is a five-year high.

There is serious thought that the unemployment rate, which climbed to 2.5 per cent in December, could even surpass the record 5.2 per cent set in 2003 when Sars hit, if the situation worsens.

There is no question that Singapore is facing a huge challenge to ride out this global recession. How it emerges from this crisis is story that can only be told another day.

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