External demand for Singapore’s goods and services has plummeted. Expecting a more difficult year, the GDP growth for 2008 was initially forecast to grow at 4-6 per cent (as compared to actual growth of 7.7 per cent in 2007). Growth was on target in the first half year, with 4.5 per cent, but export demand plummeted   in subsequent months. Singapore succumbed to negative growth in July, the first country in Southeast Asia to do so. The year is expected to end with a growth rate of about 2.2 per cent, the slowest since 2001, and to turn negative in 2009. In recent months, retrenchments have been rising, notwithstanding exhortations to employers by government and unions to cut salaries and wages first rather than to retrench.

During the high inflation, the monetary authorities allowed the Singapore dollar to appreciate more rapidly against the US dollar. With inflation abating and worsening economic growth, a steady exchange rate is being pursued.  On the fiscal front, Singapore enjoyed a huge budget surplus in the fiscal year 2007. Singapore is fortunate in that it has accumulated sizeable reserves in its boom years to buttress the economy in its lean years.  In recent months, the government has embarked on massive additional spending on households and on infrastructure projects. The government also pledged to spend S$2.3 billion (US$1.5 billion) to help firms get credit.

Two other major developments in 2008 are Singapore’s increased outward investments, particularly by its sovereign wealth funds (SWFs), and the active pursuit of free trade agreements (FTAs).  Globally, SWFs have become very large, very visible and very controversial because of their lack of transparency in respect of the size of their holdings and investment strategies, causing concern in some countries that investments may be undertaken for geopolitical motives. Singapore’s SWFs (Government Investment Corporation and Temasek) are profit-motivated, but they are making media headlines for their overseas acquisitions in OECD countries as well as in Asia. On the FTA front, Singapore has concluded and implemented several bilateral FTAs as well as those with ASEAN and ASEAN+1 countries. In view of Singapore’s inability to influence the conclusion of Doha negotiations, seeking better market access bilaterally and regionally appears to be strategic. Reflective of its free trade position in the WTO, Singapore is prepared to open up its markets for goods, services and investments almost without reservation and hence negotiations have usually been concluded much faster than those by other countries.

Going forward into 2009, there is uncertainty about how deep the recession will be, depending on how the global and regional environments pan out. However, there is no pressure towards protectionism.  Many policies and measures have been put in place to stimulate the economy and minimise the impact of the crisis on vulnerable households and businesses.  More measures are expected in the next government budget, to be announced in January 2009. Three measures undertaken to date are worth noting.  First, a government-subsidised and labour-union supported training and retraining programme for the unemployed and currently employed to prepare them for the new economy and skill requirements that will emerge after the recession. Second, the bringing forward of several infrastructure projects shelved during the high inflation period as well new infrastructure projects targeted at improving Singapore’s economic competitiveness and an environmentally-friendly lifestyle.  Third, as growing international and regional competition has eroded Singapore’s competitive advantage in many sectors, identifying new areas of dynamic comparative advantage, including in education and healthcare, and providing urban solutions for clean energy, water and environment have been given priority.

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Dr Chia Siow Yue is currently Senior Research Fellow at the Singapore Institute of International Affairs. She was formerly Professor of Economics at the National University of Singapore and Director and CEO of the Institute of Southeast Asian Studies, Director of the Singapore APEC Study Centre, and founding Regional Coordinator of the East Asian Development Network (under the Global Development Network).

This is part of the special feature: Reflections on developments in Asia in 2008 and the year ahead