Author: K. Kesavapany, ISEAS, Singapore
Singapore was the first East Asian casualty of last year’s Global Financial Crisis. Its growth rate plunged from 7.8 per cent in 2007 to 1.1 per cent in 2008. The trade ministry said Singapore’s economy would see a contraction between 2.5 and 2 per cent in 2009 before recovering in 2010.
The manufacturing sector was the worst hit due to fall in global demand for its non-oil exports. This reflects the city-state’s vulnerability to global financial and economic shocks. The labour market also suffered as gloomy earnings triggered layoffs in the manufacturing sector. In September 2009, the resident unemployment rate crept up to 5 per cent. While the damage to the banking sector was limited, the country suffered a huge loss of wealth as the stock market plummeted from a high of 3500 points in December 2007 to 1700 points in the last quarter of 2008. This depressed domestic demand and investment in assets.
Singapore’s policy makers responded with a series of measures aimed at insulating the population at large from the negative effects of the crisis. The Monetary Authority of Singapore (MAS) guaranteed bank deposits and flushed the money market with enough liquidity to restore market confidence. It established a US$30 billion swap line with the US Federal Reserve to abate any strain in US$ funding in the Asian dollar market. To facilitate credit for local companies and SMEs the Singapore government announced a S$2.3 billion loan facility and launched a risk-sharing initiative which took on a significant share of bank-lending risks. Moreover, the central bank shifted its currency policy to a ‘zero per cent appreciation’ stance. It also devalued the S$ to help electronics exports.
The change in the foreign exchange policy stance was accompanied by an unprecedented fiscal stimulus package. The government delivered a S$20.5 billion resilience package for the 2009 financial year and dipped into its reserves for the first time ever to earmark S$4.9 billion for two temporary measures to combat the effects of the financial crisis. The key objective of the package was to help Singaporeans keep their jobs, and thus increase overall confidence. The budget gave strategic industrial support in order to drive down business costs and avoid corporate failures. To reduce the negative effects of retrenchment the government persuaded businesses to make wage adjustments rather than quantity adjustments. Singapore’s corporate income tax is among the lowest in the world, and this has ensured the country’s cost competitiveness. An income tax rebate ensured household flexibility without locking down rates which would constrain further tax revenue potential.
Internally, the government is likely to spend heavily on big investment projects. The construction of two integrated resorts, the Marina Bay financial sector, and the new MRT line represent important support to the construction sector. The government will also continue with its fiscal stimulus package, although it may scale that down as the economy recovers. Financial services will be buoyed by a booming property market and better investor sentiment.
The Ministry of Trade and Industry (MTI) has projected that GDP will grow between 3-5 per cent as we go into 2010. Much of the growth is contingent on external factors. The demand for the country’s exports is expected to show gradual recovery, which in turn would bolster the manufacturing sector. Singapore’s strategic location in ASEAN and Asia will also help it to manage the current systemic external shock.
However, a high unemployment rate will weigh down on private consumption. Also, other risks remain: the hasty international withdrawal of stimulus measures, another collapse in the fragile US housing market, flu pandemics and a rally in asset prices could all slow down Singapore’s recovery from the crisis.
This is part of the special feature: 2009 in review and the year ahead.
Dr. K. Kesavapany is Director, Institute of Southeast Asian Studies, Singapore and Singapore’s Ambassador to Jordan.