Singapore weathers the crisis and prepares for a stronger year

Author: Siow Yue Chia, Singapore Institute of International Affairs

The story on Singapore in 2009 has been that of a vulnerable small and open economy overcoming the fallout from the global financial crisis with sound economic and financial fundamentals, good governance and a timely stimulus package.

The exposure of Singaporean financial institutions to failed and distressed institutions in the US and Europe was not significant and did not pose any systemic risks to Singapore’s economy, as local financial institutions were well capitalised and remained resilient. Nonetheless, the global crisis did lead the Monetary Authority of Singapore (MAS, Singapore’s central bank) to step up financial system surveillance and prudential oversight. In October 2008, MAS joined 13 other major central banks in a US Dollar swap facility with the US Federal Reserve. This was a precautionary measure for Singapore to reassure financial institutions that they would have access to US dollar liquidity. Thus far, MAS has not needed to draw on the swap facility, which will end next month.

In October, Singapore’s government announced a guarantee on the deposits of individuals and non-bank customers of banks licensed in Singapore, to ensure a level playing field for Singapore’s banks following a similar announcement by some governments in the region. This guarantee will remain in place until 31 December 2010.

Amidst the global financial turmoil, Singapore remains a leading financial centre for banking, foreign exchange and insurance, retaining a ‘AAA’ sovereign rating by Fitch (in April 2009).

The global crisis has more severely impacted on Singapore’s economy through the export and investment inflow channels. Non-oil domestic exports declined 7.9 per cent in 2008, particularly in the third and fourth quarters. The decline accelerated in the first quarter of 2009 (-25.6 per cent), and then moderated in the second quarter (-14.5 per cent) and third quarter (-7.8 per cent). This severe export decline has raised concerns over Singapore’s reliance on external demand.

Balance of payments data show FDI inflows declined by 32 per cent in 2008, after reaching a historic peak of S$48 billion in 2007. For the first three quarters of 2009, the decline moderated to 8.0 per cent over a comparable period in 2008. Large negative exports and FDI inflows contributed to a sharp decline in GDP growth to 1.1 per cent in 2008. The GDP declined a sharp 9.5 per cent in the first quarter of 2009, moderating to a 3.3 per cent decline in the second quarter or an average loss of 6.5 per cent for the first half of 2009.

Singapore’s Prime Minister noted in August 2009 that the economic crisis was worse than expected but less bad than feared. Indeed, in the third quarter, GDP recovered and actually grew by 0.6 per cent, with the forecasted decline for 2009 GDP revised to -2.5 per cent. Massive retrenchments were anticipated, which could undermine political stability and social cohesion, but in reality unemployment has not soared, partly due to mitigating measures adopted.

The dismal economic outlook from the fourth quarter of 2008 prompted Singapore’s government to move forward the Singapore Budget 2009 to January, with the announcement of a massive stimulus package to be implemented without delay. The $20.9 billion (US$15 billion) stimulus package represented 6 per cent of GDP and required the unprecedented step of drawing down of Singapore’s reserves. As Singapore has limited leverage in boosting domestic demand because of its high import leakage, the focus of the stimulus package was on saving jobs through the Jobs Credit scheme but also include skills upgrading, the lowering of corporate income tax to 17 per cent, loan assistance to small and medium enterprises, helping low income households through fee waivers and cash payouts, as well as increased public expenditures on infrastructure, health care and education.

The outlook for Singapore is of a faster economic recovery in 2010, although its pace will depend on the rate of economic recovery in the other advanced economies. Singapore’s Prime Minister announced in August 2009 that there was no need for ‘new prescription’ on top of the government’s $20.5 billion stimulus package, with the ultimate decision to modify but not yet completely remove it for 2010. Indeed, the Jobs Credit scheme will be extended to June 2010. As the stimulus package is funded from past budget surpluses and reserves, rising government indebtedness is not an issue. But in a post-crisis world, Singapore has to accelerate economic restructuring, improve productivity and move towards Porter’s ‘innovation phase’ economy if it is to remain internationally and regionally competitive. Emerging competitiveness will come from the biomedical sector, water and green technologies, and urban and city planning expertise, while emerging markets include China, India, ASEAN and the Middle East.

This is part of the special feature: 2009 in review and the year ahead.

Dr. Chia Siow Yue is Senior Research Fellow at the Singapore Institute of International Affairs