No quick recovery for Singapore

Oxford Analytica

Government says economic decline will slow, but a full recovery is not expected for three years.

Preliminary estimates from the Ministry of Trade and Industry show that Singapore’s gross domestic product plummeted by 11.5% year-on-year in the first three months of 2009, the sharpest rate of contraction since records began. Although anticipating a moderate recovery by the end of the year, the government has found itself unable to do more than manage the decline and prepare public opinion for it.

Distant recovery

Senior Minister Lee Kuan Yew warned last week not to expect a full economic recovery for three years. However, he said the government was expecting the biggest decline to occur in the first quarter, indicating that there will be a gradual upswing through the rest of the year.

In the meantime, the Monetary Authority of Singapore (MAS) is mostly concerned with managing the downturn:

1. Monetary tightrope. With inflation likely to stand at only 2% this year, a reduction in bank lending rates, now averaging 3.5%, offers the only scope for slowing the decline in domestic demand. The MAS will try to cushion the economy by manipulating its unusual currency-based monetary framework, which relies on a secret market-weighted trading band for the Singapore dollar.

On Tuesday, the MAS announced it was easing monetary policy for only the second time since 2003 by re-centering the band, which effectively weakened the currency’s trading range by a probable 1%-3%. The currency was trading at the lower end of the existing band, which had been tightened in April 2008.

The depreciation, aimed at reducing speculative pressure on the currency, represents a considerable policy gamble, as short-term interest rates have mostly climbed due to an expectation that the Singapore dollar’s value would be adjusted. There is no evidence the currency is overvalued, or that a depreciation would offer any competitive benefit to exporters while external demand remains dormant.

2. Fiscal fillip. The government’s surplus offers the best hope of a demand stimulus. In January, it announced it would invest an unprecedented 43.6 billion Singapore dollars ($30 billion U.S.) through the budget for fiscal year 2009, which started on April 1, largely by drawing from the surplus to avoid market borrowing. It also cut the corporate income tax rate from 18% to 17% and provided personal income tax rebates of 20%.

The key element is a stimulus package of $20.5 billion that includes a Jobs Credit Scheme costing $4.5 billion and a Special Risk-Sharing Initiative (SRSI). The Jobs Credit Scheme aims to lower the risk of job losses by offering cash grants to employers to cover part of their wages bill, while the SRSI gives individual firms a buffer against the default risk associated with those loans.

Both measures offer benefits in strengthening the republic’s fairly basic social safety net, but their stimulus effects are likely to be muted by the low level of consumer confidence. Despite the available surplus, there may be reluctance to approve additional pump priming, as the operating fiscal balance is set to fall into a deficit equivalent to more than 10% of GDP this year, after last year returning a surplus estimated at 1.6% of GDP.

Prospects for a recovery are tied to a revival of demand in key external markets, which is unlikely to occur until well into the second half of the year. Government policies will help cushion the impact of the recession, especially on vulnerable labor sectors, but will have limited impact on the growth outlook.

Oxford Analytica is an independent strategic-consulting firm drawing on a network of more than 1,000 scholar experts at Oxford and other leading universities and research institutions around the world.

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