Canary in the Coalmine: Singapore's 2009 Budget

The following is excerpted from a recent economic briefing note from Roman Scott, Economic Spokesman, British Chamber of Commerce Singapore:

The latest data on the Singapore economy is, in a word, dreadful. The closely watched figures for NODX (non-oil domestic exports) for December 2008 registered a fall of over 20%, its third monthly contraction in a row, and on a quarterly basis a decline of over 13%. Given our view that Singapore is the world's 'canary in the coalmine', trade and exports in the rest of the world will be following the same pattern very soon. Indeed, the latest export performance data from the G3 economies and from other leading exporters appear to confirm this. The worse readings are coming out of those countries that are heavily tied to the global electronics cycle such as Korea and Taiwan, a club that Singapore unfortunately remains a member of despite recent efforts to diversify its economy into greener pastures.

Just as Singapore has reaped the benefits of global trade during a decade of strong growth, it must now suffer when trade collapses. Consumers the world over have to rebuild their balance sheets, and have hunkered down onto their home turfs as they get back to the bare necessities of life, which means a lot less foreign stuff from food to investments. The businesses that serve them are therefore suffering too. Consumption driven economies consuming local produce have never looked so good. And that is not Singapore's strong point.

As expected, Singapore's home grown consumption has already taken the hit. Even services are feeling the pain, for the first time in as long as I can remember looking at Singapore data. The electronics sector, never my favourite industry, has gone into freefall, whilst the perennial volatility of the pharmaceuticals sector appears to be settling into consistent gloom. The only light still on is construction, and no economy, however small, can exist on construction alone. Our SME members tell us that they can't get credit, and our lads in the shipping industry are seeking solace in the bar as we look out across the waters of the east coast at rows of static and very empty ships-the pride of Singapore's shipping fleet, sitting with nothing to do. The only things moving this weekend were the 70 foot Volvo Ocean Race yachts, struggling to avoid hitting immovable 700 foot tankers on the start of their next round-the-world race leg to China. Little solace they will find there, as China's export machine also discovers what it is like to run into a concrete wall after a decade of growth.

On this basis, expect the next two quarters of this year at the very least to be the worst on record to date for the Republic (worse even than the Asian financial crisis of 1998), and the year as a whole to be a write-off. Singapore is a call option on global trade. In this context, the Chamber's previous extremely negative outlook on the Singapore economy (BCOC Economic Briefing November 2008 'The Perfect Storm') is unfortunately no longer a debate, but reality. And for followers of Asian decoupling theory, may they rest in peace (although economic theories never die peacefully, and doubtless decoupling will be back in a few years time). A contraction in GDP of less than 5% will be a good showing for Singapore this year. Companies will eventually start cutting jobs, especially in the vulnerable manufacturing sector, with the knock-on effects on consumer confidence and spend.

The only question now for Singapore is how long it will stay this bad-merely a horrible 2009, onwards into 2010, or at an extreme, beyond even that? This is not just for Singapore but for all of export dependent Asia, including China. Yes, the global capitalist empire is striking back and unleashing the largest force of simultaneous fiscal stimulation and monetary easing the world economy has ever experienced and Singapore along with the rest of Asia are fully committed. But as we all know, this force will take a long time to have any effect, although I do believe eventual victory is certain.

From a Singapore budget viewpoint, no one is going to argue that at a minimum there will be no relief from bad news for the rest of this year. Some form of aggressive support and relief for businesses and consumers in the budget is required, and I believe almost guaranteed. The only question is what, and how?

The hot spots for British firms, and the Chamber economist's recommendations, include the following:

1. GST: As a direct pay as you spend tax, GST has a drag effect on consumption. This effect tends to be small when times are good and consumers/businesses inclined to spend freely, but disproportionately increases its drag effect as times get worse and the psychology of spending shifts to careful examination of all costs before spending. As an economically progressive chamber, we support the long term Singapore government policy of shifting taxation from the blunt instrument of income tax to the targeted policy of consumption taxes. But in times like this when it is difficult to get anyone to open their wallets for anything, some relief is called for. A temporary relief or 'holiday', rather than an outright cut in GST, is one option. Unlike giveaways, which tend to be saved not spent, GST relief has a major advantage that it encourages consumption, as you only benefit if you buy something. It is also progressive unlike giveaways-more spend means more tax relief. Our retailer members, who happen to include the President of the Chamber, will I am sure be happy with any offering in this domain.

2. Personal income tax: The policy for Singapore to continue to seek to maintain top grade tax competitiveness in the world, when competition for top talent will only get stiffer in a downturn, should remain a core tax strategy. Our previous call for the top marginal income tax rate to be lowered to 18% to match the corporate tax rate still holds. There has never been a better time.

3. SMEs: A surprisingly large number of British chamber members are SMEs, which mirrors Singapore's own large population of SMEs and their enormous dependence on the smaller business sector. Despite all the rhetoric from the banks, the fact is that the flow of essential credit on reasonable terms has shrunk dramatically, the normal pattern in a banking crisis. The SME segment suffers the most from potential liquidity and cash-flow difficulties, and otherwise very sound companies can go bust without credit lines. The Government has already taken steps to raise their guarantees to the banks for SME credit lines, a positive step. This should be extended to as much as 95-100% for qualified cases or specific sectors, and /or other SME supporting measures be considered that increase the flow of credit at non penal terms.

As ever, some form of extended support for low income families will be required and doubtless provided by the Government. Finally, if all this sounds too depressing, a reminder of another point I made in the November briefing on 'the canary'- it may be the first to drop when the air is bad but it will be the first to rise again when the world recovers. Like those VOR yachts, the Singapore economy can turn on a dime. It will still be one of the best places to be for stable growth in three years time and beyond. And the same goes for the Singapore dollar.

Comments

[User 340909:]

I just went to a local shopping center (Vivo City) at 4 this afternoon and couldn't find a parking space! Restaurants are full, Louis Vuitton and Gucci shops are bursting with people; Orchard Road (the main shopping district) is as crowded as ever. I have been living here for 11 years and found the (visible) downturn during the Asian crisis in 1997/98 much more severe.

I am running a SGD 160 mil sales organisation in Asia Pacific, headquartered in Singapore, and I have surely seen better times; yet I doubt that all this whining, complaining and the usual calls along the lines of "what is the government going to do about it" are justified. Perhaps a self-fulfilling prophecy?

Jan 20 12:34 PM

[Steven Hansen:]

i think it is a little to early to speculate on singapore. it has a very pro-active government, and they have been raising the warning of bad times ahead. singapore is always a little 1984 in the way it handles crises.

singapore is a major transhipment point for asia. container count is down 30%. singapore is THE ship repair hub for asia - because of falling demand in the oil fields, this area is down significantly.

but singapore, and its neighbor malaysia baseload their labor with foreign workers. when things get tough, the bangladeshis and indonesians are sent home.

yes, profits may go down - but they will not suffer like other countries.

Jan 20 06:47 PM

[hsub:]

As foreigners you should not try to comment on what you do not understand. For user 340909, do you know how many of the shoppers were Singaporeans. Everytime cities like Singapore will attract more and more ignorant people who think they know it all and compare past achievement and trials with present ones. Eventually some of them end up heading organisations. Look at New York and London and I rest my case.

Jan 20 08:53 PM

[auto44:]

Sometimes foreigners see things with clearer eyes than locals. Being a foreigner shouldn't preclude a person from having an opinion or stating an observation even though it may not agree with the way you see things. A discussion by all parties can be helpful. Because a person expresses himself dosen't make him a know it all. Actually you sound more like a know it all than the person you are criticising. To judge a person as ignorant over one comment speaks more about you than about them. Do have a nice day.


On Jan 20 08:53 PM hsub wrote:

> As foreigners you should not try to comment on what you do not understand.
> For user 340909, do you know how many of the shoppers were Singaporeans.
> Everytime cities like Singapore will attract more and more ignorant
> people who think they know it all and compare past achievement and
> trials with present ones. Eventually some of them end up heading
> organisations. Look at New York and London and I rest my case.

Jan 21 09:56 AM

[Rhunzzz:]

Despite the appearance of normality, the fact remains that domestic consumer spending has never been sufficient to sustain Singapore's economy. Thus one can have shopping centres and restaurants still packed, and still see a severe retrenchment in economic activity.

Jan 21 01:53 PM