Morgan Stanley: Prudent Singapore Budget Sets Out Long-Term Goals

Singapore's 2008 budget is likely to provide a mild fiscal stimulus, according to Deyi Tan and Chetan Ahya, writing in Morgan Stanley's latest Global Economic Forum. The budget, announced last week, reiterated the government's long-term objectives: Diversifying economic growth drivers and staying competitive; improving the hardware and software of the economy; and improving retirement and healthcare adequacy. With a hefty increase in special transfers, the government expects to run a small fiscal deficit in FY2008.

Tan and Ahya argue that, though the budget is in line with an anti-cyclical policy, the Singapore government is 'not as much a proponent of Keynesian pump-priming as its ASEAN neighbours,' as it aims more to encourage private sector-led activities and to achieve long-term goals, and that they expect the fiscal stimulus of the 2008 budget to be mild.

Having said that, however, this does not undermine our view that there will be limited recoupling of the Singapore economy with the developed world. Indeed, in Who Has the Best Domestic Demand Dynamics in ASEAN? September 28, 2007, we already noted that while the wherewithal to engage in fiscal pump-priming is high, the government is unlikely to engage in strong fiscal stimulus measures, given its typically prudent approach. Our limited recoupling view continues to be predicated upon the broad-based construction capex boom in residential, commercial, retail and infrastructure amid the high capacity utilization rates as excesses from the 1996 bubble are purged. This will reduce the sensitivity of the capex cycle to the export cycle, to which it has traditionally been linked.