SINGAPORE PREPARES TO PHASE OUT STIMULUS MEASURES

UNCLAS SECTION 01 OF 02 SINGAPORE 001002

STATE PASS USTR

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV SN

SUBJECT: SINGAPORE PREPARES TO PHASE OUT STIMULUS MEASURES

REF: A) SINGAPORE 80; B) SINGAPORE 994


1. (U) Summary: Singapore is extending for an additional six
months a popular wage subsidy program widely credited with saving
thousands of jobs and businesses during the recession. The program
was part of an anticipated one-year set of stimulus measures laid
out in last January's budget. However, with still uncertain
prospects of economic recovery the government opted to slowly phase
out the program, and may keep expiring training and loan guarantee
programs in a more targeted form. Business and unions were grateful
for the programs' assistance during the crisis, but economists were
concerned Singapore's business competitiveness would lose its edge
as unproductive workers and unviable businesses stayed put. The
Prime Minister hinted in a speech that next year's budget will see
incentives for businesses to create new jobs in emerging industries
and boost productivity across the board. End Summary.


2. (U) Prime Minister Lee announced in an October 13 speech to the
National Trades Union Congress that the government would extend by
six months its popular Jobs Credit Scheme (JCS),a wage subsidy for
businesses designed to discourage layoffs. The program was part of
a S$20.5 billion (US$13 billion) stimulus package released in
January to boost the sagging economy and support workers and
businesses (Ref A). The Jobs Credit Scheme gave employers an
automatic wage subsidy at the end of each quarter equivalent to 12
percent of the first S$2500 (US$1775) of employees' monthly wages
for each Singaporean or permanent resident employee on the payroll.
The program will continue for the first six months of 2010, but with
reduced payouts. The subsidy will be reduced to six percent of
wages in March and three percent in June. The original S$4.5
billion budget for the scheme was financed from Singapore's
substantial fiscal reserves, but the extension's additional costs
will be taken from the general budget.

Stimulus "Has Done Its Work"
--------------


3. (SBU) In business surveys regarding the budget stimulus
programs, the JCS was consistently rated the most effective, helping
businesses with an immediate boost to cash flow. The most recent
tranche of payments at the end of September saw more than 100,000
businesses employing 1.4 million local workers receive S$890 million
(US$635 million). A Citigroup report estimated the JCS program
alone reduced overall labor costs by nearly seven percent.
Economists calculated the program saved at least 40,000 jobs in 2009
and helped some businesses avoid bankruptcy, easing the impact of
the recession. However, others criticized the program as wasteful,
noting that every employer received the subsidy regardless of
whether it was profitable or faced cash flow problems. For
businesses without a high labor component the subsidy made little
difference to the bottom line.


4. (SBU) Past weeks have seen debate in the press about whether to
withdraw the JCS and other stimulus programs. Business and unions
recognized the significant recovery in Singapore's economy in the
past two quarters (Ref B),but said they remained concerned about
uncertain economic prospects in coming months and the potential need
for additional layoffs. Singapore's exports still face weak
external demand, particularly in the electronics sector which is a
major employer. However, economists voiced concerns that extension
of the scheme would distort business decisions and erode
competitiveness by discouraging businesses from becoming more
productive. Loan insurance programs may have helped unviable
businesses stay afloat. In his speech PM Lee said that the JCS
program had "done its work" and given the strong recovery was no
longer needed. He also pointed out the long term impacts of keeping
workers under-employed and unproductive. However, the PM said he
decided to extend the program to avoid a sudden shock to company
balance sheets.

Training and Loan Guarantee Programs On The Hook
-------------- ---


5. (U) The government will also continue another stimulus program,
the Skills Program for Upgrading and Resilience (SPUR) that
subsidized up to 90 percent of the cost of training courses to
upgrade worker skills. The program enabled employers to manage
excess labor by sending workers into training for extended periods
rather than laying them off. In the first six months of the program
the Workforce Development Agency reported that over 120,000
employees from 1800 companies had registered for training courses.
The S$650 million program is budgeted to run through 2010, although
registrations for new trainees are dropping steadily as the economy
improves.


6. (SBU) The Special Risk-Sharing Initiative that guaranteed up to

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80 percent of the risk of loans will expire at the end of the year.
Through September the program guaranteed over 10,000 loans worth
S$4.7 billion, 92 percent of which went to small- and medium-sized
enterprises (SME) that had experienced difficulty obtaining new
loans as credit conditions tightened. A recent survey of SMEs found
that only 12 percent continued to have difficulty getting bank
loans. However, a local businessman told Econoff that banks were
still reticent to issue new loans, particularly to businesses in the
electronics sector, and he suspected that loans were going mostly to
businesses who would have obtained them anyway.

Getting Back to Business
--------------


7. (SBU) The stimulus programs being phased out will likely be
replaced by more targeted measures to boost productivity, which has
been declining in Singapore since 2004. PM Lee hinted in his speech
that the next budget due out in February will include incentives to
shift gears from job protection to job creation for the medium to
long term. The newly formed Economic Strategies Committee, a
public/private group tasked with devising a strategy to restructure
Singapore's post-recession economy, will be providing
recommendations in January on how to institutionalize the best parts
of the stimulus programs and provide incentives on boosting
productivity, Benjamin Cher, Deputy Director of the Ministry of
Finance's Economic Programs Office told Econoff.

SHIELDS