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 SINGAPORE 00001002 002 OF 002 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