SINGAPORE READIES BUDGET TO FACE ECONOMIC SLOWDOWN

UNCLAS SECTION 01 OF 03 SINGAPORE 000043 STATE FOR EEB/IFD/OMA AND EEB/EPPD STATE PASS USTR NEW DELHI FOR EHRENDREICH SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN SN SUBJECT: SINGAPORE READIES BUDGET TO FACE ECONOMIC SLOWDOWN REF: A) 08 STATE 134459; B) 08 SINGAPORE 1325; C) 08 SINGAPORE 1110 ¶1. (SBU) Summary: Singapore has brought forward its budget process and will unveil on January 22 what are expected to be new expansionary measures to boost the economy and provide support for workers and businesses. Singapore's economy is heavily dependent on exports and has been hit hard by the credit crisis and the resulting slowdown in global demand. Local analysts are predicting that Singapore will continue to suffer substantial negative growth through the first half of the year, putting the economy into its worst recession in the country's history. Worried about a rising unemployment rate, the GOS has already expanded programs to encourage businesses to keep workers on the payroll and is backing loans for small and medium-sized businesses. The new budget will likely bring further credit guarantees, a cut in corporate tax rates and new public construction projects. Households may see tax cuts or rebates and temporary relief for laid off workers. End Summary. ¶2. (SBU) Singapore is on the verge of what may be its worst economic contraction since independence in 1965, in terms of both depth and length. On January 2, the Ministry of Trade and Industry (MTI) released advance GDP estimates that showed a worse than expected 2.6 percent contraction for the fourth quarter of 2008, the third quarter in a row of negative growth. MTI also lowered its forecast for 2009 to between -2.0% and 1.0%. Local analysts went further, with many lowering forecasts to less than negative 2.5% growth for the year. If those predictions are correct, the recession will be the worst in Singapore's history, surpassing the 2.4% contraction in 2001 following the bust in tech stocks. That recession lasted four quarters, but analysts say the current economic slump could easily show at least five quarters of consecutive negative growth. ¶3. (SBU) Singapore's export-led economy is particularly vulnerable to the global economic slowdown. Overall trade is calculated to be over 350 percent of GDP. Although Singapore has taken pains to diversify its industries, the overall drop in external demand has hit all sectors. Manufacturing has led the slowdown, but construction and services have faltered recently as well, with weakness in financial, transport and storage, and wholesale and retail trade. Exports declined for the past seven months through November, particularly in electronics (reftel B). Tourism was off toward the end of 2008 and Singapore's tourism industry missed its yearly target for the number of tourists and tourist expenditures. Unemployment Tops GOS Concerns -------------- ¶4. (SBU) The GOS's chief concern is keeping workers in jobs, and it has embarked on a campaign to encourage companies to manage the economic downturn by cutting non-labor costs first and laying off workers only as a last resort. The government is concerned not only about the impact on downsized workers, but also the negative socio-economic effects higher unemployment may bring and the economic costs of rehiring and training workers when the recession eventually ends. The resident unemployment rate (not including foreign workers) stood at 3.3 percent in June 2008, but analysts expect the rate to climb beyond five percent in 2009 and remain there for at least six months. In past economic downturns, foreign workers who provide much of the manufacturing and construction labor have suffered the brunt of layoffs, but the current recession is broad-based and has spread to the services sector, where most Singaporeans are employed. ¶5. (SBU) GOS officials have pleaded with companies to consider alternatives to layoffs, including wage cuts, sending workers for additional training, shorter work weeks, and other flexible work arrangements. Although unemployment is low in comparison to other developed countries, Singapore's social safety net is relatively weak, and the government sees continued employment, even at a reduced salary, as the best hedge against economic downturn. The National Wage Council (NWC) is expected to recommend this month that company contributions to worker retirement funds be reduced, and may recommend wage cuts as well. The Council's recommendations are not binding, but many businesses and unions base wage decisions on the NWC's guidelines. Bringing Up The Budget -------------- ¶6. (SBU) In recognition of the severity of the crisis, the GOS has brought forward the release of what is expected to be an SINGAPORE 00000043 002 OF 003 expansionary budget for 2009 from February to January 22. In his end of year speech, PM Lee said the budget will contain measures to help businesses with rental and wage costs to continue to employ workers and to assist with financing support. Citigroup analysts speculated in a recent report that specific budget items will include personal and corporate tax cuts or rebates, additional risk-sharing by the government for loans to small- and medium-sized enterprises (SME),and the revival of previously deferred public sector construction projects. The budget measures are to be introduced in the first quarter of the year rather than the second quarter as in previous years. ¶7. (SBU) Citigroup estimated the budget for this year will be about S$41 billion (USD27.7 billion),ten percent higher than last year, and about S$4 billion higher than projected revenues. Despite the revenue shortfall, the GOS has sufficient funds to pursue an expansionary budget. The government ran a S$7.4 billion surplus in FY 2007 and still has funds remaining from that year and from many previous fiscal surpluses. In addition, a new framework allowing the government to draw from investment returns on its fiscal reserves could potentially provide an additional pot of S$3-5 billion of funds for the year. As it has done in previous recessions, the government may deploy additional fiscal stimulus in an off-budget package later in the year as well. Limited Stimulus -------------- ¶8. (SBU) Many of the new budget measures will likely do little to stimulate the economy, although they may stem the tide of layoffs, according to Dr. CHOY Keen Meng, Professor of Economics at Nanyang Technological University. Dr. Choy told Econoff that Singapore faced a fall off in external and domestic demand, and the new budget should emphasize measures to stimulate domestic demand. Policies to cut business costs will help keep businesses afloat but will not affect demand, and construction projects would do little in that regard as well since Singapore has substantial "leakage": most projects use foreign labor and imported materials, and there is relatively little impact on the domestic economy. Dr. Choy advocated tax rebates for the relatively neglected middle class for the next three years, to encourage those who are most likely to boost their consumption. Some Measures Already Deployed -------------- ¶9. (SBU) In a November preview of budget measures to come, the GOS announced it would add an additional S$2.3 billion in funds through existing programs to support business financing. SPRING Singapore, an enterprise development agency for SMEs, offers direct micro loans and shares the risk on loans for SMEs. Under the new scheme, government risk-sharing on loan defaults was raised from 50 to 80 percent and was extended from SMEs to all businesses. Firms with less than ten employees are eligible for direct micro loans, while those with more than ten employees are eligible for loans up to S$500,000 under a bridging loan program. The government also doubled the matching funds it provides to start-up businesses. Despite the increased government risk-sharing, banks have still been reluctant to lend, and reportedly only seven percent of SMEs have benefited from the financing schemes. ¶10. (SBU) The GOS also introduced in December a S$600 million package to retrain workers in a bid to encourage companies to send workers for additional training rather than laying off employees. Under the Skills Program for Upgrading and Resilience (Spur) program, workers and companies pay only ten percent of fees for approved training courses, including in-house training programs. Companies can also claim up to 90 percent of a worker's salary from the government while in training. Low-skilled workers receive a low hourly wage while in training, essentially a form of unemployment insurance. Skilled professionals receive training support for professional conversion courses to switch industries. Looser Monetary Policy? -------------- ¶11. (SBU) There has been speculation that the Monetary Authority of Singapore (MAS),Singapore's central bank, will move up its regularly scheduled April review of its monetary stance in light of the rapidly declining economy. In October 2008 the MAS weakened its stance to zero appreciation of the Singapore dollar to improve the competitiveness of Singapore's exports (reftel C). However, it is unlikely to take further steps to weaken the currency so quickly. SINGAPORE 00000043 003 OF 003 NTU's Dr. Choy pointed out to Econoff that Singapore's exports are not suffering from price competitiveness problems but rather a drop in overall demand, and changes in monetary policy would have a marginal impact. HERBOLD