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p. 21 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia Cambodia Indonesia Lao People's Democratic Republic Malaysia Myanmar Philippines Singapore Thailand Viet Nam South Asia Central Asian Republics The Pacific III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia : Southeast Asia

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Singapore

The economy contracted in 2001 amid a difficult external environment, despite fiscal stimulus measures and a move to a neutral exchange rate policy. Given Singapore’s high dependence on external demand, trends in the global economy are a key determinant of domestic economic activity.

Macronomic Assessment

The deterioration of economic conditions worldwide and a severe downturn in global electronics demand exerted a strong drag on the Singapore economy in 2001. The slowdown was broad based, reflecting a sharp drop in international trade and a weakening of consumer and business sentiment. Electronics exports fell steeply, and GDP declined by 2% during 2001, down from growth of 10.3% in 2000. The pace of the fallout, nevertheless, showed signs of moderation in the last quarter as reflected in a revival of manufacturing, particularly electronics. After contracting for the first three quarters, GDP posted 4.3% quarter-on-quarter growth in the fourth quarter of the year.

The manufacturing sector bore the brunt of the slowdown, contracting by 11.5% in 2001, compared with 15.3% growth in the previous year (Figure 2.11). The contraction was mainly due to a double-digit decline in electronics, pulled down by a plunge in output of semiconductors, telecommunications equipment, and computer peripherals. This also reflected a drop in the segments supporting electronics production, particularly fabricated metals and machinery, as well as printing and publishing. With a substantial drop in private construction activity and cutbacks in public sector residential projects, the construction sector further declined by 2.1% in 2001, following a 1.7% fall a year earlier. The services sector recorded slower expansion, given reduced international trade flows. Growth in transport and communications moderated to 2.7% in 2001 from 8.5% in the previous year, on account of falls in tourist arrivals and the volume of air and sea cargo handled. The retail and wholesale sector fell by 2.8% compared with 15.2% growth in 2000, dragged down by weak consumer sentiment and a deteriorated economic situation. The financial services sector decelerated to 2.2% growth in 2001 from 4.6% in 2000, as a result of weak equity markets and reduced regional demand for insurance and investment advice.

Overall domestic demand fell by 8.7%, compared with 11.8% expansion in 2000. Rising uncertainty over employment and wage cuts undermined consumer confidence and helped lower the rise in household consumption to 0.5% from 9.9% in 2000. In spite of a substantial growth in government spending on civil engineering works and nonresidential construction, gross fixed capital formation posted a 4.6% decrease, having increased by 6.3% in 2000. This was due mainly to a double-digit drop in private investment in machinery and equipment, as firms, faced with slackening external demand, cut back on capital expenditure and suspended investment plans. Reflecting the adjustment in production by manufacturers, inventories dropped at a rate of 6.7% in 2001, down from 2.4% growth in the previous year.

The sharp downturn in the global ICT industry severely affected Singapore’s trade performance. Total exports, which grew by a hefty 20.4% in 2000, shrank by 11.9% in 2001. Non-oil exports, the key segment that accounts for 44% of exports, contracted by 14.5% in 2001, reversing the double-digit growth of the preceding year. The contraction was caused mainly by the collapse of electronics-related exports and by a significant drop in sales of petrochemical products and machinery inputs as a result of weak regional growth. Exports of oil products declined by 5%, as world oil prices fell in the final months of the year. In tandem with lackluster domestic demand and sluggish manufacturing activity, total imports contracted by 14% in 2001, after a surge of 22.2% in the previous year. The surplus of trade in goods rose to $12.9 billion in 2001 from $11.6 billion in 2000, accompanied by an increased surplus of trade in services to $5.7 billion from $5.1 billion. The current account surplus widened to $17.9 billion in 2001, equivalent to 20.9% of GDP.

The labor market eased considerably, reflecting the economic downturn and a consolidation in the banking sector following the liberalization of financial markets. The seasonally adjusted unemployment rate rose broadly across sectors, from 2.9% in December 2000 to a 15-year high of 5.3% in December 2001. Demand for labor worsened markedly, with manufacturing and construction shedding 33,200 workers in 2001 and employment creation in services falling to 36,800 from 80,500 in the previous year. Nominal wages growth moderated to 2.3% in 2001, down from 8.9% in 2000.

Consumer price inflation trended downward to 1% in December 2001 from 1.3% a year earlier. The decline reflected mainly the deflationary effects of intensified deregulation and consolidation of the domestic services sector in banking, telecommunications, and energy, as well as keen competition in retail markets and a sustained drop in the prices of oil-related items.

In the financial markets, the Singapore dollar depreciated by 6.7% against the US dollar during 2001, and weakened marginally against the Thai baht and Korean won. Domestic interest rates softened over the year, in light of monetary easing in the major economies and low inflationary pressure. While growth of commerce and manufacturing loans slackened in line with the deterioration of the overall business outlook, overall commercial bank lending increased by 3.3% in 2001, supported by growth in loans to the transport and communications sector. The Straits Times Index lost over a third of its value in the year to late September 2001, weighed down by a protracted downturn in technology, media, and telecommunications stocks, and by substantial selling after the September 11th attacks in the US. The Index made up some ground in December, in light of better than expected month-on-month industrial production figures during the last quarter of the year, and ended 2001 at 1,624, or 14% below its level at the start of the year.

Policy Developments

With worsening economic conditions both worldwide and domestically, the Government enacted a series of off-budget measures to support the economy and help households and local companies over the severe slowdown. The first off-budget package, unveiled in July 2001, amounted to S$2.2 billion. It included measures to accelerate expenditures on economic and social infrastructure projects, and to cut business costs through property tax and rental rebates. The package was followed by S$11.3 billion-worth of stimulus measures in October, involving a range of corporate and personal income tax rebates; cuts in utilities, education, and hospital costs; the distribution of “New Singapore Shares” to citizens (providing a guaranteed investment return and a bonus tied to the economy’s GDP growth); further assistance to SMEs; and expansion of the social safety net program.

Taken together, the two packages added up to 8.4% of GDP. Given the severe external slowdown weighing heavily on the domestic economy, the measures helped market demand, but could not reverse the domestic downturn and its effects.

In view of low inflation and declining exports, the Monetary Authority of Singapore adjusted its monetary policy in July 2001. It moved from a tightening stance that sought to achieve a gradual and modest appreciation of the Singapore dollar, to a neutral stance that targeted a constant trade-weighted nominal effective exchange rate. With the intensified uncertainties in the global economy after September 11th, its target band was widened in October to permit greater flexibility in managing the exchange rate. The trade-weighted nominal effective exchange rate weakened in the fourth quarter.

The Government continued restructuring and revitalizing the economy to retain its competitiveness globally. Key economic sectors, particularly financial services, telecommunications, energy, and the media were liberalized to enhance efficiency and competitiveness. In particular, as part of the comprehensive reform of domestic banking announced in 1998, the retail and wholesale banking markets were further liberalized in 2001, to allow foreign banks to engage in broader business in these markets. Reforms of the regulatory and supervisory environment to enhance the safety and soundness of the financial system were also implemented in 2001, and included setting guidelines on the issuance of new capital instruments for Singapore banks, and revising the framework for valuation and capital adequacy requirements for insurance companies, licensed securities dealers, and futures brokers.

Singapore continued to build up the capabilities of SMEs and to invest selectively in priority areas, such as ICT infrastructure, and research on biotechnology and life sciences. The Government also emphasized assistance to the workforce to upgrade skills and knowledge. These measures were intended to reduce the economy’s vulnerability to external shocks related to electronics exports and to continue its transformation from a manufacturing to a knowledge- and skills-intensive economy, as well as to a regional service hub for health care, education, finance, logistics, media, information, and communications. Linked to this approach, in 2001 the Government established an Economic Review Committee to conduct a thorough analysis of Singapore’s areas of comparative advantage and to work out a comprehensive development package.

The corporate landscape is characterized by high-profile multinational enterprises and government-linked companies. For years, companies in the latter group have been granted certain privileges and some monopoly power, but returns were poor. In the future, cultivating an entrepreneurial and less risk-averse business culture will be necessary for the development of high-value, knowledge-driven industries. To assist local enterprises overcome shortages of skilled workers, research and development capacity, and capital, the Government will need to take a less interventionist approach to industrial management and further reduce its participation in private firms.

Outlook for 2002–2003

The substantial amount of government infrastructure expenditure in the off-budget packages is expected to provide some support to the economy. In addition, the tax rebates and transfers, such as the New Singapore Share scheme, are expected to cushion the slowdown in private consumption through relief measures to liquidity-constrained households. Nevertheless, with exports accounting for 143% of GDP in 2001, the revival of the economy depends on the upturn in the global electronics cycle and on the economies of the US and other key trading partners. Inventory destocking is at an advanced stage, which, together with improved microchip sales and new electronics orders in the US, points to some bottoming out of the global electronics cycle. This will, in turn, buttress Singapore’s electronics manufacturing and exports. Growth in trade-related transport services should also improve, in line with an expected moderate revival in regional trade.

On expectations of a modest recovery in external electronics demand during the second half of 2002, GDP is forecast to return to growth and average 3.7% over the whole year, supported by a gradual uptake in exports. However, with uncertain economic growth prospects and a weak employment market, private consumption is expected to remain depressed in the first two quarters of 2002, and then to rise moderately when the improvement in manufacturing production begins to feed through into employment. Corporate fixed investment is likely to turn around only toward the end of 2002, as business sentiment strengthens. With the Government’s scheduled infrastructure and housing spending more than counterbalanced by a moderation in private sector investment, gross fixed investment is likely to decline throughout the year.

Under the assumption of an improved external environment and increased import demand, the trade surplus will narrow, resulting in a slight decline in the current account surplus in 2002. Reflecting the weak outlook for employment, partly as a result of the restructuring process in the financial services sector, the unemployment rate is forecast to edge up in the second quarter of 2002, before declining to 3.4% toward the end of the year. Prices, which normally lag behind economic expansion, will be subdued in 2002, due to low regional inflation, slow domestic wages growth, and the Government’s cost-cutting measures.

The economy is forecast to strengthen by 6.5% in 2003. Anticipated buoyant external demand will reduce excess industrial capacity and improve investor sentiment toward the domestic ICT industry, while an expected recovery in asset values and wages growth will support private consumption.

Inflation is expected to creep up to 1.4% in 2003, based on a strengthening economy alongside a decline in unemployment. The trade surplus is projected to fall further in 2003. As a result of the import-dependent nature of exports and higher demand for capital goods, the rise in imports will likely outpace the increase in exports, in light of stronger trade flows.

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