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p. 23 of 68 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 Asia The Pacific III. Competitiveness in Developing Asia Statistical Appendix

Asian Development Outlook 2003 : II. Economic Trends and Prospects in Developing Asia : Southeast Asia

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Singapore

The economic recovery in 2002 was slower than expected, mainly due to a persistent depression in private sector consumption and investment. In contrast, external demand, which experienced a turnaround from a sharp decline in 2001 to a modest strengthening in 2002, played a major role in reviving growth in manufacturing. Private consumption and investment are expected to gradually pick up in 2003-2004 thanks to an improvement in global economic conditions and supportive domestic policies.

Macronomic Assessment

After a sharp downturn in 2001, the economy recovered somewhat in 2002, though much less quickly than expected and expanding by only 2.2%. Growth was generally lower than in most other countries in East and Southeast Asia. The main factor was subdued domestic demand, particularly a decrease in fixed capital investment and private consumption. In contrast, external demand picked up in 2002 (Figure 2.11).

On the production side, manufacturing experienced high growth across a broad spectrum of industries, due to improved external demand. The subsector grew by 8.3% in 2002, with recoveries in electronics, rubber and plastic products, and instrumentation equipment. Electronics grew by 4.1%, after a decline of 21.3% in 2001, due to increased production of semiconductors and of data storage and office automation equipment. The growth was boosted by a modest recovery in the global electronics market. The personal computers and communications segments, however, saw lower output on the back of weak corporate ICT spending. Rubber and plastic products expanded by 9.6%, pushed by production of plastic precision components, industrial rubber parts, and pipes and tubes. Instrumentation equipment grew by 10.1%, bolstered by strong demand from the US and EU for medical instruments and measuring devices.

The construction subsector, which declined by 3.2% in 2001, fell by a further 10.8% in 2002. Both public and private construction activities remained weak. Nearly all segments in public investment declined, but the shrinkage in private construction was largely attributed to weak levels of commercial, industrial, and civil engineering works.

Finance, one of the economy's key industries, fell by 4.8% in 2002, compared with modest growth of 3.7% in 2001. The performance of various segments in the financial industry was mixed. While commercial banking, investment advisory services, and foreign exchange trading showed modest growth, this was outweighed by a sharp decline in insurance and stockbroking. In contrast, the wholesale and retail trade sector grew by 2.7%, a significant improvement from a decline of 3.3% in 2001. The rebound was aided by better performance in entrepôt trade, with a substantial increase in non-oil reexports.

In 2002, total domestic demand fell by 2.3%, led by a continued drop in gross fixed capital formation, increased inventory cutbacks due to less favorable business conditions, and persistent sluggishness in private consumption, which posted slower growth of 0.9%. The poor outcome occurred across a number of categories, including motor vehicles, recreational goods, and financial services. However, public consumption increased by 4.4% as a fiscal stimulus was introduced to boost aggregate demand. Battered by flagging business conditions and underlying global uncertainties, gross fixed capital formation continued to fall in 2002. Both private and public investment slumped. The main factor in the poor private investment was a significant drop in investment in nonresidential buildings due to substantial excess capacity.

In contrast, external demand, which had continued to decline sharply until the first quarter of 2002, switched to growth in the remainder of the year. Merchandise exports expanded by 3.2% in 2002, a significant improvement from a decline of 11.0% in 2001. Exports of manufactured goods, in particular electronics, recorded a swift improvement in the latter half of 2002, though services exports remained sluggish. Contributing to this healthy expansion were key items, such as integrated circuits, personal computer parts, and disk drives. Among nonelectronics items, exports of pharmaceuticals and petrochemicals recorded healthy growth, particularly to regional markets such as Hong Kong, China; Korea; Malaysia; and Thailand.

Imports overall increased by only 0.1% in 2002, with non-oil imports contracting by 0.3%, though key electronics items, pharmaceuticals, measuring instruments, and petrochemicals rose significantly. Mineral fuel imports registered an increase of 4.1%, after a decline of 6.7% in the previous year. As a result, the current account surplus improved from 19.0% of GDP in 2001 to 21.5% in 2002.

Maintaining currency stability remained the single most important goal of monetary policy. Within this context, the Monetary Authority of Singapore (MAS) has followed a neutral policy stance since July 2001, with a stable, trade-weighted, Singapore dollar nominal effective exchange rate. The policy band was widened in October 2001 to allow greater flexibility in exchange rate management, but was restored to a narrower one in January 2002 as market and economic conditions became more stable. Domestic interest rates declined steadily in 2002 in tandem with easing monetary conditions. Inflationary pressures remained subdued, with the CPI falling by 0.4%.

The key initiatives in the budget for FY2002 (beginning 1 April) included reductions in corporate and personal income tax rates, enhanced tax incentives for the financial sector, and the introduction of employee stock option incentive schemes. The budget also prescribed that, to offset the loss of revenues from the reduction in income taxes, the goods and services tax rate should be raised from 3.0% to 4.0%, effective 1 January 2003. In FY2002, the budget deficit narrowed to S$94 million, or 0.1% of GDP, from S$2.7 billion, or 1.8% of GDP, a year earlier.

The employment situation deteriorated in 2002, with the number of those employed falling by 39,500 and the seasonally adjusted unemployment rate rising to 4.4% in December 2002, from 3.3% 12 months earlier; this was even higher than the 4.3% recorded during the financial crisis. The deterioration occurred across most sectors, with construction the hardest hit.

Policy Developments

The Government established the Economic Review Committee (ERC) in October 2001 to assess its development strategy and formulate a blueprint to restructure the economy. The ERC recommendations announced in early 2003 can be divided into two parts: more immediate measures to deal with current uncertainties, and longer-term strategies to restructure the economy. It identified lowering costs and staying competitive as immediate issues to address, while long-term national objectives should be expanding external ties, maintaining competitiveness and flexibility, encouraging entrepreneurship, promoting the twin growth engines of manufacturing and services, and developing human resources. These strategies aim to make Singapore a leading global city, as a hub of talent, diversification, enterprise, and innovation in the next 15 years.

The ERC has several subcommittees, including one on services. The share of services has assumed somewhat greater importance over the past decade and a half, rising from 61% of GDP in 1986 to 67% in 2001, while their share of total employment has increased from 64% to 74% over the same period. However, while Singapore's world ranking as an exporter of services was 16th in 2001, its rank in services productivity was only 23rd. Consequently, the services subcommittee has made major recommendations in an attempt to improve productivity in the sector and to make Singapore Asia's leading provider of world-class services. The subcommittee has also made recommendations on how to address issues of overregulation, corporatization, and privatization of public suppliers to introduce competition, institutional support, and training of human resources. The ERC's initiatives are intended to provide major inputs to the various line ministries in policy making to develop the sector.

As one of the key financial centers in the region, Singapore has stepped up its efforts to enhance its financial system, its institutional and regulatory framework, and its market structure. Two issues are of prime importance. First, it is essential to create a more conducive regulatory environment to foster market dynamism and innovation, while ensuring financial sector stability and soundness. For this, MAS is shifting its policy focus from regulation to risk-focused supervision, disclosure and market discipline, and higher standards of corporate governance. Second, financial liberalization needs to be accelerated to promote competition and discipline. Several major steps have already been taken, to deregulate the banking and capital markets in particular. Local banks have upgraded risk management systems and introduced new products and services, while some of them have been consolidated through mergers and acquisitions. Further opening up of the banking sector is expected. In the capital markets, more government securities have been issued to increase market liquidity and to create a benchmark yield curve, while internationalization of the capital markets has received increased attention. These policy efforts should pave the way for revitalizing and upgrading the financial sector, which has generally registered only average performance over the last few years.

The FY2002 budget, released on 3 May 2002, aimed to address the need for fiscal incentives to encourage domestic demand, improve Singapore's international competitiveness, and attract global talent. To this end, major measures on both the tax and expenditure sides were announced. Tax measures include (i) the reduction of the corporate income tax rate to 22% in FY2003 from 24.5% in FY2002, with further reductions to 20% by FY2004; (ii) enhanced tax incentives for the wealth- and asset-management industries, derivatives market, equity capital market, and general insurance companies; (iii) tax deduction for approved R&D expenses of all services companies; and (iv) cuts in the top marginal personal income tax rate from 26% in FY2002 to 20% by FY2004. At 44.1% of the total, the largest share of government expenditures goes to social development. The income tax cuts and the tax incentive schemes are expected to be generally conducive to economic activity in the private sector, and should help boost the ongoing economic recovery.

Outlook for 2003-2004

In 2003-2004, MAS is likely to maintain the current monetary policy centered on the management of the exchange rate, recognizing that stability of the Singapore dollar is critically important for economic recovery through supporting financial activities and entrepôt trade. Market liquidity should continue to be abundant and interest rates in the international financial markets are likely to remain low in this period. Along with a stimulative fiscal policy, these moves will support recovery efforts in the country. Taken together with the Government's firm policy stance to develop and upgrade service industries in which the economy has a comparative advantage, the domestic economic environment will be highly private sector-friendly in 2003-2004. However, external developments will remain the key drivers of growth.

Assuming that the world economy will continue to recover, GDP growth is forecast at 2.3% and 4.2% in 2003 and 2004, respectively. The reduction in income tax rates will boost disposable incomes and private consumption over these 2 years. In contrast, the increase in the goods and services tax, continued high unemployment, and slow real wage growth could all dampen consumption growth. Falling residential property prices will also have a negative wealth effect on consumption. As a result, private consumption is likely to record only modest growth in this period, and is forecast at 3.3% in 2003 and 4.7% in 2004. Public consumption will likely maintain 5-5.5% growth rates in both years.

Gross fixed investment is projected to grow by 3.5% in 2003 and by 5.7% in 2004. This reflects the recent increase in new FDI commitments in manufacturing and services and the improving prospects for global demand. Noteworthy is the sharp increase in FDI commitments from the EU for petrochemical products and chip design services in the second half of 2002.

Merchandise exports are forecast to pick up by 7.5% in 2003 and by 10.2% in 2004, with growth led by strong demand for chemicals, instrumentation equipment, and pharmaceuticals, while ICT-related products are likely to expand moderately. Prices of ICT products will probably remain weak in 2003-2004, due to a modest recovery of global demand. Exports to the PRC should continue to increase rapidly, contributing to a further diversification of export destinations. The trade and current account balances are forecast to deteriorate slightly as import growth exceeds export growth. The services balance is likely to remain in surplus to the tune of about $2 billion-$3 billion over the next 2 years. The current account surplus of 21.5% of GDP in 2002 is projected to remain unchanged in 2003 and to fall to 19.3% of GDP in 2004.

Industry (i.e., manufacturing, construction, and energy), which started to pick up in the second half of 2002, will likely expand further in 2003-2004, by 4.3% in 2003 and 5.6% in 2004. Growth in the services sector will slow, largely due to the adverse impact of SARS on the sector. The unemployment rate is unlikely to drop rapidly because of continued modest economic growth, economic and political uncertainties on the global front, and the private sector's determination to streamline operations to decrease unit labor costs and increase international competitiveness. The unemployment rate is expected to increase slightly to 4.5% in 2003, before falling to 4.1% in 2004. With modest GDP growth, the CPI is forecast to increase marginally by 0.5%-1.0% each year, against a backdrop of low international prices, projected low wage growth, and excess residential capacity.

Several downside risks have become important recently and these may undermine the base-case scenario. The outbreak of SARS, over a prolonged period of time, would significantly affect Singapore's important tourism industry. A further delay in the recovery of global ICT demand would negatively impact growth.

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