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p. 28 of 69 BACK | NEXT Foreword, Acknowledgments, Acronyms and Abbreviations, Definitions 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. Foreign Direct Investments in Developing Asia

Asian Development Outlook 2004 : II. Economic Trends and Prospects in Developing Asia : Southeast Asia

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Singapore

Economic growth rebounded in the second half of 2003, on the back of external demand and the end of SARS, though a recovery in domestic demand was far from self-sustained. Macroeconomic policies remained accommodative to spur growth. The Government emphasized supply-side policies, such as cutting labor and business costs to maintain competitiveness, in line with its long-term strategy for a globalized, entrepreneurial, and diversified economy. Growth is forecast at a faster pace in 2004-2005, due to an improved external environment and increased domestic demand.

Economic Assessment

The economy recovered in the second half of 2003, after a weak first-half performance. A sluggish external environment resulted in slow growth early in the year, and the economy contracted by a sharp 3.9% in the second quarter because of the impact of SARS. Growth returned in the third quarter at a rate of 1.7%, accelerating to 4.9% in the fourth quarter to put full-year growth at 1.1%.

The recovery was driven by external demand. Measured in Singapore dollars, net exports surged by 36.5%, contributing 8.7 percentage points to the growth in GDP (Figure 2.11). Merchandise exports increased by 12.1%, thanks to a strong performance by the pharmaceuticals sector and the pickup in global IT demand since mid-2003. Demand was particularly strong from the PRC and EU. Merchandise imports rose at a slower pace of 7.0% (also in Singapore dollars) because of weak domestic demand and reduced import contents of exports, as Singapore’s exports shifted toward higher value-added, capital-intensive goods, such as pharmaceuticals and semiconductor chips.

Declining domestic demand largely offset the strength of external demand. Private investment fell by 3.3% due to global economic uncertainties, increased international competition, and a substantial property overhang. Private consumption declined by 0.5%, weighed down by the SARS outbreak and a weak labor market. Public consumption and investment declined by 0.2% and 5.6%, respectively. Inventory reductions accelerated, reflecting the unexpected economic rebound and structural changes in manufacturing, as industries moved up the production chain.

Manufacturing value added grew by 2.8% in 2003, with export subsectors such as semi­conductors, disk drives, and pharmaceuticals producing much of the growth. Output of electronics products increased by 5.5%, boosted by the cyclical recovery of the global electronics industry. The sector was not uniformly strong, however. Semiconductor output expanded, but production of communications and consumer electronics products remained weak. This reflects the relocation of low-end, labor-intensive assembly production to low-cost countries such as the PRC. The bio­medical industry expanded by 8.1%, largely because of a switch of the product mix in pharmaceuticals to higher value-added products for patented drugs, which boosted exports. Output of chemicals rose by 6.2%. However, other major manufacturing subsectors, such as precision and transport engineering, continued to shrink, indicating that the recovery was far from broad based.

Construction declined for the fifth consecutive year in 2003, by 10.7%, against a backdrop of significant oversupply in the property market. The services sector (including owner-occupied dwellings), hit hard by SARS, rebounded in the second half to post growth of 1.1% for the year. This was largely attributable to continued strength of Singapore’s entrepôt trade, a rise in motor vehicle sales, and a recovery in financial services. The wholesale and retail trade sectors expanded by 6.7%. Financial services recorded growth of 3.7%, after a 6.3% decline in 2002. This subsector was helped by reduced risk aversion among investors and by the prospects of a pickup in regional economies, which boosted regional corporate financing activities and encouraged investment in Asian equities.

However, the labor market continued to weaken. The unemployment rate rose from 4.3% at end-2002 to 5.5% in September 2003, then fell to 4.5% by end-2003. Employment increased in the third and fourth quarters, after eight consecutive quarters of decline, but this weak job creation was unable to make up for first-half job losses, leaving total employment down by 0.8% for 2003. Job cuts in the first half resulted from the restructuring of the electronics sector and the sustained contraction of construction activity. The services sector added a moderate 4,000 jobs over the year.

Slower economic growth and tax reductions eroded fiscal revenues. Government operating revenues, which exclude investment income, interest income, and capital receipts, fell by 2.9% in 2003. Government expenditures (operating plus development expenditures) grew by 0.3%, mainly in the areas of education, housing, basic health care, and defense. As a result, the primary operating deficit widened to S$2.5 billion from S$1.7 billion in 2002.

The Monetary Authority of Singapore in July lowered the midpoint of the band governing the trade-weighted nominal effective exchange rate. The Singapore dollar remained stable against the generally weak US dollar, but depreciated against the yen, euro, and various other currencies. This easing of policy, combined with lower international interest rates, caused domestic rates to soften. The 3-month domestic interbank rate declined from 0.81% to 0.75% over the year.

The outstanding amount of lending by commercial banks to nonbank customers rose by 6.3%, propelled by strong growth in housing loans after buyers of apartments from the Housing Development Board were allowed to use their Central Provident Fund (CPF) retirement savings for the 20% downpayment on the apartments. As investor sentiment improved in the second half of the year, the stock market rebounded along with other regional markets, with the Straits Times Index gaining 31.6% in 2003.

Inflation was subdued. The CPI rose by 0.5% in 2003, after a 0.4% decline in 2002. Contributory factors included a 2003 increase in the goods and services tax (GST), higher taxes on liquor and tobacco, and rising prices of oil-related items.

The strong export performance pushed the current account surplus to US$28.2 billion, equivalent to 30.9% of GDP. Encouraged by the improved global economic environment in the second half and the Government’s efforts to attract FDI, direct investment inflows doubled to US$11.4 billion in 2003, mainly in the electronics and chemical sectors. The net outflow on the capital and financial account rose to US$25.3 billion from US$13.6 billion, largely because of increased investments abroad by nonfinancial institutions and individuals. Gross foreign reserves rose to US$96.3 billion.

Policy Developments

The authorities kept fiscal and monetary policies accommodative in 2003 in an effort to increase domestic demand. The budget for FY2003 (beginning 1 April) and adjustments in the CPF system reflected a need to stimulate the economy, preserve jobs, and improve competitiveness. Measures included extensions to a reduction in the levy on foreign workers and to rental and property tax rebates, a 3 percentage points cut in the employers’ CPF contribution rate, and the lowering of the salary ceiling of the CPF contribution.

The Government also announced a S$230 million SARS relief package that included rebates and cuts in taxes and service charges for the most affected business sectors and a S$1 billion package to boost consumer sentiment, support small and medium enterprises, and accelerate public infrastructure projects. Increases in the GST and liquor and tobacco taxes partly offset the reduction in tax revenues.

The budget for FY2004 includes a reduction in corporate income tax rates to 20% from 22%, tax exemptions for newly incorporated companies, and tax exemptions for foreign-sourced income and Singapore-sourced investment income. Overall, FY2004 budget expenditures will increase by 5.6%, mainly in defense and transport infrastructure.

In response to the challenges of adjusting to a more competitive international landscape, the Government has set a long-term development strategy for the next 15 years, which aims to establish a globalized, entrepreneurial, and diversified economy. It also aims to enhance Singapore’s integration with other economies through bilateral and multilateral trade arrangements that will link the economy closely to global economic networks, especially the regional production network centered around the PRC and India. Singapore has concluded free trade agreements with Australia, European Free Trade Association, Japan, New Zealand, and US, and is negotiating free trade agreements with Canada, Chile, PRC, India, Korea, Jordan, New Zealand, and Sri Lanka.

To cope with increased competition from lower-cost countries and reduce the economy’s vulnerability to external shocks, the Government is also seeking to nurture new sources of growth by moving up the manufacturing value chain to knowledge-intensive activities and by developing the services sector. Some of these efforts are paying off, with the biomedical and chemical industries expanding more rapidly in recent years. However, Singapore is expected to experience more structural unemployment as a result of these changes. This underscores the importance of improving labor market flexibility and including education and training in the long-term development strategy. The Government is expected to help laid-off workers find new jobs through measures such as continuing education and training.

Some services sectors, especially telecommunications and financial services, have been reformed through a series of liberalization measures, to promote competition and spur innovation. Health care, education, and creative industries will be encouraged through the removal of regulatory impediments, fostering of demand, and training. Services exports are expected to be a major engine of growth, and a more efficient services sector would also help sharpen the competitiveness of manufacturing.

Even with successful structural reform, however, growth potential in this new phase will be below the average 7.3% annual growth that the economy achieved over the past 15 years. Given its already advanced economic level and aging population, the sustainable growth rate might be 3-5% a year, underpinned by labor force growth of 1-2% and productivity growth of 2-3%.

Outlook for 2004-2005

As the most export-dependent economy in Asia, Singapore’s prospects rely heavily on world market conditions. Assuming that the US recovery strengthens, the upturn in the global electronics market continues, and the PRC’s growth remains robust, the GDP growth rate is forecast to increase to 5.6% in 2004, but then to fall slightly to 4.8% in 2005.

The recovery will likely be strengthened by increased domestic demand. The labor market will improve gradually as the recovery spreads across more industries. Recent government measures to reduce business costs, such as the CPF changes and cuts in taxes, are expected to facilitate the labor market rebound. As a result, unemployment is forecast to fall slightly and stabilize in the 4.0-4.5% range in 2004-2005. Wage increases will remain capped by high unemployment, but improved job security will likely boost consumption expenditure. Private consumption should also be helped by the low interest rate environment, although a recent further increase in the GST from 4.0% to 5.0% could hurt spending. Overall, private consumption is forecast to grow by 3.1% in 2004 and by 3.5% in 2005.

Investment in fixed assets is expected to rise modestly in 2004-2005. The upturn will be driven by investment in machinery and equipment, which showed a significant rebound in late 2003, coupled with some revival in construction. The easing of inventory adjustment will also contribute to the economic recovery in 2004-2005.

Merchandise exports measured in US dollars are forecast to grow by 12.2% this year and by 7.5% in 2005. This strong growth will be supported by economic recoveries in the US, EU, and Japan, as well as the pickup in global IT-related industries, significant growth in intraregional trade (stemming largely from the PRC’s economic boom), and the free trade agreement with the US. Imports will likely rise at a slower pace than exports. The services trade surplus is expected to widen, due to an anticipated revival of trade and tourism in the region following the containment of SARS. The current account surplus is forecast to rise to 34.5% of GDP in 2004 but then decline to 32.7% in 2005.

Domestic prices are likely to edge higher as the economy picks up pace, but price rises will be restrained by a benign external inflationary environment and lack of domestic cost pressures. With stronger than expected GDP growth in the first quarter of 2004 (7.3% on a preliminary basis) and higher inflation in January and February, the Monetary Authority of Singapore tightened monetary policy in April by allowing a modest and gradual appreciation of the Singapore dollar. Given the moderate outlook for inflation, a neutral monetary policy is likely for much of the rest of the year, to support a sustainable recovery in domestic demand. Fiscal conditions are expected to improve, reflecting stronger economic growth. The operating fiscal deficit will shrink in 2004 and the operating budget is likely to be in balance in 2005.

From a sector perspective, the growth momentum of electronics, chemicals, and bio­medicals will remain strong in 2004. An overall strengthening of manufacturing is likely from mid-2004 and the construction sector is forecast to gradually stop contracting. Services are expected to register strong growth in 2004-2005, reflecting the post-SARS recovery (for 2004), improving regional trade and investment, and increased consumer spending.

Risks to a sustained recovery include uncertainty in global demand conditions, and in particular uncertainty about the upturn in the global electronics cycle; possible interest rate hikes in the US; and possible terrorist attacks, which would damage Singapore’s tourism, transport, and related services industries.

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