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p. 10 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects II. Economic Trends and Prospects in Developing Asia Newly Industrialized Economies Hong Kong, China Republic of Korea Singapore Taipei,China Central Asian Republics, Azerbaijan, and Mongolia People’s Republic of China Southeast Asia South Asia The Pacific III. Asia's Globalization Challenge

Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia : Newly Industrialized Economies

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Singapore

After strong GDP performance in 2000 on the back of an export boom in electronics, growth momentum is likely to moderate in 2001. However, with a strong fiscal position and a highly competitive economy, Singapore is expected to weather the slowdown in world economic growth well. After this, its investments in education and telecommunications infrastructure as well as liberalization measures should enable the economy to continue robust expansion.

Recent Trends and Prospects

In 2000, Singapore’s real GDP growth surged to 9.9 percent from 5.9 percent in 1999 as growth in real total demand (i.e., domestic demand plus exports) more than doubled to 14.0 percent from 6.5 percent. Stronger external demand accounted for nearly 80 percent of the growth because of strong global demand for manufactured exports, particularly integrated circuit boards, and because of a rising volume of trade flowing through Singapore’s ports, fueling a rapid rise in services exports. Domestic demand also accelerated as investor and consumer confidence rose. Real gross fixed capital formation recovered from two years of contraction with a 5.9 percent improvement, while consumption spending, benefiting from rising income, expanded by 10.3 percent. By sector, the percentage contributions to real GDP growth were largest in manufacturing (3.9 percentage points), due primarily to electronics exports, and in retail and wholesale trade (2.5 percentage points), largely because of entrepôt trade.

Associated with strong GDP performance, total employment creation in June 2000, at 110,700 jobs, returned to precrisis levels. Both manufacturing and services made job gains of, respectively, 26,200—the highest increase since 1988—and 82,700. The seasonally adjusted unemployment rate continued to fall throughout the first three quarters of 2000 to 2.5 percent in September 2000 before rising modestly in the last quarter. The average rate of unemployment fell to 3.1 percent in 2000 compared with 3.5 percent in 1999. With accelerating economic growth and falling unemployment, inflationary pressures began to emerge as the average consumer price level, which had been unchanged in 1999, rose by 1.3 percent, primarily because of the effect of rising world oil prices on housing and transport costs.

In the midst of a rapid expansion, macroeconomic policy in 2000 was conservative. Fiscal policy was more restrictive as strong economic performance and surging car sales led to a further widening of the fiscal surplus to 3.5 percent of GDP from 2.6 percent in 1999. Operating revenues increased by 17.1 percent while total expenditures rose by only 12.3 percent. The generally strong economy pushed up collection of income tax by 15.5 percent to 40 percent of operating revenues, and that of the goods and services tax by 26.3 percent to 6.7 percent of operating revenues. A 60.6 percent increase in the number of new cars that the Government allowed for registration led to a surge in new car sales and thus in motor vehicle tax collection and customs and excise receipts, which together accounted for 11.8 percent of operating revenues in 2000. On the other side of the account, a 35.9 percent rise in operating expenditures, in part because of salary increases, was mitigated by lower development expenditures as a large waste-management system was completed.

The Monetary Authority of Singapore (MAS) voiced its intention in July 2000 to permit a modest and gradual appreciation of the trade-weighted Singapore dollar but it is likely to wait until world economic trends are clearer before moving to a more restrictive monetary policy. The MAS adopted a broadly neutral stance with respect to the exchange rate in 2000, acting only occasionally to support the Singapore dollar when its value was eroded by the general weakness of most Asian currencies. Exchange rate movements were mixed in 2000 as the Singapore dollar depreciated by about 1.7 percent against the US dollar and by 6.6 percent against the yen, while appreciating by 13.6 percent against the euro. Interest rates moved very little in 2000, with the prime lending rate remaining at about 5.8 percent. Broad money supply (M2) shrank by 2.1 percent, despite an 11.0 percent increase in checking accounts associated with robust income growth, as savings deposits declined, perhaps as a result of low interest rates and a switch to alternative savings vehicles such as insurance policies.

At the heart of the strong economy, export growth in 2000 in current Singapore dollars accelerated to 22.4 percent from 5.7 percent in 1999 (see Figure 2.2). A 30.7 percent surge in reexports, from virtually no growth in 1999, accompanied the acceleration of domestic export growth from 9.8 percent in 1999 to 16.9 percent in 2000. Rapid strengthening of global demand for electronic products, particularly semiconductors for which sales grew by over 30 percent worldwide in 2000, stimulated domestic exports and increased the volume of trade flowing through the ports. Although the value of office machinery exports fell in 2000, while the value of electronics components and parts exports rose, both have expanded rapidly in the last decade to become major non-oil export earners. Total imports rose by 23.4 percent compared with a 10.8 percent improvement in 1999, with retained imports growing by 18.3 percent, largely due to rising demand for intermediate inputs for the electronics industry.

The current account surplus narrowed to 23.6 percent of GDP in 2000 due to faster growth of imports and a fall in net income. The capital account deficit shrank from 22.0 percent of GDP in 1999 to 12.5 percent in 2000 as the 1999 banking sector net outflow was reversed with the repayment of external loans. The overall balance-of-payments surplus strengthened and official foreign reserves expanded to about S$139 billion, sufficient to cover about seven months of imports.

Economic growth is expected to moderate to about 5 percent in 2001 as the US economy slows and the electronics boom subsides, while export growth is expected to slow markedly to about 5 percent. In line with a general cooling of the economy, private consumption growth is likely to ease. However, gross fixed capital formation should continue to grow, based on manufacturing’s higher levels of fixed investment commitments in 2000 than 1999. Electronics exports should slow in the second half of 2001 since new US orders in this area showed some signs of declining in 2000. Much of the downside risks to the forecasts are due to the uncertainty surrounding the magnitude of the slowdown in intraregional and US imports of semi-conductors and personal computers.

Issues in Economic Management

If the global economic slowdown is deeper or longer than presently expected, or both, the Government may need to take steps to counter an extended loss of export earnings. Given the high degree of openness of the economy, external shocks feed through to domestic demand and price pressure quickly. Fortunately, given its strong fiscal position, the Government has latitude to ease fiscal policy to cushion the economy against an adverse external shock. Indeed, it is already moving to modestly reduce corporate, property, and income tax rates in 2001, while planning for a small increase in revenues, in part based on the contributions of past budget surpluses in the form of net investment income. However, planned operating and development expenditures plus special transfers are to remain roughly constant so that the Government expects a continuation of the budget surplus in 2001.

The Government has less scope to use monetary policy to stimulate the economy, with rising inflation and generally low interest rates relative to other markets such as the US. Price stability remains the primary goal of monetary policy. Thus, as it has previously signaled, the MAS would likely tighten monetary policy if consumer price inflation edges above 2 percent, resulting in a strengthening of the trade-weighted exchange rate. This could exacerbate the weakening in external demand caused by softer information technology spending in the US. Thus, the Government is likely to proceed cautiously in allowing the exchange rate to appreciate.

Policy and Development Issues

In the longer term, the Government is eager to retain Singapore’s distinction of having one of the world’s most competitive economies. It continued its efforts in 2000 to improve the business environment by divesting its holdings in companies, by expanding opportunities for foreign direct investment, and by facilitating development of selected economic sectors. Sales of government interests in transport companies were initiated, while preparations to reduce state interests in leading firms in other sectors progressed. However, the Government is unlikely to markedly reduce its holdings in private firms in the near term. Restrictions on foreign investments are being relaxed, most notably in communications, media, insurance, and banking, which should enable foreign companies to enter these areas. The Government continues to invest selectively in priority areas such as information technology infrastructure, biotechnology, and worker training. This is to encourage the economy’s transition from a base for manufactured exports to a fully networked, knowledge-intensive economy and a hub for Asian finance, information technology, and transport.

The Government is also promoting competitiveness through liberalization of key economic sectors, particularly finance, telecommunications, and energy. To promote the financial sector in particular, the Government has been taking steps since 1998 to soften its policy of discouraging internationalization of the Singapore dollar, which was intended to protect its capital markets against excessive volatility. In late 2000, to further facilitate the development of domestic capital markets, primarily for bonds and loans, new guidelines were issued to permit banks to lend to nonresidents in Singapore dollars for investments in equities, bonds, and real estate in Singapore, as well as for offshore activities under certain conditions. This will broaden the customer base for local banks and retain the investor base for bonds denominated in Singapore dollars.

Before the new guidelines were announced, nonresident investors were discouraged by the requirement to raise foreign currency to finance their investments in Singapore, which made them vulnerable to exchange rate risk. Although it is hoped that the new guidelines will help attract not only more foreign investors but also more foreign bond issuers, leading to a larger and more efficient bond market, as of the end of 2000, the size of the Singapore bond market was only S$30 billion. Thus, the Government may have to consider further measures for boosting liquidity in the financial sector.

Another way in which the Government is strengthening the economy’s competitiveness is by promoting diversification of exports. Office machinery is showing signs of decline, despite its current importance as an export earner. The Government has been successful in attracting higher value-added semiconductor producers. However, this has mixed implications for future economic performance. The semiconductor industry is still in its infancy with respect to its ability to build complete wafer-fabrication plants or produce the inputs to the process of fabrication. It will have to rely heavily on imports for them over the medium term, which implies that the overall effect of this restructuring may be to reduce the contribution of net exports to GDP growth over the next few years.

In the interim, the Government is working to address the mismatch between availability of local talent and the demands of the higher value-added industries for highly skilled personnel. The Government forecasts that in the next 10–15 years, at least 65 percent of the workforce will need an education beyond secondary school; the current rate is 35 percent. The fiscal budget for the 2001 financial year reflects a two-pronged approach to this challenge. First, an enlarged education budget of S$6.3 billion is intended to ensure that new labor force entrants are well prepared. Second, a S$30 million Manpower Development Assistance Scheme and a S$1 billion Lifelong Learning Endowment Fund will emphasize skill upgrading for the existing workforce.

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