Extract of Parliament Report - Monday, 20th Oct, 2008


SINGAPORE ECONOMY
(Impact of financial crisis and economic slowdown)

     Mdm Halimah Yacob (Jurong GRC) asked the Minister for Trade and Industry (a) how has the deterioration in financial markets affected Singapore's growth; (b) whether Singapore will be facing a recession this year; (c) whether our economic growth rate will be revised; and (d) what is the implication of the deterioration on our job situation. 

     Mdm Ho Geok Choo (West Coast GRC) asked the Minister for Trade and Industry how is the sub prime meltdown affecting the Singapore economy, in particular the small and medium enterprises and the construction industry.

     Mr Lim Hng Kiang (Minister for Trade and Industry):  Mr Speaker, Sir, advance estimates indicate that Singapore's GDP declined by 0.5% in the third quarter. On an annualised quarter-on-quarter basis, the economy has now registered two consecutive periods of negative growth, which is the common definition of a technical recession. Given the deteriorating external climate and the volatile financial situation globally, growth will remain weak for some quarters to come.  MTI has revised the GDP forecast for 2008 to around 3%.

     Singapore's economy is small, open and closely linked to the global economy.  We cannot escape the impact of the global financial crisis and economic slowdown. First, although Singapore banks have largely escaped the direct impact of the crisis because they have less exposure to distressed assets, the segments of our financial services sector which are more sensitive to market sentiments have been affected. This includes trading of stocks, shares and bonds, foreign exchange trading activities, as well as fund management activities. The local stock-market index has dropped by over 40% from the peak in October 2007.

     Second, the financial market turmoil has clearly affected sentiments in the property market. The number of residential property sales transactions has fallen sharply. In the third quarter of 2008, the private property price index also registered the first quarter-on-quarter decline since the first quarter of 2004. This will weigh down on related real estate activities.

     Third, the financial crisis has weakened consumer demand around the world, and this has affected our manufacturing and domestic exports. In the third quarter of 2008, Singapore's non-oil domestic exports fell by 8.5%, with the biggest declines in electronics and pharmaceuticals. Our tourism sector has also been hit. Visitor arrivals fell by about 6% in July and August 2008. Also, growth in retail sales has slowed down. Excluding motor vehicles, real retail sales grew by just 2.5% in the first eight months of 2008, compared to 8% last year.

     Mdm Ho Geok Choo asked about the impact on our SMEs and the construction industry. This slowdown has inevitably affected SMEs in the manufacturing sector who are facing lower demand and profits. SMEs in certain services clusters, such as retail and food and beverage, may also be facing slower growth. Other services segments are holding up so far, and overall growth in the services sector is estimated to be 6.1% in the third quarter.

     In the area of financing, our banks are fundamentally sound. They do not face liquidity issues as serious as in other countries and still have credit available for lending. Nevertheless, banks have become more cautious. Default rates, while still stable, are also likely to increase. We will, however, ensure that credit is available to our SMEs through the Local Enterprise Finance Scheme (LEFS), Loan Insurance Scheme (LIS) and Microloan Programmes.  For instance, the amount of outstanding LEFS and LIS loans to SMEs for the first eight months of 2008 has grown by more than 55% over the same period last year. We will ensure that our SMEs will be able to continue financing their business operations and investing in capability upgrading with these loans.

     The situation in the construction sector is slightly different. The sector is estimated to grow by 7.8% in the third quarter of this year, compared to 18% in the first half of this year.  Part of this growth moderation is because of supply-side constraints. A shortage of contractors, a tight labour market for skilled engineers and project managers, and longer waiting times for construction equipment have all resulted in construction firms stretching out their projects over a longer period of time. Weaker market sentiments have also dampened the outlook for private sector construction demand, and the stream of new private projects to be launched has slowed.

     However, total public sector construction demand is projected to remain robust; at between $10.5 billion and $13.5 billion for 2008 as the Government proceeds with several essential infrastructural projects such as the MRT Downtown Line and the Marina Coastal Expressway. As such, strong public sector construction demand is expected to provide some cushion and offset the possible decline in private sector construction demand.

     Let me now turn to the employment outlook. Employment growth in the first half of 2008 has thus far been healthy, with 144,600 jobs added. However, there are signs that the economic slowdown has started to impact the labour market. Employers are exercising more caution in their hiring, with most employers preferring to keep their headcount steady. Given that the economic weakness is expected to continue into 2009, moderation in employment growth is expected in the second half of 2008 and through to 2009.

     The slowing economy and more cautious hirings have contributed to an increase in the overall unemployment rate  from 2% in March 2008 to 2.3% in June 2008.  The unemployment rate for 2008 as a whole is likely to be higher than the 2.1% in 2007, which was a record low in 10 years. Retrenchments so far have stayed at roughly the same level as in previous quarters, although this could go up if the economic weakness persists. The Government will continue to keep a close watch on the labour market situation and already has various measures in place to assist retrenched workers and the unemployed. For instance, the WDA has implemented the Place and Train programme which assists job seekers in securing jobs in industries such as construction, marine, aerospace and healthcare sectors before they undergo relevant training. In 2007, the WDA also helped 68,000 workers to upgrade and certify their skills through its Workforce Skills Qualifications (WSQ) system.

     In 2006 and 2007, EDB client companies committed $27.5 billion worth of investments, which will create a total of 55,400 new jobs when fully operationalised. Additional job opportunities will also be created in SMEs that support these companies. Many of these investments will continue to come on-stream in the year ahead.  For example, in this quarter alone, companies such as Halliburton and Soitec will all be launching their operations officially in Singapore. While we cannot expect overall job creation to be as robust as the past two years, these investments coming on-stream now will create new job opportunities that will benefit Singaporeans.

     Mr Speaker, Sir, the impact of the evolving global financial crisis and slowdown has already started to flow through to the Singapore economy and our companies.  We must be prepared for weaker growth in the next few quarters, and possibly longer depending on when the global economy recovers.  However, Singapore's financial and economic fundamentals remain sound.  This will enable us to weather the current storm, and emerge strong and resilient.

     Mdm Ho Geok Choo (West Coast): I would like to thank the Minister for the very comprehensive response.  Two questions for the Minister: (i) I would like to find out how will the increase in borrowing cost affect especially the small businessmen, and in what way would MTI come up with programmes to help them better address the increase in the borrowing cost; and (ii) Caveat emptor may be the principle that we are trying to encourage among the consumers, but is enough being done to educate our consumers on basic financial skills and knowledge for the principle to operate effectively?  In fact, for that matter, what are the current programmes that are being run in schools, if any, to educate even children and youths with financial planning?

     Mr Lim Hng Kiang:  Mr Speaker, Sir, as the financial crisis works itself through the system, particularly through the real economy, it must be braced for slower growth.  One of the consequences of this whole deleveraging exercise is that credit will become scarcer and cost of credit will become higher.  This is something that our companies have to face.  This is the reality of the situation.  On our part, the Government will continue to assist our companies, particularly the SMEs, as I have explained in my response just now, through the LEFS, LIS and the microloan scheme.  As I explained, the take-up rate is, in fact, now 55% higher than previous years. So, already the mechanism is working.

     On the second question of consumer education, this is an on-going exercise.  I think there are several agencies involved to make the effort to explain and educate Singaporeans at all levels, including in the schools, on consumer conservatism and to purchase things that they really can afford.

     Mdm Halimah Yacob (Jurong):  Sir, two follow-up questions.  I would like to ask the Minister, in view of the weakening economic condition and the slowdown in growth, whether the Government would be considering restoring some of the public construction projects that it has earlier on announced that they would be delaying.

      Second question: could the Minister also give us an update on the inflation situation - what is the expected inflation rate for this year?  And in view of the weakening job situation as well, what is the expected inflation next year?

     Mr Lim Hng Kiang:  Mr Speaker, Sir, as I have explained just now in my response, so far the construction sector is holding up well.  In fact, we do face some supply constraints.  At this juncture, I do not think it will be very useful for the Government to add to these supply constraints and pressures by increasing our public sector projects.  But this is something that we are watching very carefully, particularly the Ministry of National Development.  And as I explained in my response, we have several public sector projects which we have deferred previously and, of course, if the situation is right and there is some capacity for us to inject these projects into the market, I am sure the Ministry of National Development will do so.  But it is a question of timing.  If we do so now, I think it will just exacerbate the supply constraints and, in fact, the tender prices will continue to be very high.  But at the same time, if the demand drops from the private sector, the Government is in a position to inject some of these projects back into the pipeline.

     The second question is on inflation.  Inflation for Singapore has peaked and we are now seeing the inflation numbers going down.  But I must caution that inflation will continue to be sticky for the next few months because some of these costs have a certain amount of lag.  Going into next year, over the next 15 months, both MAS and MTI are confident that our inflation numbers will revert back to the more normal 2%-3% that we see in previous years.

     Mr Zaqy Mohamad (Hong Kah GRC):  Sir, the Minister mentioned earlier on that pump-priming is probably one of those measures that we probably took as public spending to boost the economy towards recovery.  Given that there are many foreign workers in Singapore as well as some foreign companies, are we confident that this kind of measures will not lead to money flowing out of the country into foreign companies and foreign nationals, and help more to boost the local economy and domestic companies?

     Mr Lim Hng Kiang: I think we are acutely aware of the impact of any of the so-called pump-priming measures that we may undertake later on, to make sure that there is proper flow-through to the local economy.  We will look at the multiplier effects and make sure that whatever injection we put into the economy does not just flow out because of import content or foreign workers content.  So, it is something that we have to analyse carefully.