and on foreign direct investments (FDI) for supply of capital. in marked contrast to an average of 89. the Singapore economy receives a double blow from both the demand and supply side. as a regional transportation hub. This rapid contraction of the economy is due to the fact that Singapore is among the most open economies in the world and the size of its domestic market is small.6% and 73. The leading index points to accentuated economic weakness going forward. and expects the biggest economic contraction in the country’s history. difficulties ( Unit: %.2% year-on-year in the third quarter of 2008 and plunged 3.0 -10. and its economic contraction has recently been gathering pace. Singapore’ s heavy dependence on exports implies that its pain from the global downturn would be proportional to its reliance on exports. The export to GDP ratio in Singapore stands at a whopping 230. other trade-reliant Asian economies. Its real GDP marginally declined 0. have export to GDP ratios of 45.7%. with only 4. Finance Minister Tharman Shanmugaratnam said in his FY2009 budget statement that Singapore is currently facing its worst crisis in living memory.0 1Q91 Singapore’s Economic Growth Economic Growth Composite Leading Index 2Q92 3Q93 4Q94 1Q96 2Q97 3Q98 4Q99 1Q01 2Q02 3Q03 4Q04 1Q06 2Q07 3Q08 Source: CEIC Database April 2009 | SERI Quarterly | 31 . respectively.5 million people. The Singapore government has dragged down its 2009 growth forecast to as low as minus 5%.0 10. Daniel Soh Singapore is one of the first Asian economies to sink into a technical recession amid the current global financial crisis.Impact of a Global Recession on a Small Open Economy SHIN Jang-Sup.0 15.0 5. As the global economy decelerates.7% in the Asian region (Figure 2). Moreover.0 -5.0 0.9% in 2007. The economy therefore depends heavily on exports for demand of its products and services. YoY ) A SMALL OPEN ECONOMY VULNERABLE TO GLOBAL DECELERATION |Figure 1 Singapore’s Economy Geared for a Sharp Downturn 20. South Korea and Taiwan.7% yearon-year in the fourth quarter of 2008 (Figure 1).

The North Ameri- |Figure 3 Diversification of Exports 100 80 60 40 20 0 Export Diversification Index China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Source: WTO Database plus own calculations Notes: The index is calculated using the reciprocal of the Herfindahl Index (HHI) for the composition of export in SITC Rev. Singapore is reported to have the second highest export concentration (after the Philippines) among Asian economies (Chart 3). 2 classification 32 | www. Singapore’s electronic sector. Exports are concentrated in a few highly vulnerable segments. particularly electronics products.SERIWorld. Not only is Singapore highly exposed to trade. its export base also lacks diversity.org . the country’s major export sector. which compose nearly 40% of the country’s non-oil domestic exports (NODX). has suffered since late 2006 amid a protracted global technology slump. Hopes of a technology recovery were dashed with the onset of the global financial crisis.Impact of a Global Recession on a Small Open Economy |Figure 2 GDP Breakdown (as of 2007) Exports of Goods & Services Private Consumption Expenditure Gross Fixed Capital Formation ( Unit: % of GDP) 250 200 150 100 50 0 China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Source: Ecowin Database facing the Singapore economy are more than its exposure to trade because other trade-related sectors including transportation. logistics and so on are suffering as well. Using the Herfindahl index to assess export concentration.

SHIN Jang-Sup.40 -40 0.80 0.40 1.00 120 110 1.75 100 1.25 80 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 1. which compose nearly 40% of the country’s non-oil domestic exports.50 90 1.20 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Source: CEIC Database |Figure 5 Singapore’s Exchange Rate REER NEER vs USD ( Unit: SGD/USD) 2. its export base also lacks diversity.60 1. YoY ) 30 20 10 0 -10 -20 -30 1. Exports are concentrated in a few highly vulnerable segments.00 Jan-10 Source: BIS Database April 2009 | SERI Quarterly | 33 .20 1. particularly electronics products.00 0.60 0. |Figure 4 Singapore’s Electronics Exports Electronics Exports US New Orders: Computers & Electronics SEMI Book-Bill Ratio (RHS) ( Unit:%. Daniel Soh Not only is Singapore highly exposed to trade.

0 4. the biggest decline in more than seven years. ADVERSE EFFECTS OF HEAVY RELIANCE ON FDI The heavy reliance on foreign direct investment (FDI) for growth and employment also becomes an Achilles’ heel of Singapore during this |Figure 7 FDI in Singapore ( Unit: SGD bil) 14. the country’s central bank.0 0. respectively.0 12. New orders for computers and related equipment in the US – a lead indicator for Singapore’s electronics exports – showed signs of pronounced weakness.Impact of a Global Recession on a Small Open Economy |Figure 6 Inward FDI as share of GFCF ( Unit: %) 80 60 40 20 0 Taiwan Singapore Philippines Indonesia Malaysia Thailand China India Korea worsening from an already alarming fall of 25. posting the biggest drop ever on record.0 8.org . In a move to combat inflation. Singapore’s electronic exports plunged 38. pointed to weaker demand in December 2008. Singapore’s effective exchange rate in nominal and real terms has risen by 7.8% year-on-year in January 2009. has quickened the pace of its currency appreciation.0 6. nose-diving 34.0 2.4% year-on-year in January 2009. MAS’s stance toward a strong Singapore dollar changed when signs of recession became evident.SERIWorld.0 10. since April 2004. Another reason for the faster pace at which Singapore’s exports is falling relative to that of its Asian peers could be the accumulated effects of a strong Singapore dollar policy since 2004. the Monetary Authority of Singapore (MAS).3%. Source: UNCTAD Database can semiconductor book-to-bill ratio. Singapore’s NODX plummeted in parallel.0 Q1 Q2 2005 2006 2007 2008 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q3 Source: CEIC Database 34 | www.4% and 7. Against such a backdrop. which showed that supply has outpaced demand for nearly two years.4% year-on-year in December 2008.

although it was a boon to the economy when the world market was expanding smoothly. Daniel Soh The heavy reliance on foreign direct investment (FDI) for growth and employment also becomes an Achilles’ heel of Singapore during this global economic downturn.0 5.0 Mar-92 Overall Resident Mar-95 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Source: Ecowin Database April 2009 | SERI Quarterly | 35 .0 6. The resident unemployment rate in Singapore has climbed to a seasonally adjusted 3. Inward FDI accounted for 60. Particularly in the manufacturing sector. Employers including those in government supported sectors are forcing their employees to take unpaid leaves in a bid to reduce costs.SHIN Jang-Sup. Tumbling confidence about economic prospects worldwide has outweighed the attractiveness of lower business costs and a stable political and financial climate in Singapore. global economic downturn. Job losses in Singapore could touch a record 100.4% a year ago.0 1.0 0.8% among other Asian economies (excluding Hong Kong).0% of total fixed investment (as measured by the gross fixed capital formation) in the country in 2007. unemployment is rising.0 2. many companies have adopted a four-day work week temporarily.000 or more in 2009. Along with economic slowdown.0 4.0 3. although it was a boon to the economy when the world market was expanding smoothly. This is one of the sharpest increases in unemployment Unit: % (s/ad) |Figure 8 Singapore’s Unemployment Rate 7. FDI in Singapore plummeted 61.9% in the first three quarters of 2008 as compared to the same period a year ago.7% in December 2008 from 2. This contrasts with an average of 9.

This stability can be attributed to the combination of Singapore’s geopolitical location. On top of this. as foreign expatriates (which compose about a quarter of the total labour force) tend to leave the country after they lose their jobs.0 104. Singapore’s official reserves held by the MAS stood at S$174.0 110.0 114. Even when its neighbouring countries suffered from the Asian financial crisis in 1997/98. are also a bulwark against possible speculative attacks on the Singapore dollar.0 106.SERIWorld.0 102.0 96. the Singapore government virtually prohibits short-selling of Singapore dollars by financial institutions and individuals. The Singapore government has not divulged as yet (and is unlikely to do so) the amount of actual reserves on the grounds of protecting “national security”.0 98. huge (but unknown amount of) foreign reserves and its unique FX management system. Whenever regional economies become unstable. thereby being excluded from official statistics. Singapore’s huge foreign reserves. whose actual amount is not known to market participants. ethnic Chinese businessmen tend to transfer their assets to Singapore for safety.0 100.0 112.org July-04 Jan-04 Jan-09 .Impact of a Global Recession on a Small Open Economy for Singapore. Foreigners are required to seek approval from the Singaporean authorities if they want to borrow |Figure 9 SG:NEER SG:NEER Mild Pt of Policy Brand Higher Brand Lower Brand Unit: % (s/ad) 118. It is noteworthy that the headline unemployment rate is not an accurate measure of the jobless condition in Singapore. the extent of extra ammunition that can be supplied from the twin sovereign wealth funds (SWFs).2 billion at the end of January 2009.0 108. the country has never experienced an FX crisis. GIC (Government Investment Corporation) and Temasek Holdings.0 116. there is no sense of foreign exchange (FX) crisis in the country. the Singapore dollar remained stable. Singapore is a safe haven for capital in the region. is unknown to market players. NO SENSE OF FOREIGN EXCHANGE CRISIS Despite the fact that Singapore is experiencing the worst economic downturn in its history.0 July-01 Jan-01 July-03 July-06 July-00 July-08 July-02 July-05 July-07 Jan-03 Jan-06 Jan-00 Jan-08 Jan-02 Jan-05 Jan-07 Source: Reuters Database plus own calculations 36 | www. In fact. Moreover.

SHIN Jang-Sup. However. This stability can be attributed to the combination of Singapore’s geopolitical location. the MAS was quick to abandon its fouryear-long strong Singapore dollar policy. Considering Singapore’s high exposure to trade. So far the system has minimized the disruptive effects of large swings in the currency. conventional fiscal and monetary policies are less effective in Singapore than in other bigger countries. In the wake of the current global financial crisis. 2008. Figure 9 shows that Singapore’s nominal effective exchange rate is well supported at the lower .a typical move in previous episodes of April 2009 | SERI Quarterly | 37 more than S$5 million. The Singapore dollar depreciated against the US dollar since the global financial meltdown in September 2008. rather than leaving them “free floating”. It can therefore be safely said that FX rates of the Singapore dollar are mainly determined by the Singapore government. the Singapore government manages its FX movements through a ‘basket system’. huge foreign reserves and its unique FX management system. The MAS has managed the nominal effective exchange rate (NEER) to steer the Singapore economy since the early 1980s. bound of the estimated MAS policy band. SINGAPORE’S POLICY RESPONSES TO THE CRISIS As a small open economy. At its policy review on October 10. there is ample room for the exchange rate to move lower at the next policy review in April 2009 . the policy stance was shifted to zero appreciation (or neutral bias) for the country’s effective exchange rate from a policy that allowed for gradual appreciation. And offshore Singapore dollar denominated deposit facilities are not allowed. although they do not need to seek approval in borrowing Singapore dollars for exchanging to foreign currencies. because their multiplier effects to boost the economy are smaller. its depreciation was lower than the average of other Asian currencies. in a bid to lift export competitiveness and shore up confidence. there is no sense of a foreign exchange (FX) crisis in the country. albeit continued capital outflows. The most effective policy tool for Singapore is its FX rate policy. This helps to anchor confidence and inject the necessary ingredients for financial stability. This is why the Singapore government adopts an exchange-rate based monetary policy system. Local banks are submissive to the government’s policy directions. With these partial capital controls in place. not by the market. So far MAS has refrained from moving towards depreciating the Singapore dollar because of concerns that a surprise move ahead of the scheduled policy review will precipitate a loss of confidence. Daniel Soh Despite the fact that Singapore is experiencing the worst economic downturn in its history.

The traditional stance of basic budget balance (excluding transfers to endowment funds and contributions from Net Investment Returns) was abandoned. Singapore is a huge consumer of imports (for both its consumption and production needs).0 -5. The basic fiscal deficit is expected to amount to nearly 6% of GDP in 2009.9 billion to help businesses cope with the economic crisis via a series of innovative mea- Ireland Hong Kong Switzerland Singapore Malaysia Sweden Source: Singapore Budget Highlights FY09 38 | www. The Finance Ministry brought forward the announcement of the budget to Janu- |Figure 11 Corporate Income Tax ( Unit: %) 50. markedly larger than a revised deficit of S$2. which was initially scheduled in February.Impact of a Global Recession on a Small Open Economy |Figure 10 Singapore’s Fiscal Position ( Unit: SGD bil/%) 4 10. The main focus of the budget is to boost employability of people. in order to expedite fiscal stimulus in the economy.0 0.0 -15. Instead.0 -20. with the import to GDP ratio at 202. The package will inject S$17.0 Fiscal Balance(LHS) 5.SERIWorld.0 2002 Source: CEIC Database 2003 2004 2005 2006 2007 2008 2009 Fiscal Balance to GDP Ratio 2 0 -2 -4 -6 -8 crises.1% of GDP in 2008. The change in FX policy stance has been accompanied by an unprecedented fiscal stimulus package.0 0.0 30.0 -10.org USA UK .8% in the Asian region. a large deficit of S$14. This was the biggest budget ever unveiled in Singapore.0 40.5 billion “Resilience Package” for FY2009. It is widely believed that the MAS is likely to widen the boundaries of the policy band as well amid increased uncertainty during the crisis to allow for greater flexibility in managing the exchange rate.0 10. The budget aims at the supply side of the economy because conventional demand-boosting stimulus would wane fast due to import leakages.9 billion is expected in FY2009.8 billion in FY2008.0 20.0% in 2007 compared to an average of 80. significantly raised from around 1. And it dug into its $200 billion reserves for the first time and delivered a S$20.0 ary 2009.

the government launched the Special Risk-Sharing Initiative (SRI) to take on a significant share of banklending risks and ensure that viable companies will continue to have access to credit to sustain their operations. the existing SME loan support program will be extended to more companies. The highest marginalcorporate income tax will also be cut to 17% . The government introduced a Jobs Credit Scheme that will temporarily lower the cost of hires for companies in 2009. The new BLP will extend government support to a broader segment of the credit market. Complementing the measures to boost employability. Currently.SHIN Jang-Sup. The measures will allow the government some flexibility in providing relief to individuals without locking down rates and crimping on further tax revenue potential. 18. The new trade finance schemes will help exporters obtain loans and trade insurance on the scale they need. tertiary education and restructure hospitals.000 jobs will be created over the next two years. In addition. particularly mid-sized companies. the government has also announced plans to aggressively expand recruitment in the public sector and government-supported sectors including childcare.000) will be given for 2009. The collapse in Singapore’s exports was attributed in part to the severe disruption in trade financing amid the turmoil in global banking. the April 2009 | SERI Quarterly | 39 sures to reduce business costs and cash flow problems. The SRI will include a new bridging loan programme (BLP) and trade finance schemes. A personal income tax rebate of 20% (capped at S$2. Employers will receive a 12% cash grant on the first S$2. Daniel Soh The Singapore government is also driving down business costs to help companies through an exceptional economic downturn in a concerted effort to prevent a surge in corporate failures and discourage the dismissal of workers. The Singapore government is also driving down business costs to help companies through an exceptional economic downturn. in a bid to discourage the dismissal of workers. the government will double the Goods & Services Tax (GST) credits for households in 2009. In order to ease the credit crunch and stimulate bank lending in the economy.6 billion will be infused directly to households to alleviate their hardships. Another S$2.500 of each month’s wages for each employee on their Central Provision Fund (CPF) payroll. in a concerted effort to prevent a surge in corporate failures and discourage the dismissal of workers. The effective tax rate is much lower than the headline rate because the Partial Tax Exemption scheme is widely applied. Letters of credit are estimated to fund as much as 40% of global trade. To ease the risks of property market bust. Meanwhile. from 18%. corporate income tax in Singapore is among the lowest in the world. In total.

1996).GNB Recasts IT Pecking Order .Free Trade Agreements & Korea’s Competitiveness . SHIN Jang-Sup is a Professor of Economics at the National University of Singapore.Decanting Creativity: Top-Seller Samsung Bordeaux TV THE NEAR-TERM FUTURE OF THE SINGAPORE ECONOMY Overall.Korea-China Conflict over Intellectual Property Rights SERI Interview .CEO Systems of Korean Companies .Korea: Digital Test Bed for the World .sg Daniel Soh is an economist and FX strategist heading the North Asia team at Forecast.Korean and Taiwanese Investment Patterns in China .com Vol. His publications include A Paradigm Shift for the Korean Economy (Chonglim 2008.Fragmentation of International Trade . SERI Quarterly Archives Vol. 2003). Property tax for the higher-valued secondary home will be scrapped. there is limited scope for Singapore to arrest its growth deceleration. 1 January 2009 Global Network Business Model . If the situation gets worse.Trade Minister Kim Jong-Hoon SERI Case Study .SERIWorld.edu. Previously. For instance.Korea’s Shift to Pay-for-Performance . Then. (Routledge.Presidential Council on National Competitiveness. Its healthy public finance and strong balance sheets of banks imply that there is still more room to extend policy measures to combat the recession. more policy responses are likely to come forward.SERIWorld. Restructuring Korea Inc. he was an Asian economist at Centennial Group. the Singapore government has adopted pragmatic and comprehensive policy packages to tackle the financial crisis. a London-based leading online analytical company. its heavy reliance on exports and FDI.org 40 | www. Like other countries battling against the worsening global financial crisis. 2 July 2008 Innovation and Human Resource Development In Asia . The focus lies in helping people and companies survive the current crisis until the global economy shows signs of recovery. However. the Singapore government is putting forward various unprecedented and innovative policy responses. The measures are aimed to prevent fire sales of high-end properties. SERI Interview .Reinventing Doosan Vol.New Challenges: Rethinking Korea Inc.Global Network Business Model . 1 January 2008 Rethinking Korea’s Globalization .From Homogeneous to Multi-Ethnic Society .Productivity Catch-Up in Korea and Japan .Fan Gang: Where is the Chinese Economy Headed? SERI Case Study . a Washington-based strategic advisory firm.org . 1 No. Contact: ecssjs@nus.Candlelight Protests: Self-Organization Phenomenon SERI Interview . Korean). Contact: D.soh@forecastweb. defer property tax for approved development land and ease rules.Global Network Business Threatens SMEs Focus .Impact of a Global Recession on a Small Open Economy government will give a 40% property tax rebate for commercial assets. which made the current crisis worse. the willingness to dig into foreign reserves suggests that a supplementary budget is in the cards.Korea’s Need for Scientists and Engineers . 2 No.Freeing Movement & Mind: Korea Opens to the World .Post-Crisis Reform & Consequences . The Economics of the Latecomers (Routledge. as a small open economy.The Reorganization of Global Steel Industry and the Implications for POSCO • Download the above articles for free at www. Chairman Sa Kong-Il SERI Case Study . would make the country stage one of the fastest recoveries in the region.Managing Talent through Employee Engagement Focus . 1 No.

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