IMPACT OF DEVELOPMENTS IN JAPAN,THE MIDDLE EAST AND NORTH AFRICA ON SINGAPORE'S ECONOMY

IMPACT OF DEVELOPMENTS IN JAPAN,THE MIDDLE EAST AND NORTH AFRICA ON SINGAPORE'S ECONOMY: 1.

Mdm Halimah Yacob asked the Minister for Trade and Industry if he would provide an assessment on the impact of the recent earthquake and tsunami in Japan and the conflicts in the Middle East and North Africa on our economy.

2.

Mr Teo Siong Seng asked the Minister for Trade and Industry whether his Ministry would provide an assessment on the impact of the political turbulence in the Middle East and North Africa and the Japanese nuclear catastrophe on Singapore's economic outlook.

3.

Mdm Ho Geok Choo asked the Minister for Trade and Industry in view of the current global developments like the nuclear crisis in Japan and unrest in North Africa and the Middle East (a) what is Singapore's projected economic growth for 2011; and (b) how will these developments affect our pace of inflation.

The Minister for Trade and Industry (Mr Lim Hng Kiang): Mr Speaker, may I have your permission to take Question Nos. 1 to 3 together?

Mr Speaker: Yes.

Mr Lim Hng Kiang: Sir, Mr Speaker, the situations in Japan, the Middle East and North Africa remain fluid, with a great deal of uncertainty. However, let me give my Ministry’s preliminary views based on current state of events.

Japan, as we all know, is the world’s third largest economy, accounting for around 5% of global trade and 9% of world output. It is one of Singapore’s key trading partners, accounting for around 6% of our total trade with the world. As such, the recent developments in Japan will inevitably be of concern to the rest of the world, including Singapore. The immediate source of concern lies in the impact of the ongoing nuclear emergency and power outages on Japan’s industrial activities. As Japan is an integral part of the regional supply chain, particularly in the electronics and automobiles sectors, the near term output loss in the economy could have some spill-over effects on manufacturing and trade activities in the rest of the region.

Much will depend on how prolonged the disruption to industrial activities in Japan will be. At this juncture, we do not expect significant impact on our supply chain. Less than 10% of our electronics imports – mainly components and parts – are from Japan. Feedback from our precision engineering firms also suggests that they have sufficient inventory buffers to tide over any supply disruptions for a few months. If Japan can resolve its nuclear power plant problems and factory production resumes in the near term, any negative impact on the supply chain will likely be transitory.

The events in Japan could also have some implications for our services industries. Japan accounted for around 5% of the total number of visitor arrivals to Singapore in 2010. A slowdown in tourism flows from Japan would thus affect our tourism-related industries. However, our preliminary assessment is that the impact is not expected to be significant at this juncture.

Let me now turn to the political unrests in the Middle East and North Africa which have led to higher volatility in global crude oil prices. Crude oil prices, for example UK Brent, have risen from around US$100 per barrel at the end of last year to US$120 per barrel recently. Higher oil prices will lead to an increase in business cost. Certain sectors such as our transport and chemicals sectors will be affected more. It could also affect consumer sentiments and lower private consumption. Higher oil prices could also dampen global economic growth and affect us indirectly.

At this juncture, the unrest in the Middle East and North Africa has not significantly affected global oil supply as the worst-affected countries such as Libya and Bahrain are not key exporters of oil. Moreover, some members of the Organization of the Petroleum Exporting Countries (OPEC) such as Saudi Arabia have made commitments to increase oil production to cope with any supply disruptions in the region. As such, although the recent increase in oil prices is likely to have affected global economic activities to some extent, the impact has been small.

Barring any further deterioration in events in Japan, the Middle East and North Africa region, Singapore’s economic outlook remains positive. Early indicators of industrial production and exports point to growth continuing at a healthy pace. There are also signs that the recovery in the advanced economies is gaining momentum, as indicated by recent improvements in the US job market.

Growth for the year is expected to be in the range of 4% to 6%, unchanged from the forecast announced in February this year.

Mdm Ho Geok Choo has also asked about the impact on inflation. Assuming no further escalation in global oil prices, we expect the full-year headline CPI inflation to stay within the current forecast range of 3% to 4%. This means that CPI inflation, which rose by 5.2% on a year-on-year basis in the first two months of 2011, is expected to moderate from here on.

The Government will continue to closely monitor these external developments and the potential impacts on our economy.

Mdm Halimah Yacob (Jurong): Sir, I would like to ask the Minister: if the problem in Japan is not resolved within the next few months, what measures will be in place to assist sectors that are affected, notably, sectors like electronics? Secondly, if the problem in Japan is not resolved within the next few months, what is the impact on the current assessment of our GDP for the year?

Mr Lim Hng Kiang: Mr Speaker, Sir, as I had mentioned in my reply earlier, these assumptions were based on the current power disruptions in Japan. We expect the situation to stabilise and not deteriorate too badly in the coming months. In that case, the supply disruptions will be minimal and our companies have taken steps to find alternative sources for their supplies.

Mr Liang Eng Hwa (Holland-Bukit Timah): Sir, I would like to ask the Minister whether he expects the disaster in Japan to reduce the direct investments from Japan to Singapore, and whether the existing Japanese investments in Singapore will be impacted. Does the Minister expect to see some repatriation or reduction in the investment-dollar in Singapore?

Mr Lim Hng Kiang: Mr Speaker, Sir, I think it is too early to tell. We have to do a deeper sectoral analysis on how this whole situation will pan out. It can work both ways. The need to rebuild and grow in Japan may require some repatriation of funds. At the same time, on the other side of the spectrum, Japanese industries may also want to diversify from their base in Japan. It is too early to tell which of these two trends will be the stronger trend.

Mdm Ho Geok Choo (West Coast): Sir, I would like to ask the Minister for his comments on how the political crisis in the Middle East and the nuclear crisis in Japan will have an impact on our energy needs. In view of these developments, what are Singapore's plans to go nuclear and what are our alternative sources of energy?

Mr Lim Hng Kiang: Mr Speaker, Sir, between the two developing situations, I believe the developments in the Middle East and North Africa still have several legs to work through. I do not think we are seeing the end of it yet. Whereas in Japan, the signs – hopefully – are pointing to stabilisation and maybe improvement from here on. It behooves us to be very vigilant because the situation in the Middle East and North Africa can turn for the worst, affecting oil prices and global growth, and affecting us, particularly in the cost of energy. As to the impact on our "pre-feasibility" study on nuclear energy, I think there are subsequent parliamentary Questions filed on this subject. I will let Senior Minister of State, Mr Iswaran, respond to those.