IMPACT OF EUROPEAN SOVEREIGN DEBT CRISIS

IMPACT OF EUROPEAN SOVEREIGN DEBT CRISIS: 13.

Mdm Halimah Yacob asked the Minister for Trade and Industry whether he can give an assessment of the impact of the European sovereign debt crisis on Singapore's economy, including our employment situation.

14.

Mrs Mildred Tan asked the Minister for Trade and Industry (a) what is his Ministry's assessment of the financial crisis in Greece and whether it has shown signs of spreading to other EU countries; (b) what will be the impact on the Singapore economy if it is not contained; and (c) what plans are needed to be put in place to ride out any volatility.

The Minister for Trade and Industry (Mr Lim Hng Kiang): Mr Speaker, Sir, may I have your permission to take Question Nos. 13 and 14 together? ****

Mr Speaker: Yes, please.

Mr Lim Hng Kiang: Sir, the sovereign debt crisis in Europe was felt most acutely

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in Greece, but, in fact, reflected broader concerns over the sustainability of sovereign debt in a few other southern European economies as well. To date, we have not observed signs of the crisis spreading to the larger economies in Europe. Forceful policy interventions by the European Union (EU) and the International Monetary Fund (IMF) as well as the results of the recent bank stress tests have reduced overall financial market volatility. While the situation remains fragile, investor risk sentiments appear focused on the southern European economies rather than the EU as a whole.

Given Singapore’s limited trade and financial exposures to the southern European economies at the centre of the crisis, the developments in these economies have not materially affected the Singapore economy so far. In particular, our exports to the EU as a whole continued to register strong growth in recent months.

As announced by my Ministry last week, preliminary estimates indicate that Singapore’s GDP grew by 19% on a year-on-year basis for the second quarter of this year, following a similarly strong growth of 17% in the first quarter. In tandem with the economic recovery, the labour market has also improved strongly, with the seasonally adjusted overall unemployment rate declining from a recent peak of 3.3% in September 2009 to 2.3% in June 2010.

In view of the exceptionally strong economic growth in the first half of this year, my Ministry now expects the Singapore economy to grow by between 13% and 15% for the whole of 2010.

However, the expectation of strong growth for the year does not imply that the macroeconomic risks from Europe have fully subsided. Financial instability due to the sovereign debt crisis remains a significant downside risk that could

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dampen growth in our financial sector, with negative spillovers to other sectors of our economy. Moreover, the implementation of fiscal austerity measures in some European economies, combined with the weakening of the Euro, could further weaken EU domestic demand. As announced by the IMF last month, the Euro area as a whole is projected to see a very mild growth of only 1% in 2010. These developments could affect Singapore’s export performance, given that the EU as a whole accounts for 12% of our domestic exports.

Given the small size of our economy and its outward orientation, Singapore will always remain susceptible to volatility in the external economic environment. It is not possible for us to fully insulate ourselves from the impact of any economic or financial turmoil.

Nevertheless, we can mitigate the negative impacts of economic volatility. We did so during the recent global financial crisis, because of our sound financial management and fiscal prudence, which helped to keep our financial system stable, maintain investor confidence in our economy, and provided us with the resources and the confidence to introduce various measures to ride out such difficult times.

The Government will, therefore, continue to monitor the developments in Europe and to assess the risks of contagion, and we stand ready to respond when appropriate.

Mdm Halimah Yacob (Jurong): Sir, supplementary question for the Minister. The IMF had warned the Asian countries of possible shocks from the Euro zone crisis and the excessive capital flows into the region. Could the Minister comment on this and also whether there is a danger of a double dip recession? I note the

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Minister made some general comments of a positive outlook but also made very qualified statements towards the end, and we also know that the unemployment situation is still quite critical in both Europe and in the US. So, is there a danger of a double dip recession affecting us?

Mr Lim Hng Kiang: I think, basically, we all have to recognise that the second half of this year will see lower global growth but the situation is different in different regions. The G3 economies, of course, will see much lower growth whereas for much of the emerging economies, the risk, in fact, lies in higher liquidity and the risk of an asset bubble. So as highlighted by IMF, for the emerging economies, higher liquidity, inflationary pressures and asset bubbles remain something that we have to worry about. The consensus so far among the economists is that a double dip recession is not a significant risk for the moment. The growth prospects have turned downwards but we do not expect to see a double dip global recession.

Mrs Mildred Tan (Nominated Member): Mr Speaker, can I ask the Minister for an update on the EU-Singapore Free Trade Agreement (FTA) discussions? Have these been impacted by the situation in EU?

Mr Lim Hng Kiang: Our FTA negotiations with the EU are progressing well. We have had two formal sessions and the third session is in September, and that is on track.