REGIONAL CURRENCY AND FINANCIAL CRISIS (Impact on Singapore's economy)

Mr Tay Beng Chuan asked the Minister for Trade and Industry if he will give an assessment of the impact of the regional currency and financial crisis on Singapore's economy and what are the strategic policies and measures the Government will adopt to maintain the confidence of investors in Singapore and keep the economy competitive vis-a-vis the other ASEAN countries.

Mr Choo Wee Khiang: Question No. 11, Sir.

Mr Lee Yock Suan: Mr Speaker, Sir, may I answer Question Nos. 11 and 12 together as they are related?

Mr Speaker: Yes.

Mr Lee Yock Suan: As the Singapore economy is closely linked to the region, it will inevitably be affected if the regional currency crisis continues for a prolonged period. However, the impact on the real economy has been marginal so far. There was some impact on the volume of re-exports and visitor arrivals. Nevertheless, economic growth picked up in the third quarter to 10.1% compared with 8.2% in the second quarter. For the whole of 1997, we are on track to achieve a GDP growth rate of about 7%.

Two main factors have provided underlying support for our healthy growth this year.

(a) Firstly, we are benefiting from the recovery in global electronics demand, with favourable spin-off effects on trade and hub services;

(b) Secondly, a large part of Singapore's regional trade consists of intra-firm movement of parts, components and final products by multi-national companies. As demand from the eventual markets of the US and EC remained strong, Singapore's trade was not seriously affected by the regional currency crisis.

Looking ahead into 1998, we can expect some moderation in growth. The sustained global electronics recovery and expected healthy growth in the US and EU will continue to provide strong underlying support for Singapore's economic growth. However, the regional financial turmoil is expected to affect our services sector somewhat. Activity in the commerce sector will be dampened by fewer visitor arrivals from ASEAN and lower spending from those who come, reflecting their reduced purchasing power. Re-export trade may also be affected by cutbacks on imports to the region, although this would be somewhat offset by the electronics recovery. Any slowdown in trade would also have a negative knock-on impact on the transportation sector. The financial services sector is likely to see slower growth in the Asian Dollar Market next year as major infrastructure projects in the region are postponed. General uncertainty about the region could also keep funds away and dampen the fund management industry, although fundamentals in the region remain sound and when the currency and equity markets stabilise, foreign funds could return within a relatively short period, to seek good investment opportunities at attractive lower levels. Taking all these factors into consideration, MTI's preliminary GDP forecast for 1998 is 5%-7%.

This currency crisis has highlighted the importance of fiscal prudence and sound financial management. Singapore has a strong current account surplus which stands at 15% of our GDP. The Government budget has been in surplus for many years and there has been no need to borrow money for public expenditure. The MAS has imposed high prudential standards on our financial institutions. Our foreign reserves are strong.

Investors have remained confident of Singapore's economic prospects, despite the regional financial turmoil. Recently, MNCs like 3M and Molex announced their plans to expand their plants in Singapore. In the third quarter of 1997, the manufacturing sector registered investment commitments of S$2.2 billion in fixed assets.

My Ministry does not expect the depreciation of the regional currencies against the Singapore dollar to have a serious impact on our export competitiveness, although it is monitoring the situation and will recommend appropriate measures, if necessary. Although the Singapore dollar has appreciated against the regional currencies, it is competitive on a trade-weighted basis as it has depreciated against the currencies of most developed countries. With about half of our exports going to the OECD countries, the depreciation against these currencies will help our exports.

The composition of Singapore's exports of goods and services is also different from those of other ASEAN countries. Over the years, we have upgraded our manufacturing and service sectors to stay ahead of our regional competitors in terms of technology, skill content and value added.

To remain competitive, we have to continually improve our productivity by upgrading our capabilities and moving into higher value added activities. The Government will continue to invest heavily in education and training, improve our business infrastructure, optimise the use of our limited land and labour resources, and keep a close track of our cost situation so that we remain internationally competitive.

Mr Choo Wee Khiang: Sir, with the currency and stock market turmoil, our economy has performed rather well during the last quarter. My question is: in the absence of a turmoil, would our performance be better than the given percentage? Also, if there were to be a speedy recovery in terms of currencies and stock markets in this region, would the prospect for 1998 be better than 5-7%?

Mr Lee Yock Suan: On the first question, the answer must be yes. There has been some impact, eg, in terms of tourist arrivals and this has also affected the retail trade. I think the impact would probably be greater in the fourth quarter than in the third quarter, and this is compounded by the haze problem. We have to tell our foreign visitors from Europe and elsewhere that the haze has, in fact, cleared. But the message is still there, ie, there is a haze problem here.

The currency turmoil has affected us in different ways. In the real economy, in manufacturing, in fact, we have done very well and we are geared for further growth. We have recently completed a petrochemical project. Our electronic plants are doing well and the world economic recovery has set in in the field of electronics. For next year, if the situation stabilises and the funds start to come back and the stock market picks up, obviously the situation would be better. But it is hard to say how much without proper estimation.

Dr Lee Tsao Yuan: Sir, to the extent that the other ASEAN countries as well as Korea are able to effect a real depreciation of their currencies, would not the Minister anticipate that there will be greater cost competitive pressures on Singapore, and also that there will actually be a greater outflow of investments from Singapore as a result of this, bearing in mind that it is not just the ASEAN countries but also our competitors, eg, Korea, that have depreciated in terms of their currencies?

Mr Lee Yock Suan: As I have mentioned, relative to the ASEAN countries, our export composition is somewhat different. For example, Indonesia is still very dependent on exports of oil and natural produce and their manufactured goods are lower end products. Our closest competitor is probably Malaysia. But there again, we are ahead of them in terms of the skill content. We are higher up the value added ladder. We will have to keep ahead of them. Where we are exporting the same kind of products to the same markets, then they may have a cost advantage in terms of their lower local cost. But if they are importing a lot of components, for example, and the value added component is really not very big, the question is whether they can keep their cost down. There will be higher inflation, there will be wage pressures and so on.

Relative to the NIEs - Hong Kong, Taiwan and Korea - in fact, they are worried that ASEAN currencies having depreciated, apart from the Singapore dollar which has also depreciated by about 10%, the others have gone down by about 30-40%. Taiwan, in fact, has allowed its currency to come down in order to compete and its situation is somewhat similar to ours. Hong Kong is still maintaining its peg and this has been translated into impact on the interest rate as well as the real economy and the stock market. Korea is in a rather difficult situation. We have to watch and see. But there again, they have tried to keep their currency at a certain level, which is rather high relative to the US dollar. Of late, it has come down.

Mr Choo Wee Khiang: Sir, I am aware that the Chinese Renminbi has been rather stable and unhurt thus far. I wonder whether it is going to have an impact on our economy next year.

Mr Lee Yock Suan: The Chinese Renminbi is controlled because it is a closed situation. The Chinese government will, of course, monitor and they may have to adjust. I do not know. It is up to them. But so far, the country is performing very well and the growth rate is very high.

As I said in my answer, we will have to assess and monitor and see how it goes. So far, it looks all right. In fact, in terms of the investment flow to Singapore, we are still doing very well. EDB is still very confident and, if anything, we are in a somewhat stronger position now in terms of our stability and ability to sustain real activity. And confidence of investors in Singapore is very high.

Dr Lee Tsao Yuan: Sir, the reason for Singapore companies regionalising is because of more attractive markets abroad and because of supply constraints internally, but also because of cost pressures in Singapore. Does the Minister not expect that to the extent that there is a real devaluation by these countries, actually there would be a greater outflow of investments from Singapore?

Mr Lee Yock Suan: In Singapore's case, we cannot avoid having this effect. If we try and keep everything in Singapore, we will end up strangling ourselves. So the lower value end will, in fact, have to go offshore and we have to look to the region and further afield as possible areas where we can enlarge our economic scope. Our aim should be to go higher. In fact, we are working closely with the Indonesians in Batam, Bintan and so on, to the extent that it is more attractive now for them to go overseas. In fact, we can encourage and help some of them to go overseas so long as what is remaining here is upgraded and we have full employment.

Dr Lee Tsao Yuan: To the extent that there is indeed an acceleration of offshore investments from Singapore, particularly of the lower end, would the Minister expect then that there would actually be some more medium term effect, say, for example, on unskilled workers in Singapore?

Mr Lee Yock Suan: For the moment, I remain optimistic. As I have said, we will monitor the situation. In fact, we have so many foreign workers here. For the longer term, we have to be careful and make sure that our older workers who are less educated are retrained for the higher value jobs. As of now, I am completely optimistic of the situation.