SINGAPORE'S ECONOMIC PERFORMANCE AND OFF-BUDGET MEASURES

[Mr Speaker in the Chair]

Dr Richard Hu Tsu Tau: Mr Speaker, Sir, in the FY98 Budget Statement, I informed the House that the Singapore economy would feel the full impact of the regional economic crisis this year. I announced several tax concessions and other measures to help ease business costs during this economic slowdown, and to help local businesses obtain working capital in a situation of tight liquidity. I also said that the Government would monitor the state of the economy closely and stood ready to implement appropriate off-budget measures if the economy slows down sharply.

Since then, the external economic environment has deteriorated significantly. The US and the EU are still growing robustly, but Japan has slipped into recession. Closer home, the regional economic outlook has also worsened. After the change of government in May, Indonesia is now undergoing a difficult process of political transition and economic reconstruction. The negative growth rates registered in the first quarter of 1998 in Malaysia, Hong Kong and South Korea are indications of tougher times for Asian economies in the months ahead. The weakening Yen has also led to fears of another round of currency contagion. Regional currencies have therefore come under pressure. The prospects are for continued turbulence and uncertainty.

Singapore's financial and economic fundamentals are good. But this deteriorating external environment has adversely affected us. This is inevitable, given the openness of our economy and our close linkages with the region. The latest figures confirm that growth momentum in Singapore has indeed slowed significantly. GDP growth moderated to 5.9% in the first quarter of 1998, from 7.8% in 1997. MTI's preliminary estimate for the second quarter, based on figures for April and May, is that growth has slowed further to 1.9%, with the seasonally adjusted annualised figure at 0.2%.

The manufacturing sector has slowed down, due to weaker global demand and the regional economic crisis. The outlook for the worldwide electronics industry has turned less sanguine. Producers are cautious about demand and wary about rising inventories. The commerce sector continues to be affected by the decline in entrepot trade, slower tourist arrivals and weaker domestic consumer spending. This has in turn affected the transport and communications sector.

The financial services sector has also slowed considerably as activity in the Asian Dollar Market and foreign exchange market remains weak, and domestic bank lending continues to slacken. The construction sector is still supported by the healthy pipeline of major public sector projects, although private construction activity has slowed down drastically.

The Composite Leading Index, which leads economic activity by about three quarters, has continued to fall since the fourth quarter of 1997. The latest survey of business expectations in March 1998 also showed that the outlook for most sectors had deteriorated, especially the commerce and services sectors which are more exposed to the region.

The trade figures confirm the growth estimates. Our trade performance has been weak. Non-oil domestic exports in the two months of April and May fell by 3.2% compared to a year ago. Electronics exports contracted by 4.8%, while non-oil re-exports fell by 2.4% due to a reduction in regional demand.

Given the pessimistic external environment and domestic sentiments, MTI expects economic growth in the second half of the year to remain very weak, and possibly even become negative. However, for the full year of 1998, we should still see positive growth.

MTI's previous GDP growth forecast of 2.5% to 4.5% for 1998 was made in February this year. After factoring in the substantial regional developments that have arisen since then, as well as possible future downsides in the external environment, MTI has revised this forecast down, to 0.5% to 1.5%.

Additional measures

The tax and budgetary measures announced in my FY98 Budget Statement were based on the economic outlook in February, against a volatile regional setting. Rather than reacting prematurely, the Government decided first to watch how external events would unfold, and ascertain the pace and extent of the economic slowdown.

Now that developments are clearer, and we have revised our growth forecast downwards, we are ready to act to mitigate the impact of the regional troubles on our economy. The Government has therefore decided to implement a package of additional measures worth a total of $2 billion to cut business costs and stimulate the economy.

In carrying out this package of additional measures, we should recognize that the primary cause of Singapore's current economic slowdown is the sharp fall in external demand, especially regional demand. It is not domestic problems inherent in our own economy.

This is in contrast to the 1985/86 recession where the primary cause was the loss of competitiveness of the Singapore economy. In particular, in the early 1980s, labour cost increases had exceeded productivity growth significantly. As these were internal problems, we could rectify them swiftly by changing policies and making our own adjustments. Together with the quick recovery of global demand, the Singapore economy was able to bounce back within one year.

This time, our export competitiveness position has not been too adversely affected, although we cannot be complacent and will have to monitor the situation for specific sectors. Our unit labour cost and unit business cost have been stable. While the Singapore dollar has indeed appreciated substantially against the baht, ringgit, rupiah, and won, it has depreciated against most OECD currencies. On a trade weighted basket basis, the Singapore dollar has appreciated only slightly. Furthermore our inflation has been low, whereas several of these regional countries are suffering from high inflation and cost of capital as a result of their weaker currencies.

The problems we face this time are largely outside our control. We cannot change the external environment, or determine the course of events in the region. However, we can cushion the fallout from the regional economic slowdown on the Singapore economy. We should also use the opportunity to consolidate our strengths and further enhance our capabilities. In this respect, the package (Cols. 359 - 360) of additional budget measures has three broad objectives : (i) to reduce business costs; (ii) to build economic infrastructure and capabilities; and (iii) to help stabilize specific sectors of the Singapore economy. Package - OFF-BUDGET PACKAGE (Cols. 359 - 360)

Land - Rentals and Charges

With our limited land resource, land-related costs like rentals are a significant proportion of business cost. To help ease the pressures of land-related business costs, the Government will implement the following measures.

Additional Property Tax Rebate

First, in addition to the 15% property tax rebate which was announced during the FY98 Budget Statement, the Government will grant an additional 40% property tax rebate on commercial and industrial properties for the year commencing 1st July 1998 for a total of 55%. The additional revenue loss to Government is estimated at $400 million. HDB and JTC will pass on all of this rebate to their tenants and lessees. Likewise, the Government strongly urges private sector landlords to pass on at least half of this rebate to their tenants.

Rental rebates by JTC & HDB

Second, JTC and HDB will increase the rental concessions to their tenants and lessees.

As part of JTC's continuing efforts to adjust its rents to varying market conditions, JTC will reduce its posted rents by up to 12%. This will benefit new tenants and those whose tenancies come up for renewal.

In addition, JTC will also grant enhanced rental rebates of up to 20%, depending on how far the existing rents are from JTC's posted rents. About three quarters of JTC tenants and lessees, who are currently paying more than 80% of the posted rent, will enjoy the full reduction of 20%. Those paying less than 30% of posted rent, about 2% of the total, will get a freeze in rents. The rest of the tenants and lessees will enjoy pro-rated net reductions. These measures supersede those announced at the FY98 Budget, and are estimated to cost JTC an additional $200 million over a 12-month period.

Similarly, HDB will reduce its posted rents in line with market rents. For industrial properties, HDB revises its posted rents every quarter in line with the market. It has already reduced posted rents by 10% in the first half of this year, and will implement a further reduction of up to 5% in the 3rd quarter. In addition, HDB will also grant a net rebate on its industrial land leases of up to 20%. Tenants of HDB industrial and commercial space will enjoy a flat 10% rebate on their gross rents. These rebates are estimated to cost about $80 million.

JTC and HDB will be releasing more details on these additional concessions shortly. Rental rebates by Civil Aviation Authority of Singapore (CAAS)

CAAS will also extend a 15% rebate on the rentals for its office, warehouse and retail tenants for 12 months with effect from 1st July 1998. In addition, it will continue with the rebate on airport concession fees which was given in the first half of 1998. These additional measures are estimated to cost CAAS $54 million.

Labour Costs

Labour costs form a significant proportion of business cost in Singapore. Appropriate wage restraint will be a key measure to keep labour costs down. The priority must be to protect jobs.

Cutting wage costs was also a key response during the 1985 recession. However, at that time our wage system was too rigid. To trim wage costs, we had no choice but to cut the employers' CPF contribution rate. After the recession, we set up the flexible wage system. Over the years, we have built up a variable component of wages which can serve as a buffer and be reduced during difficult times. Today, in the civil service the variable component has increased to over 20% of annual wages, while the corresponding figure in the private sector is about 16%. This sizeable variable wage component will provide a useful first line of defence to reduce wage costs. As the National Wages Council has pointed out, wage restraint is an integral part of our response to the current problems, for both the private and public sectors. The civil service will take the lead in this.

In February, the Government announced a freeze on salaries of Ministers and senior civil servants this year. In line with NWC recommendations, the civil service also reduced the mid-year portion of the Annual Variable Component (AVC) to � month, from the usual _ month. At the same time, the Government indicated that the end-of-year AVC would be reviewed when the economic situation and outlook became clearer. The deteriorating outlook has made it more probable that we will have to reduce the end-of-year AVC. We will decide on the actual adjustment nearer the end of the year, taking into account the economic conditions prevailing at that time.

Wage restraint will complement Government's ongoing efforts and new initiatives for worker training, job matching and upgrading the employability of Singaporean workers. These include the Education Training Fund and various manpower development and training initiatives under EDB's Economic Development Assistance Scheme (EDAS). Recently, the Government and SDF contributed $50 million each to expand the Skills Redevelopment Programme (SRP). The SRP provides training courses to raise the employability of less educated and older workers by equipping them with certifiable skills, so that they can find suitable employment.

The Government will extend an additional $20 million grant to expand the training facilities and capacity to support the SRP. This includes establishing a new Skills Development Centre to cater to growing demand for training places, and expand the range of courses through the Singapore National Employers Federation and the network of industry associations. The Ministry of Manpower will be announcing further details when they are finalised.

Costs of Capital

The availability and cost of capital to support business activities are a third area of concern amongst businessmen during this period of uncertainty. Interest rates have indeed risen in recent months, but this is largely a reflection of the rising risk premium in Asia. In fact, Singapore's interest rates remain relatively low, compared to other countries in Asia with perhaps the exception of Japan.

There have been calls from the public for the Government to reduce interest rates and to encourage banks to be more forthcoming in their lending. However, the scope for doing this is very limited. Given the openness of our financial system, MAS can only manage the exchange rate. The level of interest rates is set by market forces based on foreign interest rates and market expectation of the movement of our exchange rate. For individual loans, banks set the interest rates based on their cost of funds and their assessment of the credit risks of individual borrowers.

If the MAS were to start pumping in liquidity to bring down interest rates, foreign investors would move out of the Singapore dollar. And then, we will end up with even higher interest rates because investors will start demanding a higher premium to hold Singapore dollar deposits. The banks would in turn have to raise their lending rates because their cost of funds would have gone up. So it is better for interest rates to be determined by the market.

Neither can Government instruct the banks to extend loans to companies. These are commercial decisions which the banks themselves have to take. The Government is not in a position to second guess their judgments, or to take responsibility for the consequences if the loans turn bad.

However, what the Government can do to help local businesses continue to have sufficient working capital is to provide support through the Local Enterprise Financing Scheme (LEFS). Under this scheme, banks undertake the necessary credit assessment, while the Government co-shares the risks with them. This is a practical way to help local enterprises address the problem of credit availability.

In the FY98 Budget the Government enhanced the LEFS scheme, to increase the loan line to $1.1 billion. We also increased the co-sharing of risks by Government and the maximum loan quantums, and extended the scheme to cover more local enterprises. The response so far to the enhanced LEFS scheme has been encouraging. The Government will now increase the LEFS loan line further, to $2 billion and more if necessary. We will also study further enhancements to the scheme to respond to changes in the credit situation.

Services Charges

Fees and service charges are a fourth area of business costs containment which Government will address. Suspension of Parking Surcharge Scheme

Currently, a surcharge of $60 per lot per month is levied on all non-residential car parks with at least 5 parking lots in and around the Restricted Zone (RZ). The surcharge supplements the Area Licensing Scheme (ALS) as a road usage restraint measure to keep traffic free flowing within the CBD.

The retailers have been asking the Government to suspend this Parking Surcharge Scheme for some time. We were unable to do so earlier because the Parking Surcharge Scheme was an important component of the total traffic management system within the CBD. The Electronic Road Pricing (ERP) scheme will be a more flexible and effective way to control traffic congestion. With the extension of the ERP to the Restricted Zone from 1st September 1998, the Land Transport Authority (LTA) will be suspending the Parking Surcharge Scheme.

The suspension will benefit the owners of car parks currently under surcharge. The Government urges these owners to pass on their savings in the form of lower parking charges to benefit their tenants, retailers, and motorists who use their car parks. This measure is estimated to cost $37 million a year.

Retailers in the CBD have also requested that ALS hours be shortened on Saturdays to encourage shoppers to drive into the CBD. With the implementation of the ERP for the CBD, the LTA will be able to make this adjustment as well. The Ministry of Communications will release the details in a few weeks' time, when it announces full details of the new ERP charges.

Port-Related Tariffs

Responding to market conditions and customer requirements on an on-going basis, PSA Corporation has already extended various rebates to its shipping customers through its customised agreements. Similarly, it has reduced its distripark and warehouse rentals.

For shippers who use Jurong Port, JTC will also offer a 20% rebate on Jurong Port tariffs with effect from 1st July 1998. This is estimated to save $20 million for some 1,000 companies.

Telecommunications Tariffs

Similarly, as part of its regular schedule of tariff reductions, Singapore Telecoms has informed the Government that it will be offering further rate reductions on its International Direct Dialling, Subscriber Trunk Dialling, Local Leased Circuit, International Leased Circuit, and Frame Relay services beginning the second half of this year. These changes are expected to result in customer savings totalling $100 million. Electricity Tariffs

Since corporatisation, Singapore Power has made substantial productivity gains, reducing costs and improving financial returns. It will give a one-off 3.5% rebate on the non-fuel component of electricity tariff for 1 year with effect from 1st July 1998. This is equivalent to a 2.6% reduction in average electricity tariff and is estimated to result in cost savings of about $81 million for all users. This is separate from any adjustments which will be made on the fuel component of electricity tariffs in line with movements in fuel cost every quarter.

Water Tariffs

The Government will not hold back or reduce the PUB water tariff increases for households, scheduled for 1st July. The increases are a long term strategic move to get water tariffs to reflect the true scarcity value of water in Singapore, and to make Singaporeans conscious of the vital importance of conserving water. The increases will not cause any hardship to lower income households, as they will be fully offset by the PUB rebates and service and conservancy charge grants for the HDB 1-4 room flat dwellers.

Economic Infrastructure/Capabilities Building Public Sector Projects

Given the open nature of our economy, it is difficult to stimulate domestic economic activity through pump priming or boosting consumption. However, even as we seek to reduce costs to maintain our competitiveness, there are projects which the Government can undertake which contribute to building our economic infrastructure and enhancing our capabilities for the longer term. To put in place such economic infrastructure and capabilities for the future, Government will speed up several on-going public sector infra-structure projects as well as bring forward suitable new development projects. In total, close to $1.9 billion worth of new development projects have been approved. Together with the on-going projects which will be speeded up, it will result in an estimated additional $670 million in new disbursements in FY98 alone.

Education will continue to be the key focus, accounting for over 40% of the newly approved projects. Human talent remains our most precious resource and we want to develop it to the maximum. Major projects brought forward will include the expansion of our Primary School Building Programme to increase the number of Primary schools to be built in new and mature towns from 18 to 27; the incorporation of IT into Primary and Secondary Schools under construction; upgrading of NUS and NTU; and enhanced computer facilities at our polytechnics. MOE will also expand its recruitment of teachers to raise the effectiveness of the education system.

Economic infrastructure will be the other area of focus. Key projects include increased investment for commercial rollout of Singapore One; Jurong Island development; and development of industrial land. We will also provide additional funds for EDB's Economic Development Assistance Scheme Phase III which provides loans and grants support for companies and manpower initiatives, and for TDB to undertake more trade promotion and facilitation work.

Measures For Specific Sectors

Aside from cost reduction and infrastructure enhancement measures, the Government will adopt several specific measures to help stabilise and strengthen certain sectors of the economy. This is to ensure that such sectors, whose health affects the rest of the economy, are not subject to severe stress.

Property Market

The property market is one area of particular concern. A weak property market can affect confidence and asset values, and also have repercussions on the financial sector.

In November 1997 and again during the FY98 Budget Statement, Government made adjustments to its land sales programme, to avoid aggravating the excess supply in the market.

Since the last review, the property market situation has continued to weaken. To help stabilise the market, the Government will adopt the following additional measures.

First, we will suspend sale of sites for private residential, executive condominiums and commercial development for the rest of 1998 and 1999, except for the following:

a. Sengkang site to tie in with the development of the MRT/LRT station and bus interchange in Sengkang New Town.

b. Clarke Quay MRT site to tie in with the development of the North-East MRT line.

c. Four small infill sites within the Chinatown Conservation Area.

The Government will resume selling a steady supply of land when the property market recovers. We will review the situation at the end of 1999 to decide whether to resume land sales in the year 2000.

Second, we will suspend the 5% per annum premium that is currently levied on developers of private residential properties for every year of extension of their Project Completion Period (PCP). Developers can now apply for extension of PCP up to 8 years without penalty. The suspension will apply to applications made before the end of 1999.

Third, we will allow the reassignment of government land sale parcels, as a temporary measure, until the end of 1999. This will allow consolidation within the property development industry, as some successful tenderers may no longer be in a financial position to complete the development.

Fourth, we will defer payment of stamp duty by purchasers of uncompleted properties until TOP or time of subsequent sale, whichever is earlier. This will also apply to subsequent buyers of an uncompleted property. It will help to improve the cash flow of property purchasers. This is a refinement of the measure introduced during the May 1996 property curbs. The estimated revenue impact on Government is $85 million.

The Ministry of National Development will be announcing more details of these measures separately.

Financial Sector

Tax Deduction for Bank Provisions

Besides the property market, another key area is our financial sector. Our banking system is strong and sound. However, to encourage banks to make adequate provisions for loan exposure to the region and to further promote stability in the banking sector, the Government has decided to lift the current 3% limit on tax deduction for general provisions made by banks and merchant banks for Year of Assessment 1999, provided such provisions exceeding 3% are approved by the Monetary Authority of Singapore.

General provisions exceeding 3% will be brought to tax when they are written back to the bank's Profit & Loss Account later. The tax rate to be applied will be the tax rate prevailing when the provisions were made. If at the end of 5 years, the general provisions still exceed 3%, the provisions in excess of 3% will be brought back to tax. Again, the tax rate to apply will be that prevailing at the time when the provisions were made.

Stamp Duty for Contract Notes

At the same time, the Government has also decided to suspend the stamp duty on contract notes for share transactions for one year, with effect from 30th June 1998. This is in recognition of the marked weakness in the stock-broking industry. Compared to the average monthly turnover in 1997, stock market turnover in the month of May 1998 declined by over 40% in value terms. Consequently, earnings for stockbrokers as a group have also fallen sharply. The immediate outlook for the industry also remains weak. The suspension of stamp duty will help to lower transaction costs. This measure is estimated to cost the Government about $50 million. Hotel Sector Refurbishment Of Hotels

The hospitality sector has been one of the most severely hit. Tourist arrivals have declined by about 17% in the first five months of this year. Hotel occupancy has also fallen. Government will give a tax allowance of up to 150% for qualifying expenditure incurred in the refurbishment of hotels, to encourage hotels to upgrade during this lull period. This incentive is applicable for a period of 5 years and focused more on hotels in the core zone.

Conclusion

The whole package of measures will inject an estimated $2 billion into the economy. Of this, about $1.6 billion is expected to affect the Budget balance directly. Based on revised revenue and expenditure estimates, the introduction of the package will result in a budget deficit of about $800 million for FY98. The Government believes that this level of budget deficit, relative to the size of our economy and at a difficult time like this, is still in line with our prudent approach towards fiscal policy.

As a small open economy with extensive links to the region, we cannot generate strong economic growth through our own actions, so long as the regional environment and external demand remains depressed. Sustained resumption of economic growth can only come about with the stabilisation and recovery of the regional economies and increased global demand for the goods and services we produce.

We must brace ourselves for slower economic growth during the next few years of regional transition and recovery. Some industries and companies will feel the fall in business demand and profits more acutely than others. Some may have to merge or relocate. Retrenchments will increase as businesses consolidate and re-structure themselves. This process will be painful but we must accept it as the only way to adapt to the changed economic conditions and resume growth again.

The Government will continue to monitor the external and domestic economic situation closely and take additional suitable measures where necessary to maintain the framework for economic activity.

With more retrenchments this year, workers should have more realistic expectations, accept wage restraint and retrain themselves to acquire new capabilities and remain employable. New jobs are being created, but Singaporeans must acquire the necessary skills and knowledge to perform these jobs.

On their part, companies should streamline their operations, improve their efficiency and productivity, and upgrade their workers. They too should make the necessary adjustments to stay the course and position themselves to capitalise on the opportunities when the region recovers.

The regional economic crisis poses us a formidable challenge. But there is no reason to be daunted or disheartened. Our financial and economic fundamentals are sound. We do not suffer from the problems which beset some other regional countries. Analysts and investors know this. To quote a recent report by SG Securities Research, "Overall the Singapore economy will face a difficult environment but, like a well maintained ship with plenty of ballast, state-of-the-art navigational facilities and a good crew, will safely navigate the choppy waters and not only stay afloat but slowly move against the storm". By taking appropriate measures now to counter the adverse conditions, and to develop our long term potential, we will emerge more resilient and competitive when the region recovers. [Applause.]

Mr Leong Horn Kee: Mr Speaker, Sir, I like to take this occasion to ask the Minister a few questions. First, I would like to congratulate him for having presented a comprehensive and a well-done Off-Budget Budget. Reading his speech, it sounds really like a Budget session to us. And I believe the Minister has put in a lot of thoughts by introducing measures that are able to stimulate the economy and bring us back to a good footing. I am particularly impressed by the Minister's coverage on how he intends to cut down corporate expenses and costs. In this respect, I like to congratulate the Minister for having introduced many new cost-cutting measures, especially by JTC, HDB, CAAS and various other quarters.

I would like to ask the Minister a few questions. First, on the proposed property tax rebate for commercial and industrial properties, which is a very substantial 40%. Why is it that the Minister did not also include the residential sector as a component to enjoy this rebate?

The Minister mentioned that for this entire Budget package, there will be a negative budget of $800 million. It seems to be a very prime pumping Budget. May he explain whether this $800 million negative is just for operating budget or does it also include the capital expenditure of the Government?

On the question of interest rates, of course, the Minister explained that the Government cannot ask banks to be more accommodating. But I think the Government revenue collection agencies can be more accommodating. In their collection of rates, fees, various payments, perhaps the Government can instruct the Government agencies like JTC, HDB, PSA and even IRAS to be more accommodating. Since times are difficult, many companies and individuals are facing difficulties in meeting cash flow requirements.

I would like to say that the Minister has come out with a good package for a specific sector, which is the property sector. I note that the measures are very well conceived and well thought through. Once again, we would like to appeal that this 80-20% payment between the bank and the individual might also be a point that the Minister would like to review, since it is an item that can help purchasers in their cash flow. Perhaps they can use their CPF savings for that 20%. This might help them to buy properties, especially for first-time property purchasers who may find that this is the time for them to enter the market if they are able to find the finances.

Mr Speaker: Order. Mr Leong, may I remind you that you are not allowed to make a speech. Please ask your questions.

Mr Leong Horn Kee: Yes, I will ask two more questions, Sir.

I want to ask the Minister how come he did not consider the foreign worker levy and the foreign maid levy as components for cost cutting. These are very heavy costs to the employers and they have to incur substantial costs to employ some of these foreign workers. For families which employ foreign maids, they also can look for some form of relief for their households.

Finally, I note the Minister has not provided any particular incentive for the individual. Could he also explain why in this case he has not considered giving, say, an increase in the tax relief from 5% to 10% that was given last year. In this particular package, I do not see any provision for individuals to improve on their own cash flow and increase spending, so as to help stimulate the economy.

Mr Lew Syn Pau (Kreta Ayer-Tanglin): Mr Speaker, Sir, like my colleague before me, I would like to thank the Minister for Finance for the very comprehensive off-Budget measures. I am sure they will be welcomed by a lot of corporate business people as well as property developers. But I would like to ask why the Minister has not considered measures to stimulate domestic consumption, because I notice most of them are more cost cutting measures for companies. There are not enough measures given to the individuals to put more disposable income into their pockets and help to stimulate consumption. For example, I do not know whether the Minister would like to consider giving more time to the taxpayers to pay their income tax over a longer period of time and also, for example, the domestic and foreign worker levies could perhaps be reduced, so that there will be more disposable income for people to spend.

In terms of property purchase, the Minister may want to take a look again at this 20% which is now to be paid for in cash when one buys a property. Perhaps the Minister may want to consider allowing both CPF and cash to be used to help stimulate the property market.

Mr Low Thia Khiang (Hougang): Mr Speaker, Sir, it is common knowledge that the bank interest rates will affect the ability of Singaporeans to service their loans and the ability of businesses to stay afloat under the current economic situation. I wonder why the Government has not introduced any measure to influence the banks to reduce interest rates so as to ease the burden of borrowers.

Mr Chng Hee Kok (East Coast): Mr Speaker, Sir, I applaud the Minister for Finance for some of the measures he announced today. I have a number of questions for him.

On the projection of our economic growth of 0.5-1.5%, has the $2 billion package, which has just been announced, been taken into account in the projection? The $2 billion package would have some stimulative effect on the economy.

Sir, on the budget deficit of $800 million, I would like the Minister to explain whether this will have a negative impact on the Singapore dollar.

Some of my colleagues have already mentioned measures to stimulate consumption. I hope the Minister would not take too severe a stand on the Annual Variable Component (AVC), ie, a further substantial cut in the AVC which he intends to do if the economy worsens, because this will only make the situation worse. So I hope the Annual Variable Component will not be cut substantially. If we send a wrong message that the AVC will be cut, we will end up like the situation in Japan whereby a one-off tax rebate had no effect on their economy at all.

I have another question on interest rates. The Minister has mentioned that the Government has no control on banks' credit. But, unfortunately, there are many small and medium-sized companies today which are actually facing a credit crunch from banks, all because bankers are afraid to lend. Irrespective of whether the companies are good or bad, banks take a very blunt approach and I think the Minister should address this issue to see how this credit crunch can be eased for many of the small and medium-sized companies.

Finally, the Minister said that we have no control on interest rates and yet just a few days ago, the Prime Minister of Malaysia, at the UMNO general assembly, indicated that the economy in Malaysia would have a speedier recovery if interest rates in Singapore were reduced. It was reported in the press that he said, "If interest rates rise, there would be an outflow of money from this country [meaning Malaysia]." Sir, if the Prime Minister of Malaysia says that, should we not be a good neighbour and find ways to reduce interest rates?

Mr Lim Swee Say: Mr Speaker, Sir, the Minister mentioned that the new forecast for this year will be 0.5%-1.5%. If we assume a productivity growth of 2% and the workforce expansion of 1%, it means that the unemployment rate in Singapore this year is likely to reach between 3-5%. Next year, if we continue to grow at a slower pace of about 1%, then it is possible that unemployment may reach as high as 5-7% by the end of next year. I would like to ask the Minister in what way the off-Budget measures will help us not just to contain the slowdown on the loss of jobs today but, more importantly, contribute to the speeding up of the creation of new jobs in 1998 and 1999, so that, hopefully, unemployment would not get out of control in Singapore.

Mr Speaker: Dr Hu, would you like to give your answers to the questions raised?

Dr Richard Hu Tsu Tau: Sir, I will answer the questions in turn. Mr Leong Horn Kee asked why the property tax rebate has not been extended to the private residential sector. The answer is fairly straightforward. The private residential sector is already paying very low property tax of 4%. In addition, with the GST rebates introduced over the last few years and other offsets, about 70% of the population of Singapore no longer pay property tax, particularly the HDB sector. So there is really little reason to give them further rebates.

He wants to know why the Government should not be more accommodative on interest rates and fees charged. I think the impact of interest rates on fee collections is that the amounts are so small and I do not think it is going to affect the economy very much. But I will ask our officials to be more reasonable in pressing people who find difficulty in paying on time.

He has also asked why we have not reduced the amount of cash required to purchase properties from 80% to 70%. We have said many times that this is undesirable. The last thing we want to do in a situation of an economic downturn is to induce people to increase their debt liabilities which, if uncontrolled and later if they should lose their jobs, would have a severe repercussion not only on the individual but on the banks which lend such money.

He also wants to know why we have not cut the foreign worker levy. This was explained in the earlier question and answer session because a reduction of foreign worker levy will merely induce companies to increase their intake of foreign workers which we do not want at this point of time. In the case of the domestic maid levy, even at the current rate, demand has not slackened. So a cut at this time would merely increase demand.

I had anticipated the question why nothing has been done for the individual. I would like to remind him that I started off by saying that the package of measures we are introducing is focused entirely, in this present case, on getting companies to be viable. Our main objective is to reduce costs so that they can remain in business and ensure employment. Giving concessions to individuals to stimulate the economy will have very marginal value at this point of time. For example, increased private consumption is not going to help companies in the export sector. Our priority is to help the businesses stay viable so that they can preserve jobs for Singaporeans.

This also answers the question raised by Mr Lew Syn Pau on why we have done nothing for the individual. I would point out that we have, in fact, done something for the individual in my earlier Budget in March where we gave 5% rebate on personal income tax and rebates on HDB rents and S&C charges. For the time being, we do not consider it necessary to increase these rebates because its effect on domestic consumption will be marginal in helping us recover from our present dilemma.

Mr Lew also asked about the domestic maid levy and the answer is what I have just said to Mr Leong. On the use of CPF for housing, we do not want to increase the individual's debt burden this time.

Mr Low Thia Khiang has asked why Government is not doing anything to reduce interest rates. I will answer this question together with the question raised by Mr Chng Hee Kok on interest rates in general.

Mr Lim Swee Say has asked what Government is going to do to stimulate the recovery so as not to allow unemployment to increase. There are several ways we have proposed to do this. Firstly, by reducing business costs. This will allow businesses, which may face difficulties keeping their staff because they are unprofitable, to remain in business and therefore protecting jobs. Our investments in new infrastructure are also to ensure that we continue to attract foreign investments. And we have large programmes through the EDB to co-invest in new ventures and EDB is actively scouring the world for new investments. And through the generation of new types of industries, particularly high-tech ones, we hope to protect future jobs or generate new jobs for Singaporeans.

Mr Chng Hee Kok has asked whether the $800 million deficit will affect the Singapore dollar. I would hardly think so, because we have very large reserves. As Members know, $800 million deficit is a small percentage of our total GDP and I doubt it will have any influence at all.

He has also asked why there have been complaints from the Malaysian Prime Minister and from the Malaysian media in general on high interest rates for ringgit in Singapore. The problem arises from a misunderstanding of the nature of interest rates in Singapore. The Malaysian media have reported that Singapore banks are offering very high interest rates which tend to attract the outflow of ringgit into Singapore, therefore, reducing the liquidity in Malaysia and affecting their business. Some even suggest that this might be a deliberate attempt by the Singapore Government to damage the Malaysian economy. I would say categorically that this is not the case. We have to remember that Malaysia is Singapore's second largest trading partner, and Singapore is also one of the largest investors in Malaysia. So the continuing welfare of the Malaysian economy is of vital interest to Singapore. It is not in our interest to try and undermine their economy.

The MAS has also earlier issued a statement that it does not regulate or influence the interest rates of bank deposits in Singapore, whether the money is in Singapore dollars or in any other foreign currencies. Although it has been said before, I think at this point of time it will be useful if I elaborate on the principles which have been announced earlier.

Banks in Singapore are free to set interest rates on deposits in a wide range of foreign currencies. Currently, deposit accounts for over 25 currencies are readily offered in the Singapore Asian Dollar Market, covering all the G-7 countries' currencies, and most Asian and European currencies. Interest rates quoted for these deposits in these currencies are based on market supply and demand. Singapore is the fourth largest foreign exchange trading centre in the world, following London, New York and Tokyo. Of necessity, therefore, the Government cannot interfere in the foreign exchange markets. All currencies enter and leave Singapore freely, depending on demand for such currencies.

In recent months, interest rates for off-shore Malaysian ringgit deposits have been very volatile, and have on occasion risen as high as 30% to 40%. Such high interest rates for the ringgit have naturally raised concerns in Malaysia, but it should be emphasised that the high rates were determined by market conditions and have always been of fairly short duration. In normal times, ringgit interest rates offered by banks in Singapore are not significantly different from those quoted by banks in Malaysia. The difference is probably a few percent. Today, the difference is probably about 4% to 5%, based on the risk premium, but no more than that. When spikes in the rates on ringgit do occur, they therefore reflect severe shortages of supply, suggesting that on those occasions currency speculators have been caught covering short positions.

I would also like to point out that the globalization of capital markets allows currencies to move freely world wide. As long as there is an offshore demand for ringgit, whether by Malaysians or foreigners, any attempt to restrict the trading of such currencies will merely induce the traders to shift their activities to another foreign exchange centre such as Hong Kong or London. Even the Singapore dollar is traded actively in both Hong Kong and London, and this explains why even after our foreign exchange market closes in Singapore, the Singapore dollar exchange rate still moves because of trading in the other centres. It merely moves from one time zone to the other electronically. This can just take place at any time. So trying to restrict such trading activities of ringgit in Singapore is simply not feasible.

As I said in the Ministerial Statement, the Government does not and cannot manipulate the level of interest rates even for Singapore dollar loans and deposits. Many laymen, whether in Singapore or elsewhere, believe erroneously that the Government plays a part in setting interest rates, but this is simply not so. Their belief arises because many governments, including the Malaysian government, directly intervene in the interest rate markets, quite legitimately, of course, as an instrument of monetary policy. I think many may assume that since other countries do it, we must also be doing it. But in our case we do not do it. Because of the small size and openness of our economy, Singapore cannot and does not use interest rates as an instrument of monetary policy. Banks in Singapore are free to set interest rates in response to market conditions. MAS monetary policy is centred in managing the exchange rate and not on domestic interest rates. The Singapore Government, therefore, has no policy either to raise or lower interest rates in Singapore on the Singapore dollar or on any other foreign currency.

Mr Inderjit Singh: Sir, in the interest of keeping investors in Singapore in the long term, would it not be better for us to consider a permanent reduction in the JTC or HDB rental, rather than a one-year rebate, as has been proposed?

Dr Richard Hu Tsu Tau: The one year rebate, of course, can be extended, depending on conditions. So a year-to-year extension gives us more flexibility rather than a permanent change, because conditions do change.

Mr Inderjit Singh: My point is that we want to keep investors here for a long time, not just on a year-to-year basis. So in making the assessment of whether to keep the investment here in Singapore or to move out to our neighbouring countries, they may want to look at a more permanent solution rather than a year-to-year solution that has been proposed.

Dr Richard Hu Tsu Tau: Under present conditions, the likelihood is that if things continue to deteriorate, there will be further reductions rather than remaining fixed at any single rate.

Mr Goh Choon Kang: Sir, I have two questions. First, can the Minister explain why is the suspension of land sales given such a relatively long period, ie, 1� years? Why cannot a review by made, say, during the next Budget session? Second, how confident is the Government that this off-Budget package can cushion the economy from sliding into a recession, say, in the second half of this year or the first half of next year?

Dr Richard Hu Tsu Tau: The suspension is for a fairly lengthy period because property investments take a long time to mature, and currently there is an over supply of about 20,000-odd residential units already in the market. According to URA statistics, the take-up in the first quarter of this year is probably 1,500 units. So the overhang is huge. Assuming that things do not deteriorate, the present overhang would probably last several years. So the projection is that any change we make must be over a substantial period.

Whether we can assure that the present package will help us avoid a recession is something which I cannot guarantee nor can anyone. We will simply have to review the situation. If conditions deteriorate sharply, we will always be prepared to come back with more measures.

Dr Tan Boon Wan: Can I ask the Minister, although it is difficult to stimulate the local market demand, and perhaps also the regional market demand, why have we not considered the provision of incentives to tap overseas markets which are non-traditional? These are areas which are still there and which can provide us with growth. In the past, because the regional market tended to be accessible, is it not time now for us to tap into these markets? The reluctance to go overseas into more difficult markets is something which can be overcome now. Would the Minister like to comment on that?

Dr Richard Hu Tsu Tau: I am not sure what other market the Member is talking about. Which other countries can provide this growth? Eastern Europe is in difficulties. Latin America is stumbling along. I do not know what other countries he is talking about.

Dr Tan Boon Wan: What about South America, for example?

Dr Richard Hu Tsu Tau: South America has its own share of problems and I doubt that it would provide a major source of investment either for us or for exports into the region.

Perhaps I could use an example. To use a medical analogy, the present problem we are facing is like a healthy person suddenly being attacked by a viral flu. As everybody knows, a viral flu cannot be cured by a large injection of antibiotics. It is simply this: if you have a healthy body, the doctor will treat the symptoms, give you panadol for your headaches and give you a lot of vitamins. If you are basically healthy, sooner or later you will recover. So do not expect a magic bullet.

Mr Choo Wee Khiang (Jalan Besar): Sir, one short question. I think a lot of lay people, individuals and small and medium sized businesses, will be asking why the Government is not considering suspending GST because this has the most far-reaching impact on one's cash flow.

Dr Richard Hu Tsu Tau: Mr Choo talks about GST having a far-reaching impact on the cash flow. It is only 3%. It is already fully offset for all the lower income people. So removing it is not really going to stimulate the growth of the economy. As I have said earlier, our main objective in this exercise is to reduce cost so that companies which are in difficulties can remain in business and continue to employ Singaporeans. That is what we are trying to do. Trying to artificially give money back, hoping that the individual would then go and spend it, does not really help, because the bulk of the industry we want to support should be exporting.

Mr Ahmad Mohd Magad (Pasir Ris): Sir, while it is really laudable that the Minister for Finance has announced a host of measures to lower the business cost and preserve jobs as a result of that, the fact still remains that there are many individuals in distress, especially individuals who have lost their jobs and those who may be losing their jobs. The question I have is this: why has the Minister not considered using the CPF mechanism? For instance, I know that many individuals are prematurely redeeming their insurance policies and individuals who have difficulties paying for their children's education. Perhaps the Minister could consider using the CPF mechanism to allow the usage of their CPF funds to temporarily at least pay for some of these costs that individuals have to incur.

Mr Peh Chin Hua (Jalan Besar): (In Mandarin): Sir, I have two questions to raise here. Three months after presenting his Budget statement, the Minister for Finance is now presenting his package of off-Budget measures to help cut the business cost in Singapore. I hope that three months later, he will review this package and make the necessary adjustment to it. I believe most Singaporeans will be disappointed with the package introduced today, because the people have high expectations. The higher the expectations, the greater the disappointment. Entrepreneurs in Singapore know that the Singapore Government is prudent, and very conservative, especially in time of crisis.

Mr Speaker: Order. Mr Peh, what is your question?

Mr Peh Chin Hua: (In Mandarin): I am coming to my questions. The Minister has just said that we are suffering from flu. I think it is not just an ordinary flu but there is diarrhoea as well. So the treatment provided by this package must be more thorough. Just a few pills will not solve the problem. Mr Leong Horn Kee has made some useful suggestions just now. I think the Minister can consider them more seriously. Three months later he can give us a review.

Mr Simon Tay: I understand from the Minister that the bulk of companies he wishes to support are export-oriented. But does he not know that many more companies, small and medium enterprises, are not export companies? Should the Minister not then be thinking of ways to stimulate local consumption? Particularly I recall that our tax rates, because of the smaller reliefs this year, are actually higher than last year. And should there not be an increased relief for this year?

Mr S. Iswaran (West Coast): Sir, I appreciate that the focus is on businesses and helping businesses reduce costs. But I think perhaps helping or giving something to individuals should not just be seen from a stimulating angle but also from the point of view that there are those who are facing difficulties, for example, the recent increases in the mortgage rates for HDB loans. Could that not have been considered as a measure at least to defer those increases until the economic situation improves?

Mr Chuang Shaw Peng: The Minister has used a medical example of somebody getting flu, and a person with flu can get very sick. So does it imply that it is Government's policy to allow a recession to occur?

Mr Sin Boon Ann (Tampines): The Minister has said many times that the measures are actually meant to stimulate business and our economy. But surely at this time when many people are losing their jobs, would the Government not consider some sympathy towards the people who have lost their jobs and that measures be introduced to ease the pain of the cost of living in Singapore?

Dr Ker Sin Tze (Aljunied): While I agree with the Minister that the 4% property tax on owner-occupied properties is low, the 12% property tax for rented properties remains high. I am sure that a lot of middle-class people own a property for themselves but at the same time they own another property which is rented out. And they are now having difficulty in servicing their loan because the rental market is fairly bad. Why does the Minister not look at this matter and give these property owners some property tax reduction, so as to help them tide over the problem?

Mr Chng Hee Kok: What is sorely lacking in Singapore's economy is the confidence factor. I want to know from the Minister: Is he comfortable that what he has announced today addresses that issue?

Mr Low Thia Khiang: Mr Speaker, Sir, I wish to seek further clarification from the Minister for Finance who mentioned that Singapore does not control the bank interest rates. But I wonder whether he would comment on the Prime Minister of Malaysia, Dr Mahathir's recent comment after the UMNO General Assembly, that Malaysia's economic recovery will be faster if interest rates in Singapore were reduced. And if interest rates rise, then there will be an outflow of money from Malaysia to Singapore. Would he comment on that?

Mr Choo Wee Khiang: Sir, I just want to clarify. I understand fully as to what the Minister has explained earlier pertaining to the GST suspension. But I think a lot of people feel and just hope that somehow in this kind of economic situation, no matter how artificial it is, every single drop of water counts.

Mr Lew Syn Pau: Mr Speaker, Sir, I would like to ask the Minister about the Local Enterprise Financing Scheme. He has increased the amount from $1.1 billion to $2 billion. My question to the Minister is, of the $1.1 billion set aside so far, how much of it has already been utilised? And does he think that $2 billion would be enough?

Dr Richard Hu Tsu Tau: Questions have come so fast and furious, I do not think I can respond individually by name.

First question is: why do we not allow the use of CPF for those who are in trouble? Of course, that is the easiest thing to do. But do not forget that CPF is, in fact, for old age. And if we deplete it now, how are you going to top it up? We have, in fact, from time to time, in the past, introduced CPF top-ups. But to open the door to use CPF for these particular situations, I think is a step which we are very reluctant to move at this time, unless things get really, really bad. And I would recommend against it.

I think the Minister for Manpower had earlier on during Question Time already responded to this question that the bulk of money is, in fact, used for mortgage payments.

It was suggested that the problem we are facing now is more severe than a flu. Well, it is a severe form of flu. What I was really saying is: do not expect the magic bullet to cure it. You have to take tough measures. But if you are fundamentally sound, like a healthy Singapore economy or a healthy Singaporean, sooner or later, you will recover. But you cannot cure it with antibiotics, just as we cannot cure it by pure domestic stimulation. The causes are external to us. So we have to wait for demand to pick up before we can hope to recover.

SMEs, indeed, I agree they are not all exporters and equally the cost-cutting measures will be of help to them, because they will be able to stay in business and they will continue to be able to employ. So the cost-cutting measures affect everybody, not just exporters. But we hope that the exporters are the important components because they are the ones generating foreign income and foreign exchange for us.

On measures to help unemployment, the question has been addressed earlier this morning during Question Time in that a Tripartite Committee has been set up between the NTUC, Government and the Employers' Federation in which people who are unemployed will be helped to re-acquire jobs as soon as possible. If they cannot acquire jobs, they can be helped to retrain. So at this stage, I do not think we have reached a stage where there is mass unemployment. There are selective areas where people will be redundant and this Committee is set up precisely for this purpose. Government will continue to help fund all the programmes necessary to re-employ or re-train workers. There is no shortage of funds. What we need are good programmes.

Dr Ker has suggested that we should show more sympathy for individuals who own two properties. I am afraid that I cannot show much sympathy. If you already own two properties, you are quite rich.

Mr Chng Hee Kok has asked whether we are confident that the programmes are going to restore confidence. I hope so. It certainly should be. Let me just start from square one. We have all the resources necessary. I just do not want to splurge it unnecessarily. If necessary, we will continue to introduce whatever measures are required to restore the economy but we cannot influence external demand. So we need to do all the things necessary to keep our economy going during this difficult period, which basically are cost-reduction, retraining and re-investment.

On the issue of Dr Mahathir, I think he is expressing, of course, a concern from the Malaysian point of view which we fully appreciate. If money continues to leave Malaysia, interest rates will rise because of liquidity problems. But we are not the ones responsible for that. I think that is the difference. He, of course, is very worried. Quite rightly, he should. But we do not influence the outflow of money. It is a problem which is not peculiar to Malaysia but also affects other countries which face economic problems. I hope you understand that we have no incentive to undermine the Malaysian economy. If Malaysia recovers as quickly as possible, all our investments will increase in value, and that is really the only test.

There was a final question on GST, whether we should not make a gesture. Although the percentage is small, the amount collected is not small. GST is 3%, but the total amount of money collected is not small and therefore if there is no need to change it, we should not do it.

Mr Choo Wee Khiang: Under what circumstances should we change?

Dr Richard Hu Tsu Tau: We will see when the moment arises.

Mr Lew Syn Pau has asked about LEFS. So far the take-up rate has been very encouraging. I do not have the exact figures. But we will increase the amount available from $1.1billion to $2 billion, and any amount necessary if we need to. Shortage of funds is not a problem. It is the take-up rate. And there should be no constraint. If more companies need more money, we will provide it.

Mr R. Sinnakaruppan (Kreta Ayer-Tanglin): The Minister also announced that some of the public sector projects would be brought forward, and he mentioned about schools and so on. I would like to find out whether, for example, the Main Upgrading Programme, which had 15 precincts last year, and it has been reduced to 10, will be increased? And also for the Interim Upgrading Programme, will there be more precincts?

Mr Hawazi Daipi: Sir, I would like to know what measures the Government will take in order to attract more foreign investments to Singapore so that we can create more jobs for our workers.

Dr Vasoo: What contingency measures do we have in case we run into a recession by the end of the year?

Mr Leong Horn Kee: I want to say that actually I had a flu a few days ago and I saw a doctor. He gave me medicine, like the Minister said, antibiotics for the phlegm and so on. Now after a few days, I am cured. I want to say that for the Singapore economy, I have trust on Dr Hu.

Dr Teo Ho Pin (Sembawang): May I ask the Minister whether he will consider providing additional grants to voluntary welfare organisations which are facing difficulty in raising funds in the present situation? Perhaps the Government could increase the 50% operating grant to 80%.

Dr Richard Hu Tsu Tau: On the Main Upgrading and Interim Upgrading programmes, I think that is an issue which I will pass on to the Minister for National Development. But whatever that can be brought forward will be brought forward on the infrastructure side.

How can we use new methods of attracting foreign investments? I think the EDB is actively doing that. They are stepping up their programmes and trying their level best to try to attract as many new investments as possible. This is why we are continuing to reclaim new lands in Jurong Island which will accommodate all the new industries in petrochemicals and refineries and so forth. So we will not stint and hold back investments which are necessary to provide the basic infrastructure to attract new investors.

On the question of additional grants for voluntary welfare organisations, we can consider this but each case will have to be looked at on its own merits. I cannot give a blanket promise on this.

Mr Chiam See Tong: Sir, I was watching the television programme, Business Day, and almost every other company's annual report shows a loss. I was waiting for somebody to ask whether the Government would, in fact, lower the corporate tax. In fact, they had been asking for it already last year. I wonder why it was not asked, for those other companies having difficulty.

Dr Richard Hu Tsu Tau: Indeed, of course. If you do not make profits, we cannot tax you.

Mr Chiam See Tong: Of course. I just bring home the point ---

Dr Richard Hu Tsu Tau: I agree. I know what you mean. Why have we not moved corporate taxes? Corporate tax affects you the year after. What we want to do is something which helps you now. So cost reduction is the most effective. We may have to consider corporate tax if things get worse. I am not excluding it. But right now, we do not need it.

Dr Vasoo: The Minister has not answered my question about contingency measures if we run into a recession.

Dr Richard Hu Tsu Tau: We have a whole package of measures we can use.