MANAGING THE CRISIS

Since the regional crisis erupted in July 1997, the Government has monitored its development closely and calibrated our response carefully. At the last Budget, we made some adjustments to keep our business environment competitive, but emphasised a conservative fiscal stance as it was too early to determine the full impact of the crisis. In June 1998, Government implemented a $2 billion off-Budget package of cost-cuts and spending measures. These were not intended as the final package. Regional developments at that juncture remained volatile and we needed to assess how events would develop.

While we deliberated over policy options during this period, we identified the critical issues: to maintain the framework for continued economic activity; help companies tide over the crisis and minimise unemployment; and enhance our capabilities and competitiveness for future growth.

With these strategic intentions in mind, the Committee on Singapore's Competitiveness (CSC) has recommended comprehensive measures to help Singapore regain its competitiveness, weather the crisis and emerge stronger. Besides keeping Singapore cost competitive and maintaining economic activity, we have to compete more effectively by growing the revenue side of the business equation.

Cut Business Costs

First, it is vital to cut business costs to stay competitive in a period of reduced overall business demand. The Government implemented a comprehensive $10.5 billion cost reduction package in November last year, covering all the key elements of business cost, including wages, rentals, utilities and transportation costs. This was in response to the CSC proposals to help companies survive the crisis and to preserve jobs.

This major package will take time to show results. Many of the cost cutting measures only came into effect on 1st January 1999. It is still too early to assess their beneficial impact on businesses and the economy. Hence, this Budget will not contain any additional major new cost-cutting initiatives, although it will not neglect appropriate rebates to individuals, which had not been included in the November package.

The cost reduction package has received the wholehearted support of Singaporeans. Workers have accepted the 15% reduction in overall wages. The spirit of tripartism is strong and resilient in Singapore.

We have always emphasised policies to reduce stickiness in wages and improve the flexibility in the labour market. We have progressively built up a flexi-wage component over the years, and avoided restrictive mechanisms such as minimum wages, wage mark-ups or job security legislation. This has given us unique flexibility to adjust our wages quickly in the current downturn, to preserve our competitiveness. This has not only reduced business costs but also helped arrest the fall-off in labour demand. Without the necessary wage adjustments, even more jobs would have been lost and the unemployment rate would have risen to more than the 3.2% actually registered in 1998.

Our cost-cutting package has been well received by both analysts and investors. A recent Merrill Lynch report commented that as a result of the cost-cutting measures, "unit labour costs should plunge back to the 1992-93 level, substantially boosting the economy's cost competitiveness". Another report by ABN-AMRO noted that "Singapore is demonstrating that with the package it can adjust its prices and costs quickly. The package will help boost confidence in the economy". Investors too have reacted positively. The substantial cost savings, particularly from the CPF cut, will help businesses ride out this difficult period. The package has also helped the Economic Development Board (EDB) convince investors that Singapore offers them an attractive business proposition, even in the midst of the recession.

Ensure Access to Working Capital

Second, it is necessary to improve access to working capital. Government has significantly enhanced the Local Enterprise Finance Scheme (LEFS). This includes raising the overall credit line available, increasing the maximum loan quantum per company and widening the scope of the scheme to cover more local enterprises. In addition, EDB and the Productivity and Standards Board (PSB) have been active in helping participating financial institutions obtain a better understanding of the loan applicant's business case.

Feedback indicates that these changes to LEFS have met the needs of local companies. Between April and December 1998, more than $470 million of LEFS loans were approved to local enterprises. In particular, short-term LEFS loans increased by up to 600% during this period, reflecting the short-term cash needs of local companies.

To strengthen the equity base of promising local enterprises (PLEs) and help them enhance their capabilities and growth, EDB will step up the pace of its co-investment in PLEs. It will take up short-term equity stakes of up to 30% in these companies. After an appropriate period, EDB will exit from these investments, for example, by selling its shares back to the PLEs. This enhanced co-investment programme will support companies in both the manufacturing and hub services sectors.

Market Diversification

Third, we need to diversify our export markets. Singapore needs to develop strong trade and business linkages to all parts of the global economy. This will make our economy more resilient, and help to offset cyclical slowdowns in any particular region or industry.

The Trade Development Board (TDB) will be adopting a three-pronged approach to ensure that Singapore maintains its competitive edge in the global trading arena. This will involve accessing emerging markets, expanding demand into traditional markets such as the US and EU, and consolidating resources in regional markets.

To strengthen market access, TDB has expanded the scope of its Trade Development Incentive (TDI) to help companies promote trade and participate in specialised programmes such as international franchising and brand marketing. Since FY96, TDB has approved some 250 cases amounting to $11 million under the TDI. Government has allocated an additional $20 million to TDI over the next two years.

TDB will also be stepping up its market development efforts to increase companies' awareness of opportunities further afield. In 1998, around 800 companies participated in TDB's business missions and international exhibitions. This year, TDB will be organising some 100 trade missions and international fairs. About 30 such events will be targeted at the traditional growth markets, such as the US and EU. Another 40 events will be targeted at emerging markets in East Europe, South Asia, Middle East, Latin America and Africa.

Investment Promotion

Next, we need to step up investment promotion to sustain and upgrade the flow of investments into knowledge-driven activities and create challenging jobs for Singaporeans.

To spur more investments in manufacturing and services, Government has re-introduced the Liberalised Investment Allowance Scheme (LIAS). This provides a 30% across-the-board investment allowance for expenditure on productive equipment. In addition, Government has also allowed for a higher, discretionary allowance of 50%, for approved investments that meet certain requirements, such as higher contribution to value-added.

In 1999, EDB will intensify its investment promotion efforts, including stationing more officers overseas in the US, Japan and Europe, in order to achieve its target of $7.5 billion in manufacturing investments and $1.5 billion in total business spending this year.

In line with the vision set out by the CSC for Singapore to develop into a globally competitive knowledge economy, EDB has also recently unveiled its Industry 21 (I21) Plan. The vision of I21 is for Singapore to be a vibrant and robust global hub for knowledge-driven industries. EDB will develop Singapore's manufacturing and exportable services sectors with a strong emphasis on technology, innovation and capabilities. Reflecting this shift, jobs created will have a higher proportion of skilled workers. Capabilities Building

Finally, capabilities building. We will use the crisis period to upgrade both our physical infrastructure and human capital, so that we can compete in the global economic arena on the basis of world-class capabilities, while managing our cost competitiveness.

Education and economic infrastructure will continue to remain a priority in Government's development expenditure programme this year. To build economic infrastructure, $1.9 billion worth of new development projects were approved in the off-Budget measures in June 1998. These included major projects such as the incorporation of IT into primary and secondary schools, upgrading of university facilities and further investment in Singapore ONE.

In FY99, Government will continue to invest in economic capabilities for the long term. We will increase development spending by a substantial $1.2 billion to $13.9 billion. This is the highest development budget to date. We will continue to invest more in education, up from $1.7 billion to $2.2 billion, to provide better schools, campus infrastructure and facilities, teaching equipment and to roll out the IT Master Plan. These education projects will prepare our next generation for the challenge of a knowledge-based economy.

We will also spend more to increase our industrial land stock with on-going reclamation at Jurong Island, Tuas View and Changi East. Likewise, we will increase spending on rail infrastructure, including the North-East MRT line and the Changi MRT extension.

Another key challenge is upgrading our manpower to keep workers employable. With the rapid pace of economic restructuring, the current unemployment can turn into structural unemployment over time, as unemployed persons may be mismatched with new job vacancies because they do not possess the right skills.

This is a pressing issue. A disproportionate share of retrenched local workers in 1998 were older than 40 years of age and with less than secondary education. The duration of unemployment has also increased to 8.9 weeks in mid-1998, compared with 7.5 weeks a year earlier. As long-term unemployed workers lose their job skills and become stigmatised by employers, this could lead to increasing and persistent unemployment rates, a phenomenon seen in European unemployment for the last 15 years.

We must press on with Continuous Education and Training (CET) and skills upgrading to tackle this problem of structural unemployment. While the threat is more immediate for older and lower-skilled workers, it is no less urgent for our executives and professionals. They too must hone their skills and expertise in order to develop new capabilities and anticipate the rapidly changing demands in the workplace. As such, our CET plans encompass the entire spectrum of the workforce - from young to old, and from semi-skilled workers to managers and professionals.

Specific Government initiatives launched under the CET umbrella include the following: an initial budget of $120 million pledged for the expansion of the Skills Redevelopment Programme which pays special attention to unskilled and semi-skilled mid-career workers; and $800 million for the Initiatives in New Technology (INTECH) grant scheme targeted at manpower development in leading edge technologies, of which $50 million has been earmarked for EDB's new Training and Attachment Programme (TAP) which helps fund the cost of training new engineering graduates recruited by MNCs at their overseas plants.

In addition, the Ministry of Manpower (MOM) is working out a broad funding mechanism to support the development of national manpower capabilities as part of the Manpower 21 (M21) exercise. The M21 Report will be announced in due course. Programmes in the pipeline include setting up a Skills Certification System to establish a skills progression path and skills acquisition benchmark for the workforce; the Strategic Manpower Conversion Programme to incentivise the deployment of under-utilised professional manpower into strategic sectors with skills shortages; and supporting learning providers to create and augment the infrastructure and curriculum for lifelong learning.

Our aim is to build up a national framework for continuous enhancement of knowledge and skills. The goal is to educate, train and retrain workers so that they can continue to take on new jobs or enlarged duties. This is the essence of lifelong employability.