ECONOMIC SITUATION IN SINGAPORE (Assessment)

Mr Tay Beng Chuan asked the Deputy Prime Minister (1) what is his assessment of the economic situation in Singapore having regard to the current US economic slowdown and regional uncertainty; and (2) what measures are being planned or taken by the Government to save our local businesses and jobs in anticipation of the worsening economic situation.

BG Lee Hsien Loong: Mr Speaker, Sir, US economic growth has slowed rapidly from 5.6% in the second quarter of 2000 to 1.0% in the fourth quarter of 2000. US growth in the first quarter this year has also been marginal. The consensus view is that the US economy will grow by about 1.9% this year, down from 5.0% last year. More pertinently for us, the US economic slowdown is driven by a major correction in the high-tech sector of the economy. This has affected the global electronics industry and caused a sharp worldwide decline in electronics production. These factors have dampened exports and growth of the regional economies which are highly dependent on electronics exports and the US market.

The weaker external environment has caused Singapore's economy to slow rapidly. In the first quarter, our economy is estimated to have grown by 4.6%, down sharply from the 11% in the fourth quarter of last year. On a 3-month moving average basis, manufacturing output growth eased from 19% in December last year to 7.3% in February.

In view of the less favourable economic conditions, MTI has revised down the 2001 growth forecast for Singapore to 3.5-5.5%.

In November 1998, in response to the Asian crisis, we introduced major cost-cutting measures. Several of these measures have not been fully lifted, as we had expected the economy to take some time to recover fully. These include (a) restoration of the remaining 4 percentage points of employer's CPF contributions; (b) the 25% property tax rebate; (c) lower foreign worker levies; and (d) the 13% JTC and HDB rental rebates. In addition, SMEs continue to benefit from easier financing through the Enhanced Local Enterprise Financing Scheme.

The FY 2001 Budget contains several new measures. These include lower corporate tax rates, especially for the small and medium enterprises, a property tax cut of 2 percentage points, and measures to help HDB retailers. The property tax rebate expires in June this year. However, this will be offset by the reduction of the property tax rate, from 12% to 10%.

JTC and HDB will take the prevailing economic outlook into consideration when they review the industrial rental rebates.

On CPF, it is premature to commit to the next steps of restoration now. The Government will decide later in the year whether to restore further part of the remaining 4 percentage points of employer's contributions in January 2002, and, if so, by how much.

Meanwhile, I urge companies and unions to speed up the implementation of the monthly variable component in their wage structure. This will promote greater wage flexibility, and help companies to manage costs and save jobs during a downturn.

Although the outlook has turned less positive, all is not gloom and doom. The Euroland economy is still growing steadily; likewise, China and India. Our companies should take advantage of these pockets of growth, while they await the broader recovery associated with a turnaround in the US economy. Despite the slowdown, we still expect to achieve positive growth this year.

It is not possible for the Government to fine-tune its economic policy to even out every dip in the business cycle, and keep the economy growing at a constant rate regardless of external conditions. Our economy is too open, economic prospects are too uncertain, and Government pump priming and cost cutting cannot completely make up for a loss of external demand and a slowdown in the developed countries.

The present situation is unlike that we faced during the Asian crisis. The problem this time is a cyclical downturn in the US, not a systemic crisis in Asia. If the US economy recovers by the end of this year, as most experts expect, Singapore should recover with it.

However, this cyclical slowdown is superimposed on the continuing restructuring of the Singapore economy. Some workers are being retrenched in the manufacturing sector, even as new jobs are being created. The SMEs, especially retailers, are also having a difficult time. We need to help companies and workers to cope with this restructuring. The right way to do it is by upgrading industries and training and retraining workers. For the retail sector, we need schemes to raise the standard of retailers, through better management and customer service, as well as incentives to encourage marginal retailers to exit the business. The Government is already doing this. These focused measures will be more effective and appropriate than an across-the-board package of cost reductions and rebates, like the November 1998 package.

We should therefore be measured in our response, and ride the present slowdown until it passes. The Government is keeping a close watch over the economy. If the situation deteriorates (I say "if" the situation deteriorates), and further measures to help businesses and workers become necessary, we have the means and the will to implement them.

Mr Ravindran: Two supplementary questions, Sir. There is some concern among analysts as to the rapid depreciation of the Singapore dollar vis-a-vis the US dollar. The question that I would like to ask the DPM is whether we are using the currency as a means to get out of this slowing economic growth.

The second question is this. In the light of the bad economic situation in the USA, the Federal Reserve last night reduced the interest rate by half a point to ensure that the US economy can be on track for economic recovery. I am just wondering whether, on the part of the Government, we can also introduce measures like these which can also kick-start the economy so that we are on track to achieve the original goal of 6-7% growth, and also whether some of the measures that the Government introduced during the recession in 1998 can be relooked at again, because some of the agencies, like JTC, have already brought up some of their rentals closer to the market price. So I am wondering whether the Government can look at some of these measures to be introduced not only on a short-term basis but on a long-term basis.

BG Lee Hsien Loong: Mr Speaker, Sir, on the Singapore dollar-US dollar exchange rate, the Government put up a monetary policy statement update, I believe last week, to state the position, and it was carefully phrased there. I will paraphrase it, but the position is exactly what was stated last week, namely, we stated that we settled on an appreciating currency band for our policy for the Singapore dollar, measured against the trade-weighted index of our trading partners, not just the US dollar but a trade-weighted index. Our policy remains to maintain a gently appreciating band. If you look at the actual trade-weighted index since February when we set and announced this policy, the index has weakened but it has remained within the band. Our policy has not changed, and we will review it again in the middle of the year.

So we are not using the exchange rate as an instrument to depreciate the currency and maintain our competitiveness. We are maintaining a slightly strengthening exchange rate on a trade-weighted basis.

Secondly, the US Federal Reserve reduced interest rates last night, and the Member asked whether we should also reduce interest rates or do something similar. There is a difference between our position and the American position. They are the locomotive. We are being pulled along. They have an enormous economy. They set the regulator to keep it going just right, not too fast, and not too slow. And when it slows down, they adjust the regulator; the economy, hopefully, will respond and will speed up. And indeed last night, after the US Federal Reserve cut the rate by 50 basis points, the stock market went up. There was an immediate psychological reaction. But they are a big economy and there is internal feedback which determines whether they are going too fast or too slow. For us, we are a small economy, and it is the external environment which determines whether we go fast or not. And our external environment is set by the US, Europe, Japan, and to some extent also by our region. So we hope that the Americans recover, and we will go with it. But we do not have instruments like the exchange rate which we can adjust and, as a result of that, boost our businesses in Singapore, because so much of our demand is overseas.

Thirdly, as for the measures in 1998, particularly the JTC and HDB rentals which the Member referred to, as I said in my answer, we will be reviewing the rental position of JTC and HDB, and we will take the environment into account in deciding this. Once you have measures to deal with a difficult economic situation, I appreciate that it is quite hard to take away the measures, because everybody is very happy when the rental comes down; and everybody is very happy when the economy recovers. But when the moment comes to remove the concessions, everybody says, "I haven't quite recovered yet. Can I have the medicine for a little bit longer?" This year, there might even be a case, because it depends on how the economy develops, and we will see. But as I have explained in the main answer, what we need in this situation is not what we needed in 1998, because it is not an across-the-board problem. Across-the-board, we are still expecting to make positive growth this year. But certain sectors of our economy have structural problems, either because of upgrading or because our whole economic structure has changed. The retailers have difficulties in HDB estates; our market stallholders, many of them, have difficulties; our older workers have difficulties. So what we should do is to have targeted measures to deal with these structural problems, rather than across-the-board stimulative measures to try and make up for the slower external environment.

Mr Thomas Thomas: Sir, in view of the reassessment of the economic situation, can the DPM give an assessment of its impact on the labour market, in terms of job loss and job creation?

BG Lee Hsien Loong: We will have to see. The unemployment rate went up in 1998 during the crisis. Last year, it had come down considerably, although not quite to the pre-crisis level. We have not got any figures this year yet. So I cannot say how much it will go up. It depends partly on whether we see more retrenchments and prospects for some retrenchments coming, because you can see the signs in America. Cisco has just retrenched; Ericsson has been talking about it. Other electronics manufacturers are also significantly affected. It is very unlikely that this is going to pass us over and leave us untouched. So we have to be psychologically prepared for that.