ECONOMIC AND UNEMPLOYMENT OUTLOOK (Assessment)

Mr S. Iswaran asked the Minister for Trade and Industry (a) what is his assessment of Singapore's economic and unemployment outlook for the second half of 2001; and (b) whether off-Budget measures are warranted in light of recent negative economic data.

Mr Tay Beng Chuan asked the Minister for Trade and Industry whether the Government will implement an off-Budget cost cutting package immediately to save businesses and jobs in anticipation of the worsening economic crisis.

Mr Zulkifli Bin Baharudin asked the Minister for Trade and Industry whether the Government will consider introducing off-Budget measures in view of the weak economic situation.

Mr Noris Ong Chin Guan asked the Minister for Trade and Industry if he has any plans to accelerate the implementation of infrastructure projects in the pipeline of the various Ministries, as a means to provide more opportunities for local businesses and indirectly more employment opportunities for Singaporeans.

The Minister for Trade and Industry (BG George Yong-Boon Yeo): Mr Deputy Speaker, Sir, with your permission, I would like to answer Questions Nos. 2, 3, 4 and 5 together as they are on the same issue.

Mr Deputy Speaker: Yes.

BG George Yong-Boon Yeo: Thank you. The Singapore economy shrank by 0.8% in the second quarter, following the weaker external environment. The slow-down is more rapid than what we had earlier expected.

All the major economies have slowed sharply. US growth in the first quarter was revised downwards significantly from the initial estimate of 2% to 1.2%, as companies run down inventories at a much faster pace. The EU has also slowed significantly while the Japanese economy is near or may be in recession.

At the same time, the global electronics industry has deteriorated even more sharply in the last few months. Global semiconductor sales fell by 29% in April and May, down from -4.4% in the first quarter this year and +22% growth in the fourth quarter of last year. For the whole year, industry analysts at Gartner Dataquest expect the industry to shrink by 20% to 25%.

The negative environment has a large impact on Singapore's growth as external demand accounts for 80% of our total demand. In particular, our manufacturing sector has declined by 10.9% in May, and is expected to remain weak in the second half. Export-oriented services have also slowed as demand from regional economies fell. We have therefore revised our growth forecast this year down to 0.5% to 1.5%.

We can expect unemployment to worsen. The number of workers retrenched rose sharply to about 3,200 in the first quarter of this year, up from an average of 1,900 in the last three quarters of 2000. We expect more retrenchment in the second half of the year as companies, which were holding onto workers in anticipation of a quick turnaround, begin to shed off workers. Already, we have seen more companies putting their workers on shorter work-week and compulsory leave. There has also been a significant fall in job advertisements in recent months. Anecdotally, I think all of us would have heard or received feedback from friends and relatives that there is a fear that they may lose their jobs because of the retrenchment that they see going on around them.

In view of the sharper than expected downturn, the Government intends to implement some specific measures to cushion its impact on companies and workers. However, this will not be like the $10 billion package in 1998. The 1998 package was necessary to restore Singapore's competitiveness following the Asian financial crisis and the sharp devaluation of regional currencies. The current downturn is a cyclical slowdown caused by a severe drop in external demand, especially in electronics. We are encouraging Ministries to speed up their development projects, but we should be realistic that such pump priming would only be of marginal benefit; leakage is high and it would not be able to offset the drastic fall in external demand. The objective of the measures we are working on this time is to ease the burden on businesses and workers, while we await the recovery of the US economy and the global electronics industry.

Part of the 1998 package is still in place, as some of the cost-cutting measures in that package have not been fully lifted. This includes the 4% point reduction in employers' CPF contribution, the cut in foreign worker levies, and JTC and HDB rental rebates. In addition, at the last Budget, the Minister for Finance lowered corporate and property tax rates, and introduced various rebates and CPF top-ups to help individuals and workers.

We are finalising the new measures. I expect to announce them to this House at the end of the month.

Mr Zulkifli Bin Baharudin (Nominated Member): Sir, the Minister mentioned that this problem is cyclical in nature. I would like to ask the Minister whether this could, in fact, lead to more severe structural problems as there could be more hollowing out of our economy, and therefore lead to more severe unemployment and retrenchment than earlier expected.

BG George Yong-Boon Yeo: The structural shifts have been going on for some time. This is the reason why we have been pressing on with investing in R&D and worker upgrading. Part of the reason is, of course, the emergence of China into the global market. And as hundreds of millions of Chinese workers who are hardworking and not without ability join the global labour market, there will be downward wage pressure all around. Those who are unable to upgrade find themselves under great pressure.

For example, in India, Chinese consumer products are really cutting the ground from under Indian manufacturers. When I spoke to the Vietnamese Trade Minister recently, he was quite worried about the way Chinese products are fast entering the Vietnamese market. They told me that a Chinese motorcycle with as good or better quality cost only one-third of a Vietnamese motorcycle. And we see this now all over, how Chinese products are lowering the cost of clothing, of handbags, of all kinds of things. All over Singapore now, you are seeing sprouting up $2 stores and they are carrying mostly Chinese products.

While this keeps cost down, this also presents challenges to some of the industry sectors. So the only way for us to maintain our high wage levels in Singapore is to press on with the education of our young, with worker training and upgrading, improving system efficiency and investing in R&D. And if we continue to do that, we should be able to hold our own in the sectors that we are very good at. For example, if you look at the wafer fabs, I think we remain very competitive, and there are a number of investments on stream, they will probably be delayed, but I think our basic competitiveness in semi-conductors remains unchanged. For disk drives, we face a challenge, and the more labour intensive lines we are losing to Penang and China. But last year, when Seagate decided to close down its disk drive operation in Penang and shed off 5,000 workers, they reconfigured their production so that the labor intensive portions went to Wuxi and Shenzhen in China, while the higher value-added and the more automated bits were reconcentrated in Singapore, where we have been helping them to build the 'factory of the future', which means highly automated lines, you design a product with a view to producing it, and therefore enabling you to automate many of the processes. So sector after sector, we have got to keep on pushing on with restructuring and ensuring that despite competition from other countries, we are able to maintain our high wage levels.

This cyclical downturn may accentuate the process but we should not mix up the two separate tendencies.

Mr Iswaran: Mr Deputy Speaker, Sir, there is a perception in the market that pump priming and other measures to boost domestic demand may help offset some of the impact of the negative external demand. The Minister has explained why he does not think this might work. Could he elaborate on this so that everybody will have a better understanding?

The other point is that the low end of Government's forecast of 0.5% for GDP growth this year is very similar to that which Singapore experienced in 1998 which prompts many to ask the question why a similar order of magnitude of Government off-Budget measures is not warranted. Could the Minister please elaborate?

BG George Yong-Boon Yeo: We had 4.6% growth for the first quarter. Flash estimate for second quarter is -0.8%. If we anticipate 1% at the end of the year, that means for the remaining six months, for the second half, we are anticipating the economy to be flat. And 0.5% to 1.5% projection for the whole year means that we are anticipating the second half to be somewhere in between -1% and +1%. The following quarter, we expect the downturn to continue because, if you look at non-oil retained imports, which is a pretty good indicator of what is going to happen in the next one to three months, it remains sharply negative, -16% or 17% last month. So there is near certainty that the next quarter will remain negative. But when it comes to the fourth quarter, we are not sure.

If you listen to the American Treasury Secretary, he said he is quite confident that the US would be able to achieve 2% in the fourth quarter which means that things would begin to look up then. Stanley Fischer of the IMF made similar noises. And there are some indications that consumer confidence has picked up, that orders have begun to show more life. So we are not sure what the fourth quarter would look like.

While we should not be unduly optimistic, we should also not be excessively pessimistic. If you look on the horizon, yes, there are dark clouds, but there are also silver linings. If you ask me where we are at now - I do not want to go into the details of the package because that would be announced when they have been finalised at the end of the month - it is obviously raining, and the rain will get heavier. This is not a passing shower. But we should not assume that it is going to be a full-blown thunder storm. It may not be. We should get our umbrellas ready and try to stay as dry as possible, but keep watch on the weather. If it gets worse, then we have got to do more, but respond in a measured way, in a calibrated way, and look, even in the darkest cloud, for silver linings which may open up new opportunities for us, which means not slowing down our restructuring because of the problems we are facing, but pressing on so that when the weather clears up again, we will be well positioned and we will be ahead.

Mr Gerard Ee (Nominated Member): Mr Deputy Speaker, Sir, with the scenario just painted and the forecast on value added, factories of the future, and so forth, could the Minister reflect on the future of SMEs in Singapore to face such competition?

BG George Yong-Boon Yeo: Mr Deputy Speaker, Sir, SMEs will face a challenge because those who are in traditional industries will face the cold wind of competition. If you look around the housing estates, many of our small shops are facing severe challenges because the supermarkets, the big departmental stores, the franchisees are coming in. For those who are unable to upgrade, partly because they are getting on in years and their children are not prepared to take over their parents' businesses, or because of bad luck, or because of inertia, then we have a package which MND had announced recently to help them exit. For those who are prepared to try, we will make every effort to help them.

We are now looking at how we may want to reorganise PSB and TDB to give a stronger focus to entrepreneurial development, especially among our SMEs. For those who are prepared to try, there will be all kinds of packages available to help them along. And those who have decided that they want to call it a day, I think we will help them exit. But this varies from sector to sector. We have many discussions with various sectors and there are some who have done well, despite all the problems. If you look at, say, the food industry, it is quite interesting the way the food industry is being restructured now. A lot of the otak otak, nasi lemak and fishball that we are getting in the shops now are all made in factories. It is a very efficient supply chain. And there are others who are unable to make the adjustment, so they go through a prolonged period of difficulty. But this is a large subject, we have talked about it, and we will continue to talk about it. We will institute in the coming months more programmes to help SMEs.

Mr Hawazi Daipi (Sembawang): Sir, does the Minister see any possibility at all in helping to attract some of the companies to remain in Singapore, ie, companies which are likely to move over to other countries which offer lower cost structure, or attract some of these companies to come to Singapore? I ask this because there could be people who, for some reason, could only take up very rudimentary skills through all the schemes that we offer.

BG George Yong-Boon Yeo: In fact, we work very hard on this. When companies indicate that they have difficulties with their cost structure and are thinking of relocating, usually they alert EDB and we will try and sit down with them to work out a package to help them restructure and try to facilitate their remaining on in Singapore. And even if they have got to leave Singapore, we will try to encourage them to leave behind in Singapore the higher value elements. Sometimes, we succeed, but not always. But we have got to keep working at this and provide an environment which, despite higher labour costs and higher land costs, yields greater system efficiency. And one area in which we have a clear advantage is the fact that we provide a hassle-free environment. We tell them, at the outset, that we will make sure that they are able to find the skills that they need and, if these skills are not available in Singapore, they can import them from anywhere in the world in order to maintain their operation here.

We have one further advantage which should become more and more important in the coming years, which is the way we protect intellectual property rights and provide for their enforcement. This involves the judiciary, the AG's Chambers, the police, the whole infrastructure. It would eventually extend into the life sciences. And if we can be the most secure base in Asia for intellectual property, then I think many of the higher value activities will remain here. Take, for instance, Glaxo. They set up a factory in Suzhou which had to be mothballed because of intellectual property problems in China. It will take a long time for China to work through all the laws and enforcement procedures. But in the meantime, if they have got something sensitive, if they have got secrets to protect and if they have got particular codes which contain most of the value of the product, they will put them in Singapore. And the key is running a system which is efficient, a labour market which is highly flexible and an access to talent which is global. This is very important. Then when they come here, they will be assured. No businessman wants to plonk a significant investment in a place where, after they have put in the money, they face all kinds of obstacles and have got to fight them at every turn.

Mr Jeyaretnam: Mr Deputy Speaker, Sir, the Minister has spoken about the rising unemployment and he expects it to rise further. May I ask the Minister what message his Government has got at the moment for workers who are being retrenched, or has the Government got no message at all, and particularly, is the Government prepared to see that our workers are not retrenched first before foreign workers are retrenched, which is a step that is being taken by the Malaysian government?

BG George Yong-Boon Yeo: Mr Deputy Speaker, Sir, all of us, as Members of Parliament, meet our voters and in the last few months, we could sense the change in the economic climate on the ground. At our meet-the-people sessions, many more are coming forward either with financial difficulties, worried about their jobs, or have lost their jobs. The problem is not yet very serious. But we are beginning to see it and it is likely to become more serious in the coming months. I would say our response must be on a broad front. First, make sure that the children's education is not affected. I believe we have a whole slew of scholarships and bursaries available to make sure that they are looked after. With health care, housing, the basics, the safety net will always be there. Then those who are without jobs, how do we help them retrain? MOM has got a labour exchange. We have all kinds of programmes available to help those who are prepared to be reskilled to be reskilled. But there is a particular problem among older Singaporeans, particularly those who are above, say, 45-50 years old. In difficulties, sometimes they are the first to be retrenched, usually they are the last to be taken back.

In fact, just last night, one of my constituents came to see me, a 50-year old diabetic who has an MBA and he asked me whether I could help get his CPF out because he said he is finding it difficult to get a job because companies want to hire younger people. If you have diabetes, they said, "Well, we have to incur health care cost looking after you if we take you on." I told him that it is not likely that CPF is going to allow him to take out his money. But at the same time, I sympathise with him. So we have got to be specific and where we can help, we should help, make sure the children are looked after.

Can Government create jobs? I think we have got to think harder about this, whether there are not some service jobs which we can provide in the public sector later to soak up some of them. They represent a group of people who, because they grew up in an earlier era, have not had the education. Above the age of 45, less than one in two Singaporeans have more than six years of education. So when we run into the new economy, they face particular difficulties and we have got to think through in a sensible way how to help them. If we just give them money to help them by, that will be ameliorative but, I think, as a group, they will be demoralised. We must find a creative way to engage them because they are intelligent, hardworking and responsible.

I am very surprised meeting old colleagues from the army who are now working in our schools as administrators. In the army, because we want to keep our NCOs and officers young, we retire them early with golden handshakes. Many of them end up working as administrative officers in schools. For them, running a school is nothing compared to running a battalion or company. And the teachers are spared those responsibilities. Maybe there are other areas in which we can think of similar useful schemes so that those who are unable to upgrade themselves sufficiently can still have good employment. It is a complex problem. And I think all Ministries and economic agencies would have to think harder how to address this problem. It is a problem which goes beyond this economic downturn. It is a structural problem.

Mr Noris Ong Chin Guan (Nominated Member): I would like to ask the Minister whether the proposals his Ministry is working on would incorporate the speeding up of infrastructural projects.

BG George Yong-Boon Yeo: Yes, that is the natural course of action to take. But we have speeded up infrastructure projects as a result of the last Asian financial crisis. So if you look at the latest numbers, even though the construction industry has not gone negative, the reason is that it is being propped up by public sector spending. In fact, private sector construction spending has gone down into the negative. We are now reviewing in various Ministries whether we can bring forward some projects in a sensible way. We should not be doing what repeated Japanese administrations have done, which is just to pump prime and, in the end, waste resources. I do not think we should do that.

Mr Zulkifli Bin Baharudin: The Minister mentioned earlier about some specific programmes to help ease the burden of workers and companies. I would like to know when these programmes will be introduced because timing is of the essence here.

Secondly, talking about children, I would like to ask the Minister whether he sees it appropriate now to be more generous with helping families cope with some of the problems with their children. For example, I am alerted to the Straits Times' project for the School Pocket Fund. It shows a lot of demand. So should the Government not put money to help children cope with some of these problems that their parents may face?

BG George Yong-Boon Yeo: Sir, the details of the package will be announced at the end of the month, so I should not go into those details now.

As to programmes to retrain workers and upgrade them, many are already in place. We will have to give more emphasis and, if we need to allocate more funds, we will.

As for helping children with scholarships and bursaries, there are already so many in place, and many of us in the various constituencies have funds which are available. So when we hear of cases which are deserving of help, we should let the MP or the CCC Chairman know and I am quite sure those funds will be found.

Mr Deputy Speaker: Mr Jeyaretnam, last question.

Mr Jeyaretnam: I am afraid the Minister has not answered my question fully. But, particularly, I would like to know what is the Government's message regarding retrenchment, as between Singapore workers and foreign workers. Would the Minister answer that?

BG George Yong-Boon Yeo: Mr Deputy Speaker, I would like to apologise to Mr Jeyaretnam for not answering that question.

There is always a temptation in an economic downturn to say "out first with the foreign workers and protect the jobs for Singaporeans." I would caution against such an instinct. The reason why we are attractive to many foreign investors is because of the assurance we give them, that if they need workers, talent, engineers, cartoonists and accountants, if they cannot find them in Singapore, they can bring them in. And, for this reason, we run a liberal regime. If in an economic downturn, we suddenly say, "Well, you are foreign, you go out first" even though he may be doing a good job, this will unravel a reputation that we have painstakingly built up over the years.

Just two days ago, the CEO of Shell Gas came to see me, thinking of setting up an operation in Singapore for global solutions to various industries, particularly the oil and gas industry. He has his reservations about some other countries. I told him, "Do not worry. You do what you have to do in the region. But what you need in Singapore, we will provide. If you need talent, you bring them in." If a company has to shed off workers, we should let the company decide whom to shed off. We are already protecting our own local workers through the foreign worker levy and by the quota requirement that a certain percentage has to be Singaporean workers.

In the end, if we over protect Singaporeans, will we win? I do not think we will win, because what would then happen is that investments will leave Singapore to where they can access workers at internationally competitive wage rates. Recently, a group of us was talking to a Singapore doctor who has worked many years in America. In American hospitals now, doctors no longer clerk their own case sheets. They go to the nearest phone, they call up a number, they dictate, and it goes to India, where there is a whole bank of transcribers. And they are very smart. They know all the medical terms, drugs, diseases, medical conditions and, the following day, via the Internet, it appears on the doctor's screen, he makes his amendments and it is recorded. In other words, in the coming years, no sector can be protected, because the moment you try to protect it, it raises costs, and investors having choices will move somewhere else. So it is better that we stare the problem in the eyes and make the adjustment. The key is: stay competitive, continue to attract investments in, and we will be all right. And we will be all right.