Chart 1: Baltic Dry Index

Maybe it’s time for us to weigh in with some views of our own, as interest in the 2009 Budget has not waned. The Singapore Budget 2009 has been said to be being neither pro-people nor pro-business in some quarters. Although the Budget 2009 has been unprecedented in a few ways (e.g. dipping into past reserves), the scope of this particular Budget appears to be narrower and is mainly focusing on saving jobs and trying to enhance liquidity in the system.

As the main points of the Budget 2009 are already well known, this article contains further ideas of what we can expect to see in the months ahead. Nothing has yet been set in stone as the Singapore government continues to remain watchful and is downplaying expectations that 2009 could be a turning point in the world economy.

With the sum of Singapore’s exports consisting about 250% of its GDP, slowing global demand has hit the economy hard. Whether we have reached a trough in the economic cycle is debatable, and the general consensus is that there is still a high chance that economic activity will stagnate or even deteriorate for at least the first half of this year or so based on business surveys.

Hence, the huge skew towards creating a defensive package for this economy.

While we have drawn up a short list of ideas that can be further implemented, let us first briefly discuss the two key issues here that policymakers have put careful consideration towards.

Jobs Credit Scheme

While initial reaction to the Jobs Credit Scheme was effusive, it is debatable whether it would have its intended effect. S$5.1 billion will be spent on the Jobs Initiative, with the bulk of it on giving cash back to companies every quarter, as long as they continue keeping Singaporean employees on their payroll. This cash grant has been calculated to be equal to a 9% cut in CPF, which is definitely a boon to companies in this environment.

Can this scheme alone help to save jobs? Perhaps, but we see it as just a means to mitigate further job losses during the year. This is a short term measure, and it looks to be very costly for the government. The budget deficit in 2009 of S$8.7 billion amounts to 3.5% of GDP, and the amount of money going to the jobs credit scheme is S$4.5 billion, which makes up almost half of the deficit that the government will be going into just to keep employment numbers stable.

The Singapore Labour Movement has set a target to keep job losses from reaching 29,000 this year, the number last seen in 1998 during the Asian financial crisis. While we think that this Jobs Credit Scheme is innovative, it will not stop employers from cutting staff if business demands do not warrant current capacity.

The employment factor is also largely a political issue, and perhaps a very indirect means of spurring consumption within the economy. The multiplier effect of consumption will be discussed below.

Risk Sharing Initiative

The merits of this scheme have been discussed widely. We believe that the hand of the government coming in to do a risk sharing initiative will definitely ease current tight liquidity conditions. However, just guaranteeing the risks for 80% for loans made by the banks does not mean that the velocity of money in the system is expected to increase quickly. Conditions for lending are still extremely risk averse.

As a good indication of global trade conditions, the Baltic Dry Index has fallen hard in the 2H of 2008, affecting all participants in the trading environment (See Chart 1). Poor credit conditions mainly contributed to this steep fall, as lenders stopped issuing letters of credit and trade virtually came to a standstill in tandem with waning demand.

We have seen slight upturns in the BDI recently – trade conditions are as depressed as they have ever been, but we hesitate to continue using the term ‘demand destruction’ going forward. While demand has fallen obviously, demand has not been destroyed, and we attribute this mainly to the liquidity crisis.

As a corollary to this, we expect that the risk appetite when it comes to lending by the banks will slowly start to come back, especially with 80% of the risk being guaranteed. This thawing will, however, need some time.

Multiplier Effect

Is the record spending by the government likely to have a multiplier effect within the economy? The multiplier effect is used by governments to stimulate demand, which in turn creates more jobs, which allows people to earn incomes, which then go into spending, which helps the overall economy, etc.

The idea is that knock-on effects will be able to aid the economy with initial spending by the government such that the total economic gain is more (in multiple terms) than the initial spending by the government. Without going too much into theory here, the main fault with this line of thinking specific to this budget is that there is no real stimulus package as yet in this Budget.

We doubt that the “Resilience Package” will be able to offer much in terms of a multiplier effect within Singapore’s economy, unless other off-budget measures with simulative effects are brought into the picture.

Off Budget Measures In The Works

Moving Towards Higher Value

Being a developed country, Singapore has comparatively higher labor costs, which explains why the manufacturing sector has been, and will continue to be among the worst hit industries during this period of economic weakness. Cost pressures coupled with slowing global economic demand have hit the manufacturing sector hard.

One of the ways that Singapore has tried to be more competitive is to move into higher value manufacturing (like semiconductors) versus manufacturing shoes, which can be produced much more cheaply in China or Vietnam.

There was also a concerted shift into pharmaceuticals, the bio-sciences industry and laying bigger bets on the finance sector. It is no secret that Singapore aspires to be the ‘Switzerland of Asia’, hoping to get a larger piece of the wealth management pie. 

All these measures have been done in the hope of allowing Singapore to create higher value services/products within the economy.

In the 2008 Budget, the Singapore government committed S$7.5 billion to research spending. This amounted to about 3% of entire GDP at that point in time. While we would have liked to see further initiatives in the 2009 Budget, we noticed that this time round, spending on research was conspicuously absent.

Going forward, we hope to see even more initiatives to boost innovation. Moving people up the value chain in whatever industry they are in should be an aggressive measure rather than a passive measure for the medium term.

GST Cut To Spur Consumption?

This is unlikely even if the economy continues to deteriorate in the short term. While undeniably it would be a populist measure, the diminished revenue for the government from a cutting of the GST, no matter how short term would have to be compensated elsewhere…. The only question is, where?

It has been made clear to Singaporeans that this broad-based tax on consumption would be the way going forward as the government starts to rely less on direct taxes for revenue. With an effective CPF cut of 9% for FY 2009 owing to the Jobs Credit scheme, a further lowering of direct corporate tax and increased income e tax rebates, we cannot foresee the GST being cut this time round in an off-budget measure.

Furthermore, as alluded to the multiplier effect mentioned earlier in this article, cutting the GST to spur consumption is unlikely to add to a growth effect as about 40% of Singapore’s GDP is made up from private consumption, much less than other developed Asian economies like Hong Kong.

If the GST is cut, Singapore is likely to see longer term repercussions from loss of revenue and further backlash when they attempt to re-institute it again. We do not see this happening at all.

Infrastructure Projects

There are many projects that have been deferred in the 1H of 2008 that are likely to be back on track again later this year. The high costs of raw materials in the first half of 2008, with demand for projects continuing to outstrip existing capacity have seen an almost 180 degree change since then.

Contractors are now almost afraid to be ahead of schedule when it comes to their construction projects as there is surplus capacity compared to the demand for projects on their order books. The government had the foresight to defer the construction of massive infrastructure projects (e.g. the Sports Hub) to the tune of S$4.7 billion.

While construction does not consist of a large part of our GDP (4% of GDP in 2007, compared to manufacturing which accounts for about one-quarter), we see positive spillover effects into other industries. Infrastructure projects have also traditionally been used by governments to keep up economic activity during downturns, and we think that the construction sector is likely to reap benefits this year.

Conclusion

There is no doubt that the policies in the 2009 Budget have been made with the best intentions for the Singapore economy, given all available information about the current situation. However, it was not the expansionary kind of package that the market was hoping for. Instead, the focus was on being resilient and defensive in the current global economic situation.

However, we think that the probability of further measures down the road to further boost the economy is likely, and have put forth some of our ideas here. Ultimately, policy makers will have to set policies in place that maximise utility for as many as possible.

The fact that we have the reserves to ride out these tough times should give most of us hope that the government will help to aid the economy in getting back on its feet. This is not a normal business-cycle recession, but we believe that the bottoming out process is already underway and in time to come, markets will once again start to look less dislocated and we will likely revert back to trend growth figures again.

related webcast:

Absolute Research Special - Singapore Budget 2009

useful link:

Singapore Budget 2009 – A Preliminary Examination