As a small open economy, Singapore is more vulnerable than most countries to external economic developments. Thus, the large and adverse economic shocks triggered by the Asian crisis could have been expected to generate significant economic problems for the country. Amid extensive economic distress in the region, however, Singapore has maintained a relatively favorable economic performance. Its economy recorded positive growth for 1998 and lately has shown signs of recovery. Singapore’s resilience appears to be rooted in strong fundamentals and a willingness to take timely and effective policy measures in response to the crisis.
Impact of crisis
With its strong regional links, Singapore inevitably saw its economic performance during the regional crisis adversely affected through several channels. Diminished demand and exchange rate depreciation lowered its exports to the rest of Asia, and the crisis reduced its banks’ regional lending as well as activity in the stock market and foreign exchange market. The collapse of intraregional trade hampered growth in Singapore’s commerce and transport sectors, while subdued consumer sentiment and a drying up of tourist arrivals contributed to weakness in the retail sector. In addition, regional spillovers and a worldwide weakening of electronics, which had begun before the Asian crisis, caused a contraction in manufacturing production in 1998. Mainly as a result of these developments, real GDP expansion slowed sharply from 8 percent in 1997 to 1½ percent in 1998—the lowest growth rate since 1985.
Still, in comparison with other economies in the region, Singapore’s macroeconomic performance since the beginning of the crisis has been favorable. While low by Singapore’s standards, growth in 1998 exceeded that of other countries in the region, except for Taiwan Province of China (see chart). Similarly, while asset prices in Singapore have dropped substantially, much of the fall in property prices took place before the crisis began, reflecting measures undertaken by the authorities to cool the market. In addition, the decline in stock prices has also been less severe than the regional norm. The already large current account surplus rose further, largely because of import compression but also due to a strong surplus in the income balance generated by a large stock of overseas assets. Although the capital and financial account deficit remained large during 1998—chiefly as a result of banking sector net outflows and some slowing of net direct investment inflows—Singapore maintained its reserves at about nine months of imports. More recently, signs of recovery have started to emerge, including a ½ of1 percent increase in real GDP in the fourth quarter of 1998 on a seasonally adjusted basis and an upswing in industrial production early in 1999.
Roots of resilience
Fundamentals. Singapore’s favorable performance reflects, first, strong fundamentals. The country’s fiscal policy is guided mainly by medium-term considerations, and the budget typically has been in surplus (averaging 5 percent of GDP during fiscal years 1990-98) at moderate levels of expenditure and taxation. These surpluses have produced a substantial level of fiscal reserves. Monetary policy has been anchored by the exchange rate and directed at price stability, and has helped limit inflation to an average of about 2 percent during 1990-98. Generally flexible labor markets and policies have led to skill development and higher value-added activities; the trade regime is very open, and Singapore has a high degree of capital mobility. Finally, the banking system is well supervised and has a strong capital base.
East Asia: real GDP growth, 1998
Data: World Economic Outlook, 1999
Policy response. Just as important, the authorities’ policy responses to the crisis have been flexible, timely, and pragmatic and have included a range of fiscal, monetary, structural, and financial sector initiatives:
- Fiscal policy. Fiscal policy has been eased substantially in response to the crisis. For 1998/99, the authorities sharply increased development spending and implemented a package of supplementary measures. Together, these initiatives brought the primary operating balance into a deficit of about ½ of 1 percent of GDP—the first deficit since the recession of the mid-1980s. The deficit for 1999/2000 is expected to widen to 3½ percent of GDP as a result of higher development spending and lower revenues. This fiscal stimulus would seem to be appropriate in the context of a sizable negative output gap, large fiscal reserves, and a credible fiscal policy founded on a strong track record.
- Monetary policy. Following the outbreak of the regional crisis in mid-1997, Singapore also took steps to ease its monetary policy. Interbank interest rates have declined sharply over the past year; banks have been gradually reducing both lending and deposit rates; and the exchange rate has fluctuated in a flat and wider band. Despite the easing of monetary conditions, inflation is mildly negative—reflecting slow growth in unit labor costs in a relatively slack labor market, and falling commodity and imported food prices.
- Structural measures. Singapore’s policy response to the crisis also took the form of structural initiatives. The authorities implemented a package of measures designed to reduce business costs and improve competitiveness and thus alleviate the burden on firms from the cyclical downturn in export markets and the realignment of regional currencies. The package halved the employer contribution rate to the Central Provident Fund (a compulsory saving scheme mainly used to finance pensions), and introduced tax rebates and cuts in government charges. In addition, a consensus emerged for wage cuts of 5–8 percent in 1999. These measures are expected to encourage employment and hence reduce the burden of unemployment, while also helping to position firms to meet a rebound in export demand. For the long term, Singapore remains committed to shifting into higher value-added activities by upgrading human capital and physical infrastructure.
- Financial sector. In addition, Singapore is implementing important financial sector reforms. The financial and business service sector accounts for some 31 percent of Singapore’s GDP, reflecting the country’s long-standing policies to encourage its development. In recent years, however, financial sector growth has slowed, and the regional crisis has highlighted other outstanding issues, such as transparency and regulation. In response, the authorities have recently enhanced financial sector transparency by raising disclosure standards for banks and are emphasizing supervision of financial institutions rather than excessive regulation. The authorities also took the opportunity afforded by the present lull in regional activity to position the financial sector for the next wave of regional growth. To this end, they relaxed some restrictions governing the internationalization of the Singapore dollar and are in the process of enacting a variety of regulatory changes and incentives to expand the investment fund management industry and the bond market.
Singapore’s resilience in the face of the large and adverse economic shocks triggered by the Asian crisis may offer lessons for other countries. Singapore’s long record of prudent macroeconomic policies and market-oriented structural reforms established strong economic fundamentals and enhanced the ability of the economy to absorb shocks. The financial reserves and strong track record built up by these policies also helped reassure markets that the measures taken by the authorities to address short-term problems are less likely to endanger or signal a deviation from commitments to long-term goals. In addition, Singapore responded to the Asian crisis with a set of timely, flexible, and well-aimed policy measures. Taken together, these measures helped cushion the adverse consequences of the crisis while positioning Singapore for the recovery.
Ian S. McDonald
Senior Editorial Assistant
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