Facing up to recession

http://www.businesstimes.com.sg/sub/...00807,00.html?

Published October 11, 2008

Facing up to recession

Government should intervene to keep credit flowing to corporate sector

By VIKRAM KHANNA


THIS time last year, with the stock market near its all-time high, the property market booming and the Singapore economy cantering towards a growth rate of 7.5 per cent for 2007, who would have thought we were, in fact, on the cusp of a recession?

But here we are, entering our first technical recession - two consecutive quarters of negative growth - since 2001; the flash estimate for Q3 growth was a worse-than-expected minus 6.3 per cent. We're also in the first quarterly contraction on a year-on- year basis (minus 0.5 per cent) since the time of Sars, in the second quarter of 2003.

It's a sobering reminder of how vulnerable even a fundamentally sound and well-run economy like Singapore can be to global economic headwinds; except that what we're facing now is no mere headwind, but a gale-force storm.

There is nothing Singapore could have done to prevent this. There is not much that any Asian country could have done. And the financial market turbulence we are seeing is only the beginning of a long spell - at least a couple of years - of pain for any economy that depends heavily on doing business with the United States and Europe.

After the current phase of the financial storm subsides - which depends on what the G-7 finance ministers decide to do at their meetings in Washington - the theatre of action will shift to the real economy. The US, Europe and Japan will experience a marked slowdown, if not outright recession, and rising unemployment. The great American consumption machine, in particular, which accounts for more than two-thirds of US GDP, will be reduced to a shadow of its former self.

While the International Monetary Fund still resists calling a global recession - it forecasts 3 per cent global growth next year - that view could change.

But global recession or not, few Asian countries - certainly not those with export-oriented economies - will be spared from the backwash of slowing growth in the major economies. Not even China; while its growth rate will probably still be respectable at around 7-8 per cent, the economy of the coastal provinces, where hundreds of thousands of factories have to depend for their livelihoods on the American consumer, will be devastated. Thousands of SMEs in China have gone bust already this year.

India, for its part, has seen its financial markets ravaged as a result of selloffs by foreign institutional investors; but the real economy - which is still overwhelmingly domestically focused - will be relatively resilient.

But even if China and India boom, they cannot come close to compensating for a US slowdown: a mere 20 per cent reduction in consumption in the US wipes out the equivalent of all of the consumption of China and India combined. Add in a European slowdown as well and the problem is multiplied.

So in the circumstances, what are the policy options for a small open economy like Singapore? The focus would have to be on, first, ensuring that banking functions as normally as possible and businesses keep running.

Right now, banking is not functioning normally; the credit crunch and fear of counterparty risk has spread here too. Despite liquidity injections by the Monetary Authority of Singapore, interbank rates remain elevated. Banks have pulled in their credit lines to even well-run companies. If this continues, layoffs will inevitably rise.

There could well be more financial accidents, or at least strains, in the US and Europe in the months ahead, which suggests local banks will remain unusually risk averse. There is a strong case here for temporary government intervention to keep credit flowing to the corporate sector - whether through direct loans by government agencies such as SPRING (via their several loan schemes, which can be enhanced) or through credit guarantees.

There is a case, too, for an off-budget package of fiscal measures - particularly increases in public spending, as well as help to businesses and vulnerable groups - to cushion the impact of the slowdown. The last budget did not, and could not, see it coming, but it is here. And help can't wait till the next budget. A philosophy of prudent economic management practised over decades has yielded a legacy of fiscal surpluses. It's now time to put them to work.

This crisis is also an opportunity - for example, to ramp up infrastructure, to develop new capabilities through higher outlays on training and retraining, and promote new technologies.

Storms don't last forever and Singapore's recession, like so many before it, will pass. What matters now is how productively and creatively we handle it, and what shape we will be in when the global economy comes back.

http://www.businesstimes.com.sg/sub/...00805,00.html?

Published October 11, 2008

Prepare for a rough ride: PM Lee

There is no escaping global impact of crisis

By CHUANG PECK MING


IN his first public comment on the global financial crisis, Prime Minister Lee Hsien Loong yesterday told Singaporeans to 'prepare for a rough ride at least over the next year, and quite possibly longer'.

While Asian banks have been spared the woes of their US and European peers, stock markets everywhere have been battered in the fallout. Singapore shares tumbled 7 per cent yesterday.

The crisis will curb consumption and investment in the developed countries and affect economic growth beyond their shores, Mr Lee said. 'Asian countries cannot avoid the impact of weakening US, European and Japanese economies.'

He was speaking on the first day of the two-day Global Indian Diaspora Conference, where Mauritian Prime Minister Navinchandran Ramgoolam and India's Minister for Overseas Indian Affairs Vayalar Ravi were also present.

Mr Lee's comments came after Finance Minister Tharman Shanmugaratnam on Sunday projected 'several quarters' of slowdown for Singapore's economy. And National Trades Union Congress (NTUC) chief Lim Swee Say warned on Thursday of possible wage and job cuts.

Expressing a similar view at the conference, Senior Minister Goh Chok Tong said: 'This time, Asia is not as adversely affected as US and Europe because we are less sophisticated in derivatives.'

Banks have also recapitalised since the Asian financial crisis, he said. But there is no escaping the global impact of what is happening. 'The worrying part is how it affects the real economy,' Mr Goh said. 'That will affect us. The US is one of the biggest exports markets for Asia. Asia and Singapore will be impacted. The worry for next year is how long will slow growth be dragged out for all of us.'

Mr Lee said that the problems facing financial institutions in the US and Europe are complex and grave, and will not be solved overnight or even 'within a few months'.

'The fear and panic gripping financial markets everywhere will take time to subside,' he said. 'The trust and confidence between banks, which lie at the heart of finance intermediation, will take time to restore.' But the momentum from projects Singapore has secured, including the F1 race, will help see it through the financial storm, he said. Unemployment here remains low and 'we are still on a steady course'. Singapore's strategy of growing with Asia remains valid, 'because we are confident that Asia's dynamism will endure', Mr Lee said. 'Both India and China are continuing to transform their economies, and their emergence in a stable and peaceful region will benefit many other Asian countries.'

Singapore's links through the Indian disapora - the second largest, with 25 million people of Indian origin scattered around the world - has helped Singapore and India boost ties, he said.

Also, the Comprehensive Economic Agreement signed between Singapore and India in 2005 has helped increase two-way trade to $24 billion in 2007. Singapore was India's second-biggest investor last year. And Singapore was the choice investment location for Indian companies venturing overseas.

Mr Lee said that just as Singapore has built ties with India itself, it wants also to network with Indian overseas communities throughout the Asia-Pacific.

The conference is hosted by the Singapore Indian Chamber of Commerce, the Ministry of Overseas Indian Affairs and the Confederation of Indian Industry.