Published January 16, 2009

A fiscal big bang to numb the pain

S'pore can't spend its way out of trouble but many expect big stimulus

By ANNA TEO

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(SINGAPORE) Beyond 'big bang'; just all-out aggressive; altogether unprecedented. Such are the demands on the 2009 Budget next Thursday.

Tackling the economic challenges of the day - potentially Singapore's most severe recession - call for an extraordinary fiscal stimulus package, economists say.

Having squirrelled away in the good years, Singapore can well afford to rack up a deficit of the order of some S$10 billion, they reckon, if that's what it takes to throw lifelines to keep businesses afloat and jobs intact - the priority at hand.

Yet, can Singapore effectively 'spend' its way out of recession? And will (or should) the government fire all its bullets next Thursday, or save some for an off-Budget package or two like in previous crisis years?

The economy has contracted for two quarters (three in adjusted quarter-on-quarter terms) and the current Q1 is widely expected to hit even bigger negatives as the impact of the global financial and economic crisis deepens here.

But given that the recession here is basically an externally induced export slump, few believe that a domestic spending spree will save the day for Singapore. Yet it's hardly the time for any government to turn coy and not weigh in.

Singaporeans are primed for what might in normal years be termed a 'hong bao bonanza', except that this time the Budget would largely be seen as a rescue package.

As Prime Minister Lee Hsien Loong told Singaporeans recently, the Budget will not restore high growth overnight, but should cushion the impact of recession on the economy and its people. And market expectations on the Budget to deliver couldn't get higher.

Governments will 'do what they can on the fiscal side, taking advantage of the balance sheet space to provide stimulus where they can', says Michael Spencer, Deutsche Bank's chief economist for Asia.

'So every government will see deficits going up, in many cases by what would seem like fairly alarming amounts,' he told BT. 'But households will want to borrow less and banks appear to be tightening credit quite significantly.' In any case, there's no way Singapore can spend its way out of recession, he says.

'No, the size of the government sector's too small relative to the size of the shock. In Singapore where real exports of goods and services are 250 per cent of GDP, essentially everything other than the government is directly or indirectly linked to external demand.

'So the government can mitigate to a little extent the downside by spending more or cutting taxes, but they cannot change the fact that the economy is in recession and the recession will get a lot worse.'

Mr Spencer - who probably has the most bearish forecast on Singapore's 2009 GDP pace (4.5 per cent contraction, versus most estimates of 2-3 per cent falls) - believes there will be lots of fiscal relief on business costs and utility charges, including 'tax cuts of various kinds', in next week's package.

'All told, that maybe gives you a percentage or two of GDP worth of genuine stimulus, but the size of the export shock is, you know, a negative 10 per cent shock to GDP.'

Vishnu Varathan, regional economist at FORECAST's Singapore office, reckons it will be an 'unprecedented' Budget, with the primary deficit hitting S$6.4 billion, or 2.4 per cent of GDP.

Singapore may not be able to 'spend away' the recession, 'but that is not going to stop it from trying', he says. 'Cushioning of the economy is an imperative part of setting the foundation for a strong recovery.'

Apart from a kickstart of deferred infrastructural and other construction projects and an array of business cost cuts, including possibly shrinking the Central Provident Fund (CPF) base rather than a cut in CPF rates, Mr Varathan expects a rollback of measures put in place earlier to cool the property market surge.

'One of the key issues will be to prevent a freefall in the property market,' he believes. Other issues of focus include ensuring business cash flow, along with increased corporate tax rebates and 'more nuanced' measures to drive investments in certain areas.

Other analysts, including the Singapore economists from Daiwa Institute of Research, Standard Chartered Bank and Citigroup, expect rather bigger fiscal packages and - along with smaller revenue inflows - a sizeable deficit in the 2009 fiscal year.

Stanchart's Alvin Liew is looking at a stimulus package worth some S$15 billion (about 6 per cent of GDP) and possibly a S$10 billion FY09 deficit, from measures including a 4.5-point cut in the employers' CPF rate and partial tax waivers.

Still, it will all amount to but a 'coping mechanism' against the recession rather than any real stimulus, says Mr Liew.

Citigroup's Kit Wei Zheng believes a huge fiscal stimulus package to the tune of some S$24 billion (8-9 per cent of GDP) is 'not inconceivable' but does not think it will all be disbursed in one go next Thursday.

The government may provide for an off-Budget package if the recession worsens, as well as save its fiscal bullets for an election Budget in FY10 or FY11, he says.

One economist who is looking to the Budget to be more than a recession buffer is Daiwa's P K Basu - who's possibly the only economist with a positive 2009 growth forecast for Singapore. He predicts 1.5 per cent growth - 'more if the fiscal stimulus is larger', he told BT.

'A concerted, global fiscal stimulus is the only way out of this global recession. The US, EU, China and the UK are all crafting aggressive fiscal stimulus packages, and Singapore can be no exception. Singapore has deep fiscal reserves, and it should do as much as possible to counter the impact of this recession with fiscal expansion. Like for the rest of the world, that is the only way out of this recession for Singapore.'

Fiscal spending here will be targeted in three main areas: infrastructure, skills development, and direct income support to households via tax rebates and top-ups.

'I expect the Budget to provide an additional stimulus equivalent to 3.5-4 per cent of GDP in FY09/10 (and tax rebates and Medisave/Edusave top-ups in the current quarter to also move this fiscal year's fiscal balance to a small deficit; note there was a surplus of 5.5 per cent of GDP in the first half of the fiscal year).'

Investment income will also be quite substantial, as the government can now tap capital gains from past investment income, Mr Basu points out.

Much of this year's GDP growth will come in the second half as the impact of the concerted fiscal stimulus around the world begins to be felt around Q3, he says.

And 'with a large pipeline of net investment commitments, especially in the petrochemical sector, I expect the economy to rebound to 4.5 per cent real GDP growth in 2010', he forecasts.

This is the first in a series of articles in the run-up to the Budget. Watch out for Vikram Khanna's analysis tomorrow