Published February 27, 2009

Obama stares at eye-popping US$1.75 trillion Budget deficit

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(WASHINGTON) US President Barack Obama yesterday projected a stunning US$1.75 trillion deficit this year, followed by US$1.17 trillion in 2010 and warned that tough choices were needed to get US finances back in order.

Mr Obama: 'There are times when you can afford to redecorate your house, and there are times when you have to focus on rebuilding its foundation.'

The Budget is equal to 12.3 per cent of US gross domestic product - the largest share since 1945 when the country ran a shortfall of 21.5 per cent of GDP.

In 2010, the deficit would dip to a still-huge US$1.17 trillion, but Mr Obama promised to get the red ink under control within a few years through a combination of tax increases and spending cuts.

'While we must add to our deficits in the short term to provide immediate relief to families and get our economy moving, it is only by restoring fiscal discipline that we can produce sustained growth and shared prosperity,' Mr Obama said at the White House.

'There are times when you can afford to redecorate your house,' Mr Obama said, 'and there are times when you have to focus on rebuilding its foundation.'

The proposed US$3.55 trillion spending plan for the 2010 fiscal year that begins on Oct 1 provides the broad outlines of a more detailed one to be released in April.

The soaring deficit figure sent US Treasury bond prices lower and yields up to three week highs yesterday.

Gold prices slid to their lowest level in more than a week, after testing all time highs over US$1,000 an ounce earlier this month. Stock prices rose.

The Budget requires passage by Congress to take effect.

While Mr Obama, a Democrat, has broad support with both chambers in Congress controlled by his party, he could face a fight as the sticker shock of huge deficits lead to wariness about more spending for goals such as the healthcare overhaul.

Federal spending is skyrocketing as officials try to jolt the recession-hit economy with public-works spending and tax cuts and bail out the troubled financial industry.

The deficit number reinforced concerns the government will need to sell record amounts of debt to pay for programmes aimed at pulling the economy out of a deep recession.

'The Budget issue is definitely one for Treasuries because it means greater funding going forward, it means that there is going to be a lot of supply that has to be taken on board by the market,' said Orlando Green, fixed income strategist at Calyon in London.

Mr Obama, who took office on Jan 20, has pledged to slash the deficit he inherited from former Republican president George W Bush in coming years, bringing it down to US$533 billion, or 3 per cent of GDP by 2013, then increasing again to US$712 billion by 2019.

Mr Obama takes credit for US$2 trillion in deficit reduction over 10 years, three quarters of which comes from lower expenses in Iraq and Afghanistan and most of the rest to tax increases on the wealthy and revenues from a market-based cap on greenhouse gas emissions.

Mr Obama is seeking an additional US$75.5 billion for wars in Iraq and Afghanistan for the rest of the current fiscal year.

He is requesting US$130 billion for military operations in the two wars for 2010, which would be down from the roughly US$140 billion he expects will be needed this year. Washington spent about US$190 billion on the wars in 2008.

Mr Obama's Budget proposal lays out spending cuts in farm subsidies and other areas to meet the deficit-reduction goal.

But spending would increase to meet key objectives.

The Budget sets aside US$250 billion as a 'placeholder' if Mr Obama decides to ask Congress for more money in the current 2009 fiscal year to help the ailing US financial system. No such decision has been made yet, officials said in a briefing with reporters on Wednesday.

The officials said that if the government were to spend US$250 billion to inject money into the banking system, that would finance about US$750 billion in asset purchases.

Signalling he has no intention of delaying his campaign promise of expanding healthcare to the 46 million people who are uninsured in the United States, the Budget includes a 10-year, US$634 billion reserve fund to help pay for the president's proposed healthcare reforms. -- Reuters, NYT

Published February 27, 2009

That shrinking feeling gets more acute

Q4 contraction of 4.2% is worse than expected; services sector badly hit

By CHEW XIANG

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(SINGAPORE) Singapore's economy shrank 4.2 per cent in the fourth quarter, worse than the 3.7 per cent decline estimated last month, as financial services performed even more poorly than expected.

The Ministry of Trade and Industry in its annual economic survey released yesterday said that the financial sector contracted 8.1 per cent, substantially worse than the 1.8 per cent drop forecast in January, on the back of significant declines in trading activities in foreign exchange and stock brokerage, fund management and Asian Currency Units.

On the whole, services producing industries were down 1.3 per cent in the quarter, substantially below the MTI's previous estimate of a 0.1 per cent fall. Services make up roughly 60 per cent of Singapore's $257 billion economy.

Manufacturing - a quarter of the economy - contracted by 10.7 per cent in the three months to December, in line with earlier government estimates.

'The manufacturing weakness story is well known, but the main thing is the speed and severity with which the services sector rolled over,' said OCBC economist Selena Ling. 'When two of your engines fall off, you can't see the economy flying at all.'

Related link: Click here for MTI press release

The only pleasant surprise came from the construction sector, which increased by 18.5 per cent in the quarter, up from the 14.1 per cent previously estimated.

On a seasonally adjusted annualised quarter-on- quarter basis, Q4 gross domestic product (GDP) declined by 16.4 per cent, the sharpest drop on record. Full year GDP growth came in at 1.1 per cent, marginally below the 1.2 per cent estimated by the MTI in January and sharply lower than the 7.8 per cent growth recorded in 2007.

Manufacturing was down 4.1 per cent for the year, but construction gained 20.3 per cent and services 4.7 per cent, driven by strong growth in the first three quarters of the year.

'Broadly speaking, 2008 was a year to forget,' said Standard Chartered economist Alvin Liew. 'The data revision was minimal. It was already bad but it got a little bit worse,' he said.

DBS Bank, in a note, said 'the minor revision to last year's GDP growth figures has not changed our view on the economy and hence we maintain our 2009 GDP growth forecast at -4.8 per cent.' It had cut its estimates from -3.8 per cent only on Wednesday.

But the latest estimates prompted OCBC to cut its 2009 full year forecast, from -2.8 per cent to -4.8 per cent. 'Frankly, we don't see any light at the end of the tunnel for financial services. It will be the main drag on services,' said Ms Ling. 'And we think consumption will fall off the cliff once we get the retrenchment numbers.'

Stanchart's Mr Liew noted that much of the fall-off in total demand was due to a 9.6 per cent drop in external demand in the fourth quarter. Private consumption expenditure and private sector investment fell by 1.2 per cent and 13 per cent respectively.

'The recovery process - if we see any at all - needs to come from the external sector. If that doesn't recover, we are looking at a very protracted downturn,' he said. Non-oil domestic exports fell 17.8 per cent in the fourth quarter, while total exports were down 12 per cent.

The decrease was sharp over almost all of Singapore's main export markets, with only Indonesia recording a minor increase.

For the whole of 2008, inflation as measured by the consumer price index (CPI) rose 6.5 per cent, compared to 2.1 per cent in 2007, on the back of price increases in housing, food and transport and communications.

The seaonally adjusted overall unemployment rate rose to 2.6 per cent in December 2008 from 2.2 per cent in September 2008 and the decade low of 1.7 per cent a year ago, MTI said.

But labour productivity fell for the second year running, to -7.8 per cent in 2008 from -0.8 per cent in 2007.

OCBC's Ms Ling said unemployment could rise a quarter of a percentage point for every percentage point fall in headline GDP. 'We expect 4 per cent unemployment (from 2.3 per cent in 2008) by the end of the year,' she said.

On Wednesday, DBS said 99,000 jobs could be lost while unemployment may peak at 5 per cent in mid-2010.

Jan electronics output short-circuited, Page 4

More reports, Page 11

February 27, 2009, 2.31 pm (Singapore time)

Update: UOB Q4 profit falls 34% as bad debt charges rise

* Worst quarterly results since Q2 2003
* Q4 bad debt charges almost trebled to $381m
* Shares down 1%, reversing earlier gains

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SINGAPORE - United Overseas Bank (UOB), Singapore's second-ranked lender, reported a bigger-than-expected 34 per cent drop in fourth-quarter profit as writedowns for bad debts trebled and fees from capital markets fell.

UOB's net interest income rose 29 per cent to $957 million from a year earlier, helped by a jump in net interest margins to 2.45 per cent in the fourth quarter as the global credit crisis jacked up borrowing costs

The results, UOB's worst since the second quarter of 2003, reflect the growing risks for Singapore banks' earnings as weakening Asian economies threaten to hurt asset quality, slow loan growth and boost credit costs.

UOB, controlled by chairman Wee Cho Yaw and his family, is considered the leader in Singapore's loan market for small- and medium-sized businesses, which have been hit hardest by a global economic slowdown and a downturn in the property market.

'That was a bit of shocker,' said David Lum, an analyst at Daiwa Institute of Research, referring to the $381 million in writedowns for bad debts. 'Clearly impairments are based on outlook that conditions will continue to deteriorate.'

Related articles: Click here for UOB's news release Click here for Group financial report

UOB chief executive Wee Ee Cheong, the son of the chairman, said the bank is not immune from the impact of the global financial crisis and will be prudent in managing its business.

Net profit for October-December fell to $332 million (US$216 million) from $506 million a year ago. Analysts had estimated, on average, a net profit of $468 million, according to six forecasts compiled by Reuters.

UOB wrote down $381 million in the fourth quarter in bad debt, up from $128 million a year earlier, mainly due to loans that turned sour and on losses on investment securities.

The market had begun to pare down their expectations after DBS Group, Southeast Asia's biggest bank, earlier this month reported a bigger-than-expected 40 per cent drop in quarterly profit, its worst result in three years.

Third-ranked Oversea-Chinese Banking Corp (OCBC) last week posted a 30 per cent drop in quarterly net profit.

UOB said net lending grew 7.7 per cent from a year earlier, slowing from an 18 per cent expansion in the third quarter.

Net interest income rose 29 per cent to $957 million from a year earlier, helped by a jump in net interest margins to 2.45 per cent in the fourth quarter as the global credit crisis jacked up borrowing costs. The margin was 2.21 per cent in the third quarter and 1.94 per cent a year ago.

Non-interest earnings, such as commissions and fees on investment products, fell 27 per cent to $391 million as capital markets tumbled.

UOB shares fell 1 per cent to US$10.26 in afternoon trade after the results, erasing gains of 1.5 per cent at the midday break.

The shares have underperformed its Singapore rivals this year, falling around 20 per cent, more than the 8 per cent decline in the benchmark Straits Times Index. -- REUTERS