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

Published January 16, 2009

Developer sales plumb new depths

Home sales hit record lows in 2008 but new launches are on the cards

By ARTHUR SIM

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(SINGAPORE) The year gone by was one to forget for developers as they managed to sell just 4,351 homes in 2008, representing the lowest figure in at least 10 years - diving beyond the previous troughs of 5,156 and 5,520 units in 2003 and 1998 respectively.

The sales in 2008 were also significantly lower than the annual 10-year average (1998-2007) of 8,200 units.

Developer sales fizzled out in the last month of 2008, registering just 131 transactions - less than five a day.

The number of projects with licences for sale in December has, however, risen to 8,350 units, up from 6,512 units in the previous month.

Only 157 new homes were launched in December, the lowest figure since developer data was made available in mid-2007. CBRE Research executive director Li Hiaw Ho said: 'This shows that developers kept their launch activity to a minimum as they monitored the market.'

But not all developers held back.

Macly Capital sold 43 units of the 104-unit Newton Edge on Makeway Avenue at the median price of $1,200 psf. Mr Li said the strength of the project lay in the affordable quantum of $500,000 to $900,000 for a majority of the units due to their small sizes ranging from 440-915 sq ft.

Pricing is likely to have been a factor also. An earlier report by UBS noted that Newton Edge was priced lower than VIVA at Suffolk Walk nearby, where 15 units were sold in Q3 2008 for around $1,550 psf.

Hayden Properties' The Ritz-Carlton Residences in Cairnhill also chalked up healthy sales at what appeared to be discounted prices. Eight units were sold at a median price of $3,086 psf.

Hayden Properties director (sales and marketing) David Neubronner revealed that the buyers comprise project shareholders and directors, with just one third-party transaction.

'The purchase prices by the related parties are preferential rates, and the purchase price paid by the third party reflects current market pricing,' he said.

Mr Neubronner added that the unit purchased by the third party is located on a lower floor and was priced at $3,700 psf, which is only an 8 per cent decrease from the initial launch price of $4,000 psf.

Colliers International director for research and advisory Tay Huey Ying noted that mid-tier projects in the Rest of Central Region (RCR) dominated launches in December, accounting for 72 per cent of the units launched during the month. 'This, following the domination of high-end projects in recent months, could be an indication of the weakening holding power among small and mid- tier developers,' she added.

RCR projects that sold in the month include 10 units at Nova 88 at a median price of $988 psf and nine units of The Aristo @ Amber at a median price of $1,002 psf.

'This decline in demand has led to the contraction in the islandwide URA property price index (PPI) of some 5.6 per cent as the market attempts to generate more activity through price reductions,' said Jones Lang LaSalle local director and head of research (South East Asia) Chua Yang Liang. 'Historically, take-up has been leading the PPI. On the back of this contraction in take-up in Q4'08, we can expect the PPI to contract further, possibly by another 5-7 per cent in Q1'09,' he said.

Nevertheless, some developers have been continuing to prepare developments for launch.

UOL is expected to launch a 646-unit development at Simei Street 4 billed as a luxury condominium for upgraders in the first half of 2009.

Frasers Centrepoint is also preparing to launch a development on Boon Lay Way. A spokesman said: 'Caspian, our 712-unit development on Boon Lay Way, is launch-ready. At this point, we are still finalising several details, with regard to the actual launch period, pricing, etc, and will announce them once we are ready.'

It is also understood that Far East Organization is preparing to launch a development in Choa Chu Kang this year.

Notably, all developments are in the Outside Central Region where property prices are not expected to fall as significantly as in the mid-tier and high-end segments.

Published January 16, 2009

Freight rates sink to zero as trade dives

Analysts say it's a desperate measure by shippers trying to recoup some costs

By VINCENT WEE

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(SINGAPORE) For the first time since records began, container freight rates from Asia to Europe have hit flat zero. Apart from signalling just how dramatically trade has collapsed, the move smacks of sheer desperation as the lines try to recoup whatever revenue they can, industry players say.

Lloyd's List had earlier quoted shipping executives as saying that many lines are now charging shippers a freight rate of US$0 plus the bunker adjustment factor or the cost of bunker.

'They (the rates) have already hit zero,' Charles de Trenck, a broker at Transport Trackers in Hong Kong, was quoted as saying. 'We've seen trade activity fall off a cliff. Asia-Europe is an unmitigated disaster.'

'The report is quite accurate and it shows that the shipping lines are in a desperate situation,' the Singapore National Shippers' Council (SNSC) told BT. However, SNSC pointed out that in many cases other charges such as terminal handling charges and other surcharges are not included in the all-inclusive price the lines charge and that some of the lines are trying to recover some revenue through these other charges.

For example, sources said that within the last few days Maersk has increased terminal handling charges from China ports by over 20 per cent. Others like French line CMA-CGM have imposed a US$23 per container surcharge on freight going on ships through the Gulf of Aden. This especially affects shippers using the Asia-Europe trade lane because the bulk of the cargo goes through the Gulf of Aden.

The freight rates are determined by market forces and therefore have to fall in reaction to these, said SNSC, but it pointed out that the lines are still trying to get whatever they can by arbitrarily imposing extra charges. The low-rate environment looks like it will be a prolonged one and the survival of individual lines will depend on whether they have sufficient cash to sustain themselves.

'The situation is very bad for the liners and is perhaps one of the worst seen so far,' SNSC said. Since they have already cut as much capacity as they can so far, they are now trying to move as much volume as possible to fill empty slots.

In that sense, some of the lines' non-contract customers may be subsidising the others because of the abundance of space on vessels. By way of illustration, one industry player said that it's like taking on a fourth passenger just to fill the taxi in exchange for helping out with petrol costs.

'We don't think it's sustainable but it's really a structural change that has never happened before and it depends on how long you consider a situation to be sustainable,' said another shipper.

Underlying the slump, of course, is the disastrous trade data from some Asian countries. Korea's exports fell 30 per cent in January compared to a year earlier. Exports have slumped 42 per cent in Taiwan and 27 per cent in Japan, according to the most recent monthly data.

Even China has now started to see an outright contraction in shipments, led by steel, electronics and textiles.